In 1886 the first true automobile powered by a combustion engine was created. Radio broadcasts could be enjoyed while driving by the creation of the first car stereo in 1930 and the year 2000 saw the first hybrid car powered by electric energy and petrol. In 2003 cars could parallel park themselves and the year 2014 saw the creation of Tesla autopilot technology. The innovation and technological improvements that have been seen through the evolution of vehicles is astonishing and it only continues to become more impressive. You therefore may be asking yourself ‘What will be next?’. It is the belief of many car manufacturers like Volvo as well as tech-giants like Google that the next step forward in the area of transportation is fully autonomous vehicles.
What Exactly Are Fully Autonomous Vehicles?
Simply put they are vehicles that will be able to drive themselves with no human interference. Yes, you did read that correctly and no, this isn’t something taken from a sci-fi film set hundreds of years from now! A report from Statista claims that one in ten cars will be self-driving by 2030. Five levels of self-driving have been clarified. Level 1 should sound familiar where the vehicle is controlled by the driver with some driving assist features included in the design – think cruise control. There a steady progression through levels 1 to 5 with 5 being the ultimate goal. Under level 5 the car is fully automated and can carry out all driving functions under all conditions. This means there would be no necessity for a wheel or accelerator (although it is still likely there will be the option for driver control). It is difficult to imagine that a car could follow all the road rules and driving basics that we have all had to do numerous driving lessons and tests to be allowed to do. However advancements in technology has made it that sensors can pick up everything a human would with the key benefit of autonomous vehicles being that they can actually pick up more than a human would.
What Are the Benefits and Concerns of Autonomous Vehicles?
The most beneficial impact of self-driving vehicles is that the risk of human error when driving would be eliminated. In a world where autonomous vehicles are part of normality no one could do things like speed, text while driving or run red lights. All of these things contribute to the number of road accidents but no driver means no human error. In fact, US Department of Transportation researchers estimate that road traffic fatalities caused due to human error could be reduced by as much as 94% by using autonomous vehicles. According to the World Health Organisiation, approximately 1.35 million people die due to road accidents each year. Imagine this number sliced by as much as 90% and the amount of lives that could be saved.
As well as the striking benefit of a reduction in road deaths McKinsey research suggests that as much as 50 minutes per day could be deducted from each person’s driving time (that’s 50 more minutes to watch Netflix per day) and the issue of parking spaces will be hugely decreased, reducing the need for space to park in the US by more than 5.7 billion square meters. Say goodbye to the days of looping trying to find a parking space for half an hour or worrying that someone is going to bump into your parked car! The same report also claims the reaction time of self-driving vehicles is already a third of that of a human with engineers continuing to work to further improve this time. These vehicles can therefore pick up on potential hazards much quicker than a human and avoid even minor road accidents. With all these potential benefits associated with self-driving vehicles you might imagine there should be a huge global push for them to be rolled out as soon as possible. Unfortunately as we well know (through many a zoom meetings/quizzes and online classes) technology, no matter how advanced, can sometimes malfunction and this is where issues arise.
Autonomous vehicles cannot 100% guarantee that no road accidents will occur because there will always be the risk (no matter how small) of a technical failure. In March 2018 an Uber self-driving car collided with a 49 year old pedestrian killing her, after struggling to correctly identify her on the side of the road and therefore not stopping as she crossed. It is accidents such as these that have contributed to the public concern over the true safety of self-driving vehicles. However, although this accident is tragic and could have been avoided, research still suggests that the overall number of road traffic deaths will be decreased. After all this exact event has occurred time after time due to human error and the probability of it occurring because of humans is much higher than it occurring due a technical fault of self-driving vehicles. A lot of people exhibit over confidence bias and have more trust in their own abilities than that of someone else or in this case something else and this brings a lot of opposition to the forefront of the topic.
Insurance and Pricing Actuaries – Why Are They Involved?
Engineers, scientists and test drivers are the first that come to mind when considering who are the people most important to getting autonomous vehicles on the road. It would be easy to forget that insurers are also extremely important in the process- remember an uninsured vehicle is not allowed on the road. In particular, pricing actuaries working for these insurance companies will be extremely important and play a key role to get these vehicles on the road.
Taking a step back let’s answer a basic question that very few people know the answer to and I know I get asked on the regular- what is an Actuary? Simply put actuaries are concerned with managing financial risk. Everything we do has risk associated with it. We take out insurance policies to protect against the risk of uncertain future events that could have a high adverse impact on us whether this be life insurance, health insurance or car insurance. The premium insurance companies quote you for insurance isn’t plucked out of the sky! It is actuaries that we trust to access specific risks and come up with an informed and reasonable premium to charge for insurance coverage in the event these risks occur. Much like the weather risk is not stagnant but it is constantly changing and actuaries need to continue to adapt and respond to changes in this risk through updating their models, statistical methods and mathematical techniques to keep up to date with new innovations and changes in the world that affect the risk they access. Autonomous vehicles are one of these changes.
Fewer vehicle crashes means fewer claims to an insurance company but the company cannot simply take this claims reduction as a win and continue to price in the same way. General insurance actuaries will need to adjust their pricing to reflect the expected reduction in claims so we could expect lesser premiums. Further to this, how the policies will be priced will be entirely different. Currently, insurance companies price their personal vehicle insurance using models based on a range of factors that include driver age, gender, number of additional drivers and many more factors related to individual driver characteristics but if there is no driver these factors become irrelevant. Even the no claims bonus that all insurance companies implement in their policy pricing will have little meaning when it comes to autonomous vehicles because there will be a random nature to when malfunctions occur that result in a claim rather than an indication that there is a lack of driver skill. When considering autonomous vehicles the risk will shift from the driver to technical failures. Therefore things such as connectivity issues, equipment failure and even cyber-attacks will be extremely important. How to collect data, model and incorporate all these new risk factors will be a big challenge that pricing actuaries (who build the pricing tools you would input your details into online to get a quote) will need to overcome.
Another difficult question becomes one of liability in the event of an accident, which is extremely important in the case of insurance. If a malfunction occurs while the car is driving itself then surely it must be the fault of the vehicle manufacturer and not the owner of the vehicle? Therefore it is possible that future vehicle insurance will shift from individual policy holders to car manufacturers instead. But wait- does there will be no need to buy car insurance? Unfortunately, if this became the case then manufacturers will experience higher operating costs and therefore this insurance cost will passed through in a higher vehicle price. To bring the prices of autonomous vehicles down then more likely is that of a joint ownership between vehicle manufacturer and individual holder meaning that insurance companies and in particular pricing actuaries will have to find a way to balance individual coverage with product liability coverage on the manufacturer