With autonomous cars ready to make their debut and disrupt key aspects of motor insurance, the future of the industry will hinge on its ability to manage and embrace the transition to a driverless landscape.
The competition in driverless car technology has heated up considerably in recent years, with automakers and technology developers promising fully automated vehicles in the next few years and a growing number of driverless vehicle pilots happening around the world.
Among other benefits, the technology has the potential to improve road safety, reduce congestion, increase fuel efficiency and ease pollution.
With these potential benefits, it is no wonder more cities are preparing for driverless cars to hit their roads.
In the Middle East, Dubai has moved ahead of its peers towards driverless vehicles with the launch of its Autonomous Transportation Strategy, which aims to transform 25% of all mobility journeys in the emirate to autonomous mode by 2030. The Road and Transport Authority (RTA) has also conducted autonomous vehicle trials in key downtown locations as part of its efforts to develop the emirate’s driverless vehicles plan.
In February this year, the RTA signed an agreement with Tesla – a world-leading manufacturer of autonomous electric vehicles – to buy 200 electric vehicles fitted with several components of autonomous driving technologies. This move came hot on the heels of Tesla officially launching its Dubai office on 13 February.
Dubai’s pole position
Dubai’s Strategy is expected to bring in a total of AED22 billion (US$6 billion) in annual economic revenue in several areas. It will save 396 million hours wasted in conventional transportation trips yearly, thereby increasing the productivity of individuals by 13%.
The Strategy will also help cut transportation costs by 44%, resulting in savings of up to AED900 million annually.
It is also expected to save AED1.5 billion a year by reducing environmental pollution by 12%, and generate AED18 billion in annual economic returns by increasing the efficiency of the transportation sector in Dubai by 2030.
“These statistics present many opportunities for building new models of economy and working towards a safer, inclusive and efficient ways of living, including new retail models, different approach to the property market, and ability to access geographies easily,” said Mr Chris Dooley, CEO - UAE, and MD - Bahrain of RSA Insurance.
Safety aspects
Apart from economic benefits, one of the biggest advantages of driverless cars is improving road safety. As the vast majority of fatal traffic accidents and car crashes are reportedly due to human error, the debut of self-driving cars has the potential to reduce these mishaps by up to 90% – a very impressive rate considering the annual death toll on the world’s roads is about 1.25 million.
The potential for improved road safety is particularly significant in the Middle East, ranked by the World Health Organization as one the most unsafe regions in the world to drive in. In the UAE, there are 10.9 road deaths per 100,000 people annually – a figure that is almost three times as high as in Denmark and Holland. In MENA, the figure is highest in Libya at 73.4, followed by 27.4 in Saudi Arabia, 26.3 in Jordan, 25.4 in Oman and 24.4 in Tunisia.
As autonomous vehicles become more common, the most noticeable and salutary effect that an increase in the use of driverless cars will have in the region is a reduction in the number of traffic accidents and road fatalities which is very high relative to western countries, said Mr Justin Carroll, Senior Associate, Transport & Insurance of Al Tamimi & Company.
Dubai’s shift to autonomous transport as per its Strategy is expected to reduce road accidents and their associated economic losses by 12%, equivalent to savings of AED2 billion a year.
Impact on insurance
Given that vehicle safety is expected to improve dramatically in self-driving cars, the motor insurance sector is bound to be affected as it would mean fewer accidents and lower premiums for customers. Motor currently accounts for around 30% of GWP in the region.
Assuming higher reliability and substantially fewer accidents by autonomous cars, it can be expected that the overall motor market will shrink substantially and insurance policies will become even more commoditised, said Dr Ulrich Koegler, Partner of Strategy& (formerly Booz & Company), part of the PwC network.
Vehicle safety is a huge part of the autonomous car conversation that is gradually gathering momentum in the GCC, said Mr Andrew Brody, Executive Vice President Consumer Lines of Oman Insurance Company. While insurers welcome the drop in accident rates that will positively impact claims and profitability, he said “they are perhaps apprehensive about the reduced premiums forecasted down the line”.
Besides lower motor premiums, driverless cars will also “open the discussion on costlier claims handling, evolving risks, new underwriting perspectives and corresponding new insurance solutions”, Mr Brody said.
Fewer motor vehicle accidents will result not only in reduced insurance premiums, but also better outcomes in terms of the overall safety and welfare of GCC societies, said Mr Carroll. “Such outcomes cannot but benefit the region’s economies,” he added.
Liability issues
As more driver-assist features are built into the cars and when fully autonomous vehicles start hitting the road, it will also affect the motor insurance sector in the long-term as liability for accidents shifts away from drivers and towards the manufacturers of driverless vehicles and their hardware and software systems.
