Insurer-less Driving Ahead

According to theverge.com, Berkshire Hathaway CEO Warren Buffett told CNBC that the emergence of self-driving cars will ultimately bring the end of car insurance as we know it.  "I think it's a long way off, but there's no question," he said.  "Anything that makes cars safer is very pro-social, and it's bad for the auto insurance industry." 

https://tinyurl.com/z2e8dpd - "Warren Buffett Says That Self-Driving Cars Will be Bad for Insurance Companies"

It's a little sad that something "pro-social" in Buffett's words is bad for insurance companies.  But the article notes that car insurance may not disappear.  The real underlying question is whether car companies become insurance companies.

Car insurance is required in the U.S. primarily to inoculate drivers against potentially bad outcomes on the road including acts of nature, the bad driving behavior of others, or the bad driving behavior of the drivers themselves.  For the past year we have heard that self-driving cars will eliminate 80%-90% of crashes.

These figures suggest that humans are at the heart of most driving mishaps and removing the human being from the equation will reduce causes of insurance claims to acts of nature, infrastructure and mechanical failures or software glitches.  The first step in the evolutionary path toward self-driving cars, though, will be the building of trust between the car and the driver.

The onset of self-driving cars is changing our assumptions about driving.  We have always been attracted by the freedom of the open road, for which cars are ideally suited.  The car directly replaced the horse a little over 100 years ago, but what we gained in power and driving range, we lost in safety.

The horse was a driving machine that had the advantage of cognition and the instincts of self-preservation.  A horse comes with collision avoidance skills and instincts built in, once properly trained to accept a human driver/passenger.  Cars have no such instincts - so we have had to build them in.

We only recently accepted this challenge of building in collision avoidance skills and instincts.  We have accepted the shortcomings of our mechanical conveyances for more than 100 years and taken on the responsibility - and associated blame - of crash avoidance ourselves.

While the U.S. Department of Transportation and Google and even car companies blame drivers for the vast majority of crashes, these parties are changing our assumptions regarding responsibility.  This is best captured by Volvo's Vision Zero pledge that no Volvo driver or passenger will be killed or injured in a Volvo by the year 2020.

No car company has stepped up to Volvo's line in the sand.  Yet, the company went a step further by stating that when it bring self-driving technology to the market it will except liabilty for the performance of those systems.

Since we don't yet have self-driving Volvo's it's hard to say precisely what the company and its President and CEO, Hakan Samuelsen, ultimately meant.  But he made the statement in the context of a call for the U.S. government to set testing guidelines and standards to foster the development of self-driving technology nationally and globally.

Volvo is most likely concerned about the behavior and performance of the cars made by competing car companies.  But Volvo has set the bar high that cars should not collide with things and that driving ought not to be a life-threatening proposition.

Volvo's thought leadership on this point is not to be under-estimated.  Cars are expensive to own and frequently frightening to drive.  The average television commercial for cars rarely focuses on these two topics.  In fact, most ads show cars driving in dangerous, high-performance ways that bear little relationship to the purpose of transportation.

The emergence of the self-driving car is fundamentally altering customer expectations for cars and, along with it, our understanding of insurance.  The regulatory environment for car insurance as it stands in the U.S. and elsewhere will have to change. 

Insurance companies have been slow to embrace self-driving car technology.  Now that they understand, from the mouth of the Oracle of Omaha, that this technology may put them out of business they are likely to become even more skeptical of and hostile to the proliferation of self-driving technologies including: automatic emergency braking, collision avoidance, blind spot detection, lane keeping, lane departure warning, and adaptive cruise control.

Car companies like Volvo, and possibly Toyota which recently created an insurance joint venture, have begun to see that they will have to take on some or all of the car insurance role.  Perhaps car insurers will only provide coverage for weather-related or non-vehicle related vehicle ownership events.

What is clear is that the insurance industry that once proudly fought for the installation of airbags (State Farm took the lead during the Reagan Administration) is absent without leave in the self-driving car debate.  The predominant insurance industry response has been silence.

It is up to car companies to step into this vacuum along with Volvo in determining the regulatory and legal framework necessary to bring self-driving cars to the market.  The greatest challenge lies ahead in the period of the next 20-30 years when self-driving cars will share the road with older vehicles lacking the latest collision avoidance prophylactic technologies.

In the verge.com article, Berkshire Hathaway Vice Chairman Charlie Munger notes the business-negating capabilities of technology citing Microsoft's introduction of the digital Encarta encyclopedia.  "We had this wonderful company that made this wonderful encyclopedia that earns $50M of income every year like clockwork. And Bill (Gates) gave away a free encyclopedia with every bit of Microsoft software, and away went a large part of our profits from the encyclopedia business forever."

Of course, Encarta arrived in the market as, itself, an anachronism in the age of the Internet along with a lot of other software that no longer needed to be sold in a box or installed on a PC.  But I don't think anyone is arguing that the bad old Internet that put Encarta out of business, should go away.

We are embarked on a similar journey in the car.  Cars will increasingly come with their own in-built insurance policy in the form of advanced technology.  Horse sense will return to transportation.  Money and resources will no longer be wasted on compensating for the weaknesses of our machines with insurance policies.  Our machines will begin to fulfill their original purpose of providing safe transportation.

To continue to play a role, the insurance industry must move to embrace and help to foster rather than flee or attempt to confront and deny the adoption of new technology.  Resistance is futile.  I can already feel the nostalgia for driving ourselves unassisted by technology that will ultimately set in 20 years from now in a world ruled by partially or fully self-driving cars.

On a positive concluding note, it is worth observing that owners of Tesla Model S's with autopilot have seen no negative impact on their rates from the introduction of the technology.  Here is at least one example of a tacit endorsement of self-driving technology by the insurance industry.

Once again: Advantage Tesla.  If car companies are going to take on the liability risk, the car companies with the most data on how their vehicles are used will be in the best position to underwrite that risk.  No car company knows more about how its products are being used than Tesla.

Roger C. Lanctot is Associate Director in the Global Automotive Practice at Strategy Analytics.  More details about Strategy Analytics can be found here: https://www.strategyanalytics.com/access-services/automotive#.VuGdXfkrKUk