4/18/2014

Do Driverless Cars Mean Adjusters Will No Longer Be Required?

It might not be long before technology prevents the vast majority of potential accidents. Where does that leave auto insurers?

By Sam Friedman

What’s keeping auto insurers up at night? Could they be losing sleep worrying about how their business might have to adapt if improvements in technology make damages from auto accidents more and more of an anomaly not too far down the road?

It’s an odd but understandable conundrum facing carriers. After all, the industry is devoted to anticipating and mitigating exposures. Consider the fine research work being conducted by the industry-supported Insurance Institute for Highway Safety. And a large chunk of insurer information technology budgets of late have been dedicated to developing advanced analytics and predictive models that can improve underwriting and pricing, as well as more effectively red-flag suspicious claims.

More recently, many auto carriers have been focusing on the development of usage-based insurance, in which telematic monitoring of actual driving behavior offers first-hand data that can be leveraged to lower loss costs, improve pricing decisions, and bolster retention of better risks—while also providing valuable evidence to help investigators get to the bottom of disputed accident claims.

Lately, however, there’s been a lot of potentially positive news for anyone interested in lowering the incidence of auto accidents, thereby saving lives, preventing injuries, and limiting damage to vehicles.

Telematic programs are already playing a significant role here. Indeed, beyond the discounts that could be earned by policyholders, part of the attraction for drivers and insurers alike is the two-way communication that telematics offers. Warnings can be relayed quickly about potential road hazards, and drivers can receive real-time feedback about whether they are going too fast, taking turns too sharply, or other safety concerns.

But we may be about to move well beyond such relatively rudimentary loss mitigation features as cars themselves become “smarter” and actually communicate with one another while on the road.

For example, in February, the U.S. government announced plans to set up regulations requiring all new cars to give nearby vehicles a heads-up about their location, speed, direction, and additional information to warn drivers about impending collisions.

Some of the enabling technology is already in place and operational. For example, some auto manufacturers have equipped their vehicles with adaptive cruise control that can keep cars from getting too close to those ahead and even automatically brake if a collision appears imminent. Another feature allows a car to sense if it is drifting outside a lane, perhaps if the driver is intoxicated or dozing off, and automatically steers the vehicle back on course. An increasing number of vehicles have parking sensors and rear-mounted cameras so drivers can back up without scraping off paint, bending a fender, busting a taillight, or worse, hitting a pedestrian.

The new safety program the government is proposing would leave vehicles under the driver’s control but issue warnings through alarms, an automated verbal alert, a display screen, or even a vibrating steering wheel, providing what’s being described as “situational awareness.” The proposal would mandate an early warning system around a vehicle of about 300 yards. One of the potential challenges in implementing this plan has already been addressed, as the government has put aside specific radio frequencies to carry such transmissions.

There is a long way to go before this virtual safety net becomes a reality. Beyond the time it will take to debate and adopt the necessary rules and regulations, it could be years before the normal turnover of vehicles puts a critical mass of cars on the road with such capabilities.

Still, looking at the big picture and taking into account the speed with which new technologies are being introduced and enhanced, relatively speaking it might not be long before vehicle-to-vehicle communication systems as well as telematic driver-feedback programs prevent the vast majority of potential accidents.

That’s a wonderful thing, right? Nobody wants to see drivers, passengers, or innocent bystanders hurt or vehicles damaged in an accident. As a society, we’d be much better off if such road mishaps became more and more rare.

But one has to wonder, if a majority of accidents are avoided or minimized by these emerging technologies, where might this eventually leave auto insurers, which generate more than one-third of property-casualty industry premiums?

To top it all off, this trend towards higher-tech vehicles that are better equipped to avoid accidents likely will be accelerated, perhaps exponentially, by the rollout of driverless cars—a development that raises a set of unique questions for auto insurers in its own right.

In the short term, these trends toward heightened safety features will likely be positive for both insurers and consumers. Even good drivers need all the technological help they can get to remain as safe and secure as possible.

If these gadgets do the job in terms of increasing awareness, improving safety, and avoiding more accidents, that’s all for the good as far as insurers are concerned because it lowers loss costs. Such factors will certainly play a bigger role in the underwriting and pricing of coverage, but for a number of years to come, auto insurers still are likely to be dealing with accident claims, even if frequency declines over time.

In the medium term, we’ll need to see how these trends play out and if the various technologies live up to the expectations for them. One should not underestimate the potential for unexpected consequences in implementing new products and systems. The output usually is only as good as the input, and unforeseen bugs seem inevitably to arise.

Long term, as the new systems take hold and if lower frequency and severity is documented, a dwindling number of accidents eventually might mean that fewer adjusters will be needed for auto liability claims. Some individuals could be reassigned to other lines, or the claims work force may simply shrink.

But in the meantime, there are a number of more pressing claims management implications for insurers to consider. For one, incorporating increasingly sophisticated systems likely means that when such souped-up vehicles are involved in accidents, despite the additional safety technologies in place, they may be more expensive to repair—especially if original equipment manufacturer parts are called for rather than generic replacements.

It’s not hard to imagine that high-tech cars might make tempting targets for cybercriminals, as opposed to those hands-on thieves who jimmy locks and hot-wire ignitions. These increasingly computerized vehicles may attract hackers who could conceivably start and steer them from a remote location if they are able to break into their operating systems. And what would happen if a virus were to infect the vehicle’s software? You can see why cyber attacks might soon have to be added as a standard insurable exposure in auto policies for select vehicles.

Another claims implication would involve the question of whom to sue if a driverless car were to hit someone or something. Is this even an auto liability claim? Or might a hardware or software developer face a product liability suit due to an alleged malfunction or simple failure to perform? As a result, could we be looking at new types of subrogation actions between auto and product liability carriers?

The claims complications of a driverless car colliding with a vehicle controlled by a live driver may also prove to be far more intriguing than your run-of-the-mill accident, keeping in mind that driverless cars are not always on autopilot. They can and likely will be driven by actual people at times—either by choice (as some people will undoubtedly still enjoy the “quaint” pastime of driving) or if conditions arise that prompt the car’s operating system to insist that a real person take the wheel.

While driverless cars theoretically could lower the risk of distracted driving, what happens if the person in the proverbial driver’s seat is caught off guard reading the paper, surfing the Web, playing a video game, texting, or fixing hair or makeup (or any of the numerous other tasks they often perform today, much to their own peril) when the “driverless” car, for whatever reason, suddenly returns control to human hands?

If such is the case and an accident occurs, insurers will need savvy investigators, keen data analysts, and experienced adjusters to make sense of it all, determining who is at fault and liable.

There are commercial auto implications as well. Will insurers eventually be writing coverage for driverless limo or taxi services? And what about trucking? Allowing an automated operating system to take the wheel during all-night drives along lonely highways might be an advantage to the risk of having a fatigued, distracted, or intoxicated human operator. But might it also put a pricey cargo at greater risk if hackers get into the truck’s command system?

Indeed, at this pace of technological progress, how long will it be before auto insurers have to deal with the flying cars envisioned in the television cartoon series The Jetsons? Or would that be an aviation risk? Stay tuned!   



Sam Friedman is insurance research leader with Deloitte’s Center for Financial Services in New York. He has been a Fellow with CLM since 2011, and can be reached at samfriedman@deloitte.com.

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