In the motor industry today, insurers provide coverage for two types of risk – the driver and the vehicle. “With driverless cars, the notion of driver risk is completely nullified. There is instead an open-ended debate on the ownership of the risk – does it rest on the manufacturer of the vehicle, the software developer of the vehicle (AI/ robotics, etc, that has been inputed into the vehicle), and/or the governments which facilitate the special infrastructure on which these vehicles operate? This is an ongoing debate and one that is evolving,” Mr Dooley said.
Once driverless cars move from research and testing environments to actual roads, insurance coverage, particularly liability coverage, will likely be impacted, said Mr Brad Simpson, Risk Management Leader of Marsh.
He said: “We expect the distribution of liability to gradually shift as control of the vehicle moves from a manual operator to an automatic computer. Uncertainties will, however, remain as to how autonomous vehicles will perform in a mixed environment of manual and autonomous operated vehicles.
“As the use of autonomous vehicles increases, the most commonly raised question will be ‘whose fault it will be if there was a collision?’. Will it be the fault of vehicle drivers, owners, operators, manufacturer, supplier, service provider or data providers?”
On the other hand, Mr Carroll said that it is “important to remember that the attribution of legal liability for injury, loss or damage caused by a motor vehicle does not depend on whether the vehicle has a driver. Instead, the crux is whether the vehicle has an owner. For driverless vehicles, persons and legal entities will still own these vehicles and, for legal purposes, owners will remain liable for any injury, loss and/or damage that these vehicles cause, whether the injury, loss or damage happen to those who use these vehicles or to other road users”.
Regulatory framework
Given the debate on the onus of liability, Dr Koegler said: “The use of autonomous cars will foremost require a clear legal and regulatory framework that defines the allocation of liabilities between different stakeholders, namely, car manufacturers, drivers, insurers and infrastructure providers such as governments. A clear framework is absolutely indispensable as currently, practically all responsibility – and consequently liability – for the use of a car resides with the driver.”
As such, he said: “The future legal and regulatory framework will need to clearly define which liabilities should reside with the manufacturer and which additional/residual risks need to be covered by the owner/driver.
“Ultimately, the implications on the motor insurance market will depend on the design of the legal and regulatory framework. However, it can be speculated that car manufacturers will take out a wholesale insurance for their deployed fleet in a specific country to protect themselves against liabilities of failure, and residual risks will still need to be covered by the owner via the traditional retail insurance.”
Mr Simpson pointed out that “legislation will need to be introduced to protect the public across the wide-ranging effects of driverless vehicles, from infrastructure strategy, the licensing of vehicles, cyber security, safety standards and, of course, insurance.
“As laws change, insurance coverages will adapt to meet the needs of customers, which may also result in a fundamental shift in the way risks are measured.”
Relevance of insurance
As autonomous vehicles become more ubiquitous, the insurance industry must adapt to stay relevant in a driverless world.
One of the enduring traits of the insurance industry is its continual ability to adapt its business as society changes, said Mr Carroll. “With this adaptabilty, driverless cars are more likely to open up new lines of business for the industry than to close off existing ones.”
As the insurance industry evolves to meet new demands, Mr Simpson said “the adoption of driverless cars is expected to reduce some existing costly liability exposures. However, consideration needs to be given to the emerging risks involved in this technological revolution and how should they be responded to. For instance, cyber liability will take centre stage”.
Mr Brody noted that the industry needs to bear in mind that the vehicle safety features like crash-avoidance technology, the introduction of sensors, cameras, lane assist and self-braking are not universal manufacturing standards yet. He said: “The market’s transition from manual to fully automated or completely driverless vehicles will not happen overnight. There may well be a long transition phase with a mix of manually operated, semi-autonomous and fully driverless cars on the roads before we see complete autonomy”.
“The transition phase will allow insurers to adapt to the changing market conditions, deliver protection solutions to a market with different levels of autonomous capabilities, address new cyber liabilities arising from innovative digital technologies in the absence of historical data to analyse or learn from, build insurance products for new and evolving manufacturer’s liability, and develop product recall solutions to cover technical failures.”
During the transition to fully autonomous mode, Mr Dooley said there are areas that require clarity such as “how do we combat hackers as self-driving cars are an irresistible target for them and current driverless cars’ inability to interpret human signs [such as traffic deviations] and inability to withstand extreme weather such as heavy rains”.
No doom for the industry
The disruption in motor insurance, “also presents opportunities for risk-savvy, technology-driven insurers quick to analyse the situation and design meaningful solutions”, Mr Brody noted.
As long as the industry is able to seize these opportunities and price motor insurance appropriately, there is no doom for the industry, said Mr Dooley. “Of course, there will be an intermediate period of ambiguity until the time when there is a full understanding of the risk factors.”
