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


Academic year: 2021

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Insurance & Liability

Breakout Session - TRB


July 2015

Insuring Autonomous Vehicles

– Changes? Challenges?


More Recent Autonomous Vehicle


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


Another Autonomous Travel Threat


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


Some Bad News




% or more caused by or contributed to by driver


--5.3 million crashes in 2011

--Leading cause of Death, ages 3-34.

--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 2014.


--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).


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,


Some Less Bad News – Declining Deaths per Billion Vehicle Miles. (Downward

trend—50 per


vehicle miles traveled (VMT) in 1960 to 11.3 per billion


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


“Uninsured” Robo Car


“Robot depicted as uninsured motorist only. Farmers

Insurance does not insure any form of robot or



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 2040.


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?


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


• Two modes of introduction

• The Moon Shot – introducing driverless cars in fleets


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?


What Goes Into A Traditional “Class Plan?”

Insurers often use the following characteristics in pricing: oMotor vehicle record (driver safety record)

oAccident history

oHow a car is driven (speed, braking, etc.) oAspects of a person’s credit

oWhere the vehicle is mainly kept oNumber of miles driven


oMarital status oGender

oOccupation oEmployment

oCharacteristics of the vehicle

California lists 3 “mandatory” and 16 “optional” rating factors for auto


Future Rating Insurance Rating Issues

Insurance class plan rate structures will need to


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


Will policies by mile, trip or


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


Sound public policy if frequency, severity, and driver

responsibility significantly diminish?

Will focus shift to OEMs and fleet owners – much like the





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


One download changes the safety profile of the

entire fleet.

Moore’s Law?


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


Some Regulatory Challenges to Pricing

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. 1861.05(a), 10 CCR

sec. 2632.5

Telematics? UBI? CA insurers may collect only mileage.

Cal. Code Regs. Tit. 10, sec. 2632.5(i)(5)(a)(insurer may use technological device only for “determining actual miles driven . . . .”)

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



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.


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



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


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.


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.


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


Insure through a risk retention group? – no guarantee fund coverage. Insure through a captive (in Bermuda?) – no guarantee fund coverage.




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