Terri Goveia
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Are insurers ready for driverless cars? | Canadian Insurance
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Are insurers ready for driverless cars?

New technology raises questions about risk, liability.

Five car pile-ups are common on North American highways. But an early August multi-vehicle fender bender in California made headlines because of what triggered the crash: a prototype driverless Prius developed by Google.

The car—usually guided by a roof camera and sensors—actually had someone manually driving it at the time of the accident, according to the tech company’s officials. But the incident offers a glimpse of the future–especially for insurers. Google is already testing its driverless vehicles in California and Nevada, and major automakers like GM and Volkswagen are following suit with similar research. Is the insurance industry ready for them?

Rethinking risk

Google’s test fleet has already racked up some 140,000 miles on US highways. When the cars leave test sites for mainstream use, insurers and risk managers must completely rethink the traditional approach to risk, according to one risk expert.

“The GEICOs and the Progressives would have to throw away their entire approach to underwriting and start all over,” said Mike Stankard, managing director of Aon Risk Solutions’ automative practice in Detroit.  Long-held factors—like age, sex—wouldn’t apply in a world where cars don’t have a human driver behind the wheel. “That would turn the [current] approach on its head.”

That’s not the only factor poised for a dramatic shift. New technologies—in the form of the car’s sensor and camera system—would also mean new exposures, he points out. If the car did crash, the intricate systems that guide it on the roads would be called into question.

“It opens up a whole new door of things they’d have to defend themselves against when vehicles crash.”

And although manufacturers wouldn’t face the usual product liability claims—which challenge a car’s “crashworthiness”—once unmanned cars are the norm, they also won’t be able to look to driver error as the cause of a crash, Stankard said.

“It’s going to put a lot of pressure on the technology, but it will take away from a product liability perspective a lot of the human element cause of claims and defense of claims.”

A focus on safety

And it could also lead to big changes on how insurance is sold, he says. With the entire risk picture simplified, “it would take their whole business and make it a commodity purchase, because there would be fewer variables, unless there was some perceived difference in safety [between vehicle models].”

But the biggest change could come on the roads themselves. The cars are meant to drastically cut back on driver error and improve road safety. In presenting the driverless prototypes at the 2011 TED (Technology, Entertainment, Design) conference this spring, Sebastian Thrun, a Stanford University professor who helped design the unmanned cars, told attendees.

Fatal accidents caused by human error “can be prevented by machines,” Thrun said.

Present-day driving issues—like distracted driving or older drivers—might also make driverless cars appealing to insurers looking to cut down on costly errors behind the wheel.

There are two sides to the argument, said Robert Tremblay, director of research at the Insurance Bureau of Canada (IBC). “There would be less possibility for human error, which is good. But on the other hand, they do relinquish control to something mechanical.”

Still the potential is there: “It would be perfect for a 90-year-old grandmother, and it would be great to transport teenagers around,” noted Stankard.

Ready or not

Is the industry ready? Not today, according to Stankard. “No insurance industry now [is] saying ‘yeah, we’re ready to do this.’ ” Although other driverless vehicles in factories are insured, Google’s driverless prototypes are likely self-insured, he added.

“They would be insurable when they’re road worthy,” said Tremblay. “Insurance companies would work with Transport Canada to look at how and where they’re used and individual insurance companies would evaluate risk and insure them appropriately.”

This could happen faster in some places rather than others. In early August, legislators in Nevada passed a law making it legal for the unmanned cars to be on the road.

But it doesn’t mean that the technology will catch on with the wider public. For one, the technology is expensive, and many drivers, well, just like driving too much to give it up.

“They [auto makers] had electric vehicle technology 25 years ago and chose not to use it,” Stankard pointed out. “They rolled out the EV1 and it died a slow death.”

Then again, the transition may happen faster—and more seamlessly–than we think. Thrun told the TED crowd that when Google first tested the cars in San Francisco, “nobody even noticed.”