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Will Self-Driving Cars Kill Insurance Companies?

Written by Monica Savaglia
Posted July 13, 2016 at 8:00PM

Globally, 1.3 million people die in car accidents each year — averaging 3,287 deaths per day.

In the U.S., over 37,000 people die in car accidents, and an additional 2.35 million people become injured or disabled.

Imagine those statistics reducing by 90%... which is expected to happen once autonomous vehicles are officially introduced to the open road. You'll be able to ease your mind, knowing that a family member or a friend won't be involved in a car accident.

Warren Buffett, whose company Berkshire Hathaway owns Geico, said:

If you could come up with anything involved in driving that cut accidents by 30 percent, 40 percent, 50 percent, that would be wonderful. But we would not be holding a party at our insurance company.

A Whole New Territory

We all want safer and less congested roads, and we're getting closer to that reality all thanks to driverless vehicles. We could see self-driving cars on the market by 2020. And with that just a few years away, insurance companies are facing their own reality...

How to insure owners of self-driving cars?

Highway statistics show that about 90% of all car accidents happen because of driver or human error. If drivers are no longer the reason behind accidents, then who should be liable for any possible accidents?

Liability will start shifting from driver to manufacturer since accidents won't be caused by driver errors but rather software errors.

The manufacturer will end up accepting that responsibility by offering customers insurance to cover them from any accident caused by the car's software. Google, Mercedes, and Volvo are already planning to self-insure their products.

But where does that leave insurance companies?

Reducing the Risk of Accidents with Biometrics and Telematics

Right now, automakers have been installing biometrics and telematics technology in their cars to constantly monitor you and your driving habits. This technology helps prevent any potential accidents — for example, alerting you if you're too close to a car when switching lanes so you don't end up hitting a car that's in your blind spot.

This technology is fairly new, but its impact has been extremely beneficial in reducing accidents. Bodily injury liability losses dropped 40%, and medical payments have decreased by 27%, according to a 2014 study of insurance claims data by the Highway Loss Data Institute.

If your car has features like helping you break when you're too close to the car in front of you, then why would you keep paying more for a premium insurance plan? Your risk of getting into an accident has been lowered severely.

Insurance companies could see premium customers drop as much as 60% in the next 15 years as self-driving cars become more common. Last year, auto insurance companies collected about $195 billion in premiums from U.S. drivers.

This drop in premiums will cut a huge chunk out of insurance companies' revenues and no doubt will leave them working extremely hard to find a way to fill this gap.

Auto Insurance Companies are Struggling to Create Plans for Self-Driving Vehicles

The biggest issue for auto insurance companies is trying to predict what kind of coverage will be needed for self-driving cars. This will reveal itself over time as autonomous cars begin to hit the road, but insurance companies can't wait that long to determine how they'll keep their customers.

The fact that biometrics and telematics technology is already reducing the risk of accidents with drivers and essentially making premium insurance plans obsolete is giving insurance companies more incentive to start brainstorming the future of their insurance plans.

One idea is to create personalize insurance plans based on the information that's monitored from a car's biometrics and telematics technology to determine the risk level of a driver and their surroundings.

Essentially, that's how insurance plans are determined at the moment, but now insurance companies could have access to information that's 100% accurate of the type of driver that you are.

However, this approach might not go over too well, since it's interfering with the driver's privacy.

Is This the Death of Insurance Companies?

Last year, four companies made up 50% of the auto insurance market: State Farm, Geico — a subsidiary of Berkshire Hathaway (NYSE: BRK.A) — Allstate Corp (NYSE: ALL), and Progressive Corp (NYSE: PGR). Altogether, the auto insurance industry is worth $220 billion and supports 277,000 jobs.

The speculation that self-driving vehicles will be the death of insurance companies is just that... speculation. This is a huge market with too many jobs to jeopardize. Obviously, they'll need to start adapting to a new way of business, but that doesn't mean the death of the industry is imminent.

Vehicles will still need insurance for theft, vandalism, and damaging weather-related events. That's one thing that won't change as people start buying self-driving cars.

Either way, insurance companies have a lot of brainstorming ahead of them in order to find out what kinds of plans will make the most sense for their customers while also keeping their pockets full.

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