Then Nobody is Safe

In the recent film Bridge of Spies, Tom Hanks plays insurance attorney James Donovan. Near the beginning of the story, there is a great scene where Tom Hanks’ character is discussing a potential claim being brought against his client. At the end of the scene he dramatically tells his competitor: “Because Sir, then that is the end of the insurance industry, and then nobody is safe”.

There are many moments where established industries experience disruptive transformation leading to confusion, fear and sometimes real pain. Today, any industry that can have an upending of its core business model earns the term Napster moment. In 1995, the music industry was multi-billion industry, larger than that the movie and publishing industries combined. In 1999, the file sharing program Napster was launched, and it transformed that industry forever, disrupting a long established business model and in many ways, killing one of the most profitable industries in history.

Some folks have suggested the introduction of self-driving cars, with their potentially significantly lower crash rates, could spell the end of the heyday of the auto-insurance industry. Digital music did it for the recording industry, will self-driving cars do it for the auto insurance industry?

The short answer is no, and I think the auto insurance professionals know this. Although there will be a dramatic drop in number of accidents on the roads, self-driving vehicles will not wipe out the auto insurance industry completely. After all, we’re human, and we are not perfect; how therefore could we be expected to create machines that are perfect. They will, however, drastically change the inner workings of the industry, as they will to so many others.

Let’s be clear, self-driving vehicles will dramatically lower the number of crashes on the road, but as Gillian Yeomans points out in her article in Lloyd’s of London Exposure Management report, the risk will be transferred from driver, and human error, to the vehicle, and system failure or malfunction. Anyone familiar with the inner workings of these emerging vehicles knows that there are a spectrum of things that could go wrong in the hardware and software that will operate the vehicles, and though crashes may be more infrequent, it is possible that when they do occur, they will be more complicated than the sorts of routine crashes insurers are used to handling now. Even if all of the hardware and software functioned perfectly and crashes were reduced to zero (which will never happen), there would still be certain risks. As Yeomans observes, “Damage or theft can still occur when a car is parked in a driveway, and for the present at least, cars with semi-autonomous capabilities are more expensive than their traditional counterparts.” Since the potential risks associated with self-driving vehicles - including injury, death, and other losses – are largely unknown and may be high, insurance companies will have a new role to play in determining the standards for the type of things that would need to me insured, the types of offerings and regulation.

There will also be new types of insurance demanded by the widespread introduction of self-driving technology. Cyber coverage, for example, is an evolving form of insurance that may be required by the various stakeholders in the self-driving vehicle arena. Service providers would need to invest in coverage to offset disruption or cyber attacks of their systems. Telematics-based policies may also emerge when sensors and computers are responsible for vehicle operation.

Finally, the notion that self-driving vehicles are raising these types of insurance questions for the first time is false. While it may be daunting for the auto industry to have to consider these questions for the first time, other industries have already faced automation and experienced accidents despite the removal of human error in vehicle operation. For example, since the 1970s, a number of subway systems around the globe have been under complete automated operation. Yet, these systems can still have failures that lead to accidents. We need only to look at how these systems integrated into the existing insurance ecosystem to see how self-driving vehicles will potentially be integrated in the near future.

So though auto insurers may no longer have as many customers with as many small claims, the market will likely shift to corporations as customers, with higher-value claims. What revenue will be lost from lower crash indexes will be counterbalanced by an increased demand in evolving, and potentially yet unestablished, insurance policies.

So maybe we can hope that all of us will still be safe after all.

This piece was originally posted to LinkedIn