Mr Carroll said it is important to remember that third-party motor insurance insures the owners of vehicles for their liability for injury, loss and damage that they or their motor vehicle cause to third parties. He explained: “It is for this reason that, in order to operate a vehicle on public roads, third-party motor insurance is required by law in most countries. Such insurance ensures that members of the public and property owners have a solvent source of recovery for any injury, loss or damage that they sustain due to another’s use of a motor vehicle. National laws that make the carrying of such insurance mandatory are not suddenly going to disappear because of an increased presence of driverless vehicles on our roads.”
Assuming that driverless vehicles will result in fewer traffic accidents and road fatalities, Mr Carroll said: “The most likely immediate consequence will be a drop in premiums for third-party motor insurance as insurers’ costs expenses fall. But national laws requiring the carrying of third-party motor insurance for the use of vehicles on public roads will almost certainly remain unchanged in substance”.
Concurring, the demand for insurance will continue in some capacity, whether in physical damage or third-party liability, Mr Brody said, adding that widening motor insurance coverage could be an opportunity, such as covering mechanical repairs or extending manufacturing warranties.
From a claims perspective, “the cost has potential to increase dramatically as conventional workshop repairs become restrictive in terms of agency and non-agency repairs and using manufacturer’s replacement parts becomes critical and more expensive”, he noted.
Future strategy
While the insurance industry is preparing for the driverless era, Tesla has started to offer tailored motor insurance to its customers in Asia. In Hong Kong, Tesla is partnering with AXA General Insurance for its new product called InsureMy Tesla, while in Australia, it is working with QBE Insurance.
Tesla will offer a pay-one-price model that will bundle insurance and maintenance for the entirety of the vehicle’s lifetime in the final price of its driverless cars. Industry reports said Tesla plans to expand the programme and have it match the progress of its second generation Autopilot, which should reduce insurance rates to match its lower accident rate.
With Tesla’s move to offer custom car insurance to its customers, it could provide guidance for how the insurance industry can develop a proposition for driverless cars.
| When driverless cars become mainstream
With driverless cars ready to hit the roads, we ask how the insurance industry can prepare for this eventuality.
“Opened dialogues with manufacturers, regulators and other industry stakeholders will allow better visibility on the challenges autonomous vehicles will bring and a consolidated effort for the way forward.”
Mr Andrew Brody,
Executive Vice President Consumer Lines,
Oman Insurance Company
“It is difficult to say because the existence of driverless vehicles on our public roads is not yet a reality. My own view is that, insofar as motor insurance is concerned, the need for this type of insurance and the sort of cover that it currently provides is likely to remain relatively unchanged even with an increased presence of driverless vehicles on our roads. Insuring such vehicles for third-party liability purposes is likely to be cheaper in the future. That could make this line of business for insurers less attractive as a source of premium. But I think that we are still some way from that situation at this stage.”
Mr Justin Carroll,
Senior Associate, Transport & Insurance,
Al Tamimi & Company
“The transition to fully autonomous driving will be a gradual process. However, it is a process that is well underway. Many cars coming off production lines today have approved autonomous and standard safety features like electronic stability control and emergency autonomous braking. It is quite possible that driverless cars, when available to the public, will have the option to switch certain autonomous features on or off so that drivers can decide how much automation they are comfortable with. It is very important as an industry to collaborate in close partnership with the regulators to agree on the understanding of ‘risk’ at every phase and agree on best practices. We are seeing a lot traction on this topic, especially in markets like the US and the UK.”
Mr Chris Dooley,
CEO - UAE, and MD - Bahrain,
RSA Insurance
“There is a highly uncertain future looming for the insurance industry - neither the regulatory framework, the liability allocation between stakeholders, the client relationship models nor the overall fleet ownership & management models can be predicted already today - and the highly transparent risk predictability of a ‘standardised machine insurance policy’ should allow new players to contest the market.
If not protected by a rigid legal and regulatory framework and taking the very fundamentals of automation, connectivity and big data into account, the insurance industry may need to gear up to a substantial change in its clientele structure [retail vs. wholesale; global vs. local], contract/transaction structure [flat time based & human traits vs commoditised & per trip; insurer dominated vs trip risk auctioned vs large scale customer dominated].
The insurance market can only shrink as autonomous vehicles perform much better on safety and accident avoidance [else, why would anybody use an autonomous car if the accident risk is higher?] and major disruptions loom across all elements of the insurance value chain. As motor insurance is traditionally the inroad to consumers’ additional insurance needs, insurers should be seriously concerned and develop the required capabilities to stand up for such a contest of their core markets.”
Dr Ulrich Koegler,
Partner,
Strategy& (formerly Booz & Company),
part of the PwC network
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