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Driverless Cars Could Destroy The Auto Insurance Industry

Insurance premiums depend on driver error—which is a problem if there are no more drivers.

Driverless Cars Could Destroy The Auto Insurance Industry

Driverless cars may put Flo out of a job.

[Source Photos: Google/Progressive]

Driverless cars mean fewer accidents, which is good news for everyone, right? Not quite. Insurance companies—which we all love—are set to lose money as premiums drop. A new report from KPMG says that the $200 billion-per-year industry might struggle to make ends meet in a driverless future. "Our belief is that the disruption to insurance carriers will be profound," says the report.

KPMG sees the transformation to autonomous vehicles happening pretty quickly—so fast that it will catch a lot of insurers flat-footed. It lists eight elements that will play a part in this change. These include the legal changes when a machine is in charge of the car instead of a human, the huge amount of data that driverless cars will generate, and regulatory permission.

The report also thinks that consumers will love driverless cars:

Our research showed that once consumers understood the potential benefits of autonomous vehicles, they were hooked. Each driver has a unique value proposition, and autonomous vehicles offer broad appeal: the ability to multi-task, faster commutes, safer travel, and more independence to name a few.

While we as consumers likely don’t care if the insurance industry withers and dies, the report is full of interesting nuggets about autonomous cars and their general impact on the future. Today, 90% of accidents are caused by driver error. Self-driving cars will decimate these numbers: "Our team estimated an 80% potential reduction in accident frequency per vehicle by 2040, resulting in roughly 0.009 incidents per vehicle."

The changes won’t have to wait for fully-autonomous vehicles, either. Already, drivers are making fewer claims thanks to the more limited automation built in to new cars. Automatic braking, adaptive cruise control, and lane-drift prevention all reduce common crashes. "Vehicles equipped with front crash prevention technology have a 7% to 15% lower claim frequency under property damage liability coverage than comparable vehicles without it," says executive vice president and chief research officer of the Insurance Institute for Highway Safety David Zuby. "Further automation, if successful, could lead to even further reduction of insurance claims."

Accidents will continue, but they will mostly have external causes—animals running onto the road, bad weather, the car’s computer brain crashing. The KPMG report predicts that cars will come with a switch that will let drivers activate a manual mode, although that seems like an interim solution at best. It would be pretty ironic if the insurance industry ended up lobbying for these manual switches, just so that it could remain profitable by keeping cars dangerous.

The industry could see a 40% drop in profits, says KPMG, as lower losses lead to lower premiums. You know things are bad when the silver lining is that the severity of accidents may increase. In this case, "severity" means the financial cost of an accident—driverless cars will cost more, and therefore be more expensive to repair or replace. But even this might not happen. As we move to autonomous electric vehicles, our traditional-shaped gas-powered monsters might not survive. "An alternative view is that cars—or at least a large subset—become more like ‘transportation pods,’ which are inexpensive, basic vehicles used to move people in urban settings. Such a scenario could flatten or reduce severity."

The only thing we really know, though, is that we don’t know what will happen. Not with the kind of certainty the insurance companies like, anyway. "There’s been an actual person behind the wheel of every car for 100 years," KPMG’s Joe Schneider told the New York Times, "and all of a sudden saying the rules are going to be different going forward, that’s a very difficult situation to wrap your head around."

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