Impact of Autonomous Vehicles and On-Demand Economy

At 2016 Philly I Day, a presentation discussed how the combination of on-demand transportation services and autonomous vehicles could impact the risk landscape in the future. The speakers were:

• Gerald Finley – SVP Casualty Treaty Underwriting, Munich Reinsurance America, Inc.
• Martin Frappolli – Senior Director of Knowledge Resources, The Institutes

There are different levels of vehicle autonomy ranging from 0-4 depending on the number of autonomous features it has. Level Zero vehicles no longer exist. All cars have some form of autonomy such as cruise control, or anti-lock brakes. A Level 4 vehicle is truly autonomous with no human control required. Level 3 vehicles are sufficiently automated under certain conditions but the human needs to be prepared to take control in certain circumstances. We are a long way from seeing Level 4 vehicles, but Level 3 are very much in the testing and development phase.

The main benefit of autonomous vehicles is improved safety. Automatic features such as anti-lock brakes, lane change warnings, and auto breaking have reduced accidents. It is interesting to note that the frequency of accidents has decreased significantly over the years due to these safety enhancements. However, the total number of deaths has not decreased. This is partially due to the fact that people are driving so much more than they were years ago. Distracted driving is also a big factor in the death rate staying at a high level.

According to NHTSA data, driver error is responsible for 94% of accidents. If we can add more autonomy to vehicles, we should see a significant decrease in accidents.

Some of the challenges of autonomous vehicles include people not wanting to give up control of their cars. Many people enjoy driving and don’t want to give that up. In addition, there are concerns around data privacy and cyber. The data allows someone to track everywhere a vehicle goes. Who has access to this information? In addition, it may be possible for someone to “hack” into a vehicle computer system and cause it to crash.

Another impediment to truly autonomous vehicles is the current infrastructure. Those vehicles will require a very precise and functional infrastructure to operate properly. It will take years to get all roads, bridges, etc up to standard and even then the ongoing maintenance costs will be significant.

Finally, it will take time to swap out all traditional vehicles with autonomous vehicles. People continue to drive cars many years after their production date. Once autonomous vehicles are available it will probably take more than ten years before they constitute the majority of vehicles on the road. In addition, these vehicles will likely cost significantly more than traditional vehicles which will further delay the integration process.

It is likely that the first autonomous vehicles will be large trucks and buses used for long-distance highway travel.

Right now there are only a few states that allow for testing of these vehicles on public roads.

From a liability standpoint, if the vehicle is fully automated, then the manufacturer would be liable for any accidents. For vehicles with autonomy levels of 1-3, there could be complex litigation around liability follow an accident. New legal theories will emerge in this area and there will likely be new legislation.

The insurance industry impact of vehicle automation will be significant. Approximately 38% of P&C premiums are derived from automobile insurance. Auto insurance premiums could drop by up to 60% by the 2020’s.

Long term, this could have a significant financial impact on municipalities. Not only will their costs to maintain the roadways increase, but their revenues from moving violations will decrease significantly.

The on-demand economy is changing the ownership of vehicles. In cities with significant UBER penetration, you can easily get around the city without having having a personal vehicle. If UBER can develop fully automated vehicles, then you could request a vehicle when needed and the driver-less vehicle would show up when you need it. In the future, it is anticipated that less people will own vehicles and that instead they will be fleet owned by transportation services.

If all this comes to play with the ownership of vehicles, we will see a significant reduction in the number of vehicles. This will have widespread impact on our economy with things ranging from auto manufacturers to mechanics, car washes, etc.