Insurance & Liability Breakout Session - TRB Symposium July 2015 Insuring Autonomous Vehicles Changes? Challenges? Opportunities?

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1 Insurance & Liability Breakout Session - TRB Symposium July 2015 Insuring Autonomous Vehicles Changes? Challenges? Opportunities? 1

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3 Earliest Form of Autonomous Transportation 3

4 More Recent Autonomous Vehicle 4

5 Puck Magazine, April 16, 1902 (The caption reads, AS THE LAW STANDS: Owner (To Chauffeur). Don t stop! It only costs about ten dollars apiece to run them down. I must break the record even if it costs a hundred!) 5

6 Another Autonomous Travel Threat 6

7 Advertisement from 1957 Independent Electric Light and Power Companies ad. ELECTRICITY MAY BE THE DRIVER. One day your car may speed along an electric super-highway, its speed and steering automatically controlled by electronic devices embedded in the road. Highways will be made safe by electricity! No traffic jams...no collisions...no driver fatigue. 7

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9 Some Bad News --Accidents 93 + % or more caused by or contributed to by driver error million crashes in Leading cause of Death, ages Over 32,000 to 35,000 U.S. deaths. In U.S., over 1 mil. Worldwide per y. Over 10 y., more that the population of St. Louis. --U.S. auto deaths over 2x - 3x worldwide Ebola deaths in Over two million emergency room visits/year. --NHTSA estimates U.S. economic and social costs of $871 Billion/year (not including cost of car ownership). 9

10 Causes of Crashes 41% due to recognition errors: inattention, distraction, and inadequate surveillance of driving environment. 33% due to decision errors: speeding, misjudgment of other cars speed and illegal maneuvers. 11% due to performance errors: overcompensation, poor directional control. 7% due to the driver falling asleep. 8% due to other types of driver errors. 2% Vehicle Problem: tire/wheel related, brake related, steering/transmission/engine related. 2% Driving Environment. 2% Unknown Source: NHTSA Crash Stats (Feb. 2015) In over 35% of traffic fatalities, the brakes are not applied. Source: Calif. DMV, Stanford Center for Internet and Society 10

11 Major Sources of Driver Error 11

12 Some Less Bad News Declining Deaths per Billion Vehicle Miles. (Downward trend 50 per billion vehicle miles traveled (VMT) in 1960 to 11.3 per billion VMT in

13 Compensation for Injuries (Liability) Faulty cars with Faultless Drivers Standard Auto Policy Liability Coverage legally responsible Uninsured/Underinsured legally entitled to recover from owner or operator When, if ever, will a faultless driver be legally responsible for an accident or be legally entitled to recover from a faultless operator of a self-driving car? 13

14 Uninsured Robo Car 14

15 Robot depicted as uninsured motorist only. Farmers Insurance does not insure any form of robot or nonhuman. 15

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17 Although mandatory in all new vehicles, it is predicted that ESC will be standard or optional on 95% of registered vehicles in 2029 and 100% by

18 Other Incentives? Cash to retire older cars? Air quality control districts do this now. Tax Credits/Deductions (Compare electric cars) Carpool lane? Higher speed limit for safer cars? 55 for trucks 65 for manually driven cars 75 for cars in self-driving mode? 18

19 Getting Insurance Right 2015 Boston Consulting Group survey suggests 44-55% are ready to purchase AVs, despite added expense, BUT reduced insurance and better safety were the two most important reasons cited. The Boston Consulting Group, Revolution in the Driver s Seat: The Road to Autonomous Vehicles. So If these vehicles are much safer, passing insurance savings to purchasers is important to their acceptance in the private vehicle fleet. Two modes of introduction The Moon Shot introducing driverless cars in fleets - Commercial Insurance. Shared driving in the hands of private individuals Personal Auto Insurance 19

20 How Insurers Price Insurance The Classic Way: Calculating the Base Rate. Based on Prior Data (e.g., three year experience), actuaries predict the total cost, including overhead and profit, to service the entire book of business. Divide by number of policies = an indication, or base rate. Class Plan. Adjust the base rate to better reflect the risk for each policyholder based on various characteristics safety record, gender, education, residence, etc. Why not charge the base rate to all? Less risky insureds would gravitate to a company offering a class plan reflecting their lower risk. More risky insureds would gravitate to the company charging only the base rate. Thus, over time, in the absence of a well constructed class play, an insurer would populate its book with high-risk insureds. The Future: Telematics? UBI? 20

21 What Goes Into A Traditional Class Plan? Insurers often use the following characteristics in pricing: o Motor vehicle record (driver safety record) o Accident history o How a car is driven (speed, braking, etc.) o Aspects of a person s credit o Where the vehicle is mainly kept o Number of miles driven o Age o Marital status o Gender o Occupation o Employment o Characteristics of the vehicle California lists 3 mandatory and 16 optional rating factors for auto insurance. States differ. California does not permit credit history. Michigan, Montana, North Carolina, Massachusetts and Pennsylvania ban gender ratings. 21

22 Future Rating Insurance Rating Issues Insurance class plan rate structures will need to change: How meaningful is the driver s record when the car (mostly) drives itself? Other driver characteristic rating factors? How meaningful is gross annual mileage when the risk varies significantly between operator controlled and vehicle controlled miles? Should self-driving cars be in a separate rating plan? Will policies by pay-by-mile, pay-by-trip or pay-byhour? 22

23 Mandatory Auto Insurance? All States (except New Hampshire) mandate a minimum level of auto insurance. The so called Financial Responsibility laws. California requires only a $15,000/$30,000/$5,000 policy (adopted and unchanged since 1967!) These were adopted when death s per VMT were at their height. Sound public policy if frequency, severity, and driver responsibility significantly diminish? Will focus shift to OEMs and fleet owners much like the transportation networks companies like Uber and Lyft? 23

24 Data? Data? Data? Does adequate data for pricing exist? Will AVs reduce accidents by 93%? (Casualty Actuarial Society study - 49% of accidents contain at least one limiting factor that could disable the technology or reduce its effectiveness. ) Will prior data be a credible predictor of future costs? One download changes the safety profile of the entire fleet. Moore s Law? 24

25 Claims Handling & Liability Determinations How determine who is liable when an automated vehicle is in a crash that appears to have been caused by that particular automated vehicle? What roles will private auto insurance play? --The operator will want a defense? Was it driver error or AV error? An insurance policy contains both the duty to indemnify and the duty to defend. The Black Box. For a computer view of a recent Google crash, see: The operator will want the vehicle repaired without pursuing a products claim. Collision and comprehensive coverage. --UM/UIM coverage when injured by un/underinsured motorists --Will the insurer or operator be initially responsible? Up to the financial responsibility limits? The insurer will want its money back from the OEM through subrogation. --Health care for major injuries is a substantial cost. As health care becomes universal, will health insurers continue to pass costs to liability insurers or OEMs? 25

26 Some Regulatory Challenges to Pricing All states, including California, provide that rates may not be excessive, inadequate, or unfairly discriminatory Nevertheless, Prop. 103 and accompanying regs. mandate the top three Rating Factors in the following order of importance (abridged) 1. The Insured s driving safety record 2. The number of miles he or she drives annually 3. The number of years of driving experience the insured has had. Followed by 16 optional rating factors. See Cal. Ins. Code sec (a), 10 CCR sec Telematics? UBI? CA insurers may collect only mileage. Cal. Code Regs. Tit. 10, sec (i)(5)(a)(insurer may use technological device only for determining actual miles driven.... ) 26

27 California s Good Driver Discount California s Good Driver Discount. Proposition 103: at least 20% below the rate the insured would otherwise have been charged. Prior approval of rates when safety is rapidly (perhaps exponentially) increasing. Initial lack of data for rating. Credibility of data in fast moving environment. 27

28 Some New Costs? Bumper tappers (less than fender benders ) can destroy expensive sensors, raising repair costs. Expensive technology may be destroyed in more serious collisions. Who will be authorized to make repairs? Bob s Pretty Good Repair Shop? 28

29 Some New Costs? (Cont d) Claims currently un/undercompensated will now flow up to the OEM, e.g. Parent drives car into tree, injuring parent and child. No insured claim. Car drives parent and child into tree. Products claim against OEM. Trucker drives truck into tree. Workers compensation is the only remedy. Truck drives trucker into tree. Tort claim against OEM. Serious injury, but only $15,000 in insurance or assets. Claim s value is $15,000. If a products liability claim, the OEM s insurance and assets are available to pay the claim. 29

30 The Future? Market for first-party insurance (like uninsured/underinsured coverage) to protect from injuries from autonomous vehicles? Will insurers and OEMs enter into arbitration agreements to resolve subrogation claims (much like how insurers resolve collision claims at present)? Vaccine compensation model. As infrastructure matures, resolving disputes in a fault based/defect based system may make less and less sense. 30

31 Guarantee Funds and General Motors Regulators first obligation - insure the solvency of insurers so that they can honor the promise of the policy. This is especially so when public policy demands financial responsibility for automobiles. Regulators accomplish this through: Conservative accounting principles for insurers Financial surveillance Guarantee Funds General Motors and Other OEMs Who Guarantees Their Obligation? Guarantee Funds? probably not because OEMs may: Self-insure? no guarantee fund coverage. Retain some risk and reinsure? no guarantee fund coverage for reinsurance Insure with a nonadmitted ( surplus lines ) insurer? no guarantee fund coverage. Insure through a risk retention group? no guarantee fund coverage. Insure through a captive (in Bermuda?) no guarantee fund coverage. Public Policy Issue If a large part, or most, responsibility for injuries is to move to OEMs, should there be some sort of guarantee fund to protect the public from insolvencies? 31

32 Questions? 32