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Vol. 4, Iss. 3
March 18, 2015

Driverless Cars: The Real Insurance Issue

 

There has been a lot of talk lately about driverless cars. It has included when various manufacturers plan to introduce models with some driverless features (soon) and, more generally, longer-term predictions of when we’ll all be skootin’ around in KITT. However, while automobile manufacturers long-ago conquered cruise control, I’m dubious that the day will come when I can play backgammon while driving. After all, in nearly two centuries, nobody has been able to figure out how to prevent train derailments. And they run on a track -- and usually without any other trains nearby.

Given my skepticism of driverless cars taking over the highways and byways of America I haven’t given much thought to the subject. But I recently did – on account of a Wall Street Journal article that discussed various insurance implications of them. Throw insurance into the mix and I’ll try bird watching.

A March 4th Journal article, from reporter Theo Francis, discussed the fact that some insurance companies now see the need to mention in securities filings that driverless cars are a threat, albeit not an imminent one, to the way that they do business. Admittedly, this is all nervous nellie stuff by lawyers, but the article makes clear that some insurers are warning investors that, because driverless cars may be so safe, there could be a decrease in demand for auto insurance. [As if somehow auto insurance will no longer be mandated by law.] I don’t know about you, but the idea of driverless cars just makes me want to buy more insurance – auto and life.

[Another Journal article, from March 6th, stated that, according to McKinsey & Co., self-driving cars could eliminate 90% of all auto accidents. McKinsey predicts that, based on interviews with dozens of industry officials, mass adoption of driverless cars will begin in about fifteen years.]

As I see it, and this point was made in the earlier article, driverless cars can have a significant effect on the insurance market – liability that is. Right now, when there is an auto accident, it is rare to see the automobile manufacturer named as a defendant. Auto accidents are generally matters between the involved drivers and at issue is whose driving, and not whose car, was the cause. But if the car involved in the accident was designed not to have accidents, it is easy to see an automobile manufacturer being named as a defendant in just about every automobile accident suit – of which there are only a gazillion filed per year. Not to mention the other gazillion auto accident claims per year that are resolved pre-suit. The manufacturers of component parts for the supposedly safe driverless cars can also expect to get to know their way around every courthouse in America. This is the plaintiff’s lawyers dream – a deep pocket for every automobile accident. No longer will it be a problem when the negligent driver only has a 15/30 policy.

Under this scenario – and I don’t think it’s far-fetched – there will be a huge demand for liability insurance by automobile manufacturers and manufacturers of automobile component parts. Of course, given the massive claims frequency and severity involved, it is hard to imagine that such insurance would be even remotely affordable. And that assumes there is even an insurer willing to write it. If the solution is to build this risk factor into the price of the car, that would presumably make it more challenging for manufacturers to sell them.

Even if McKinsey is correct, that self-driving cars could eliminate 90% of all auto accidents, manufacturers would still be named as a defendant, in enough cases, to surely cause them serious financial consequences.

Of course all of this is pie in the sky stuff. But I can’t help but think that automobile manufacturers, who are falling all over themselves in the race to get to market with driverless cars, should be careful what they wish for.

 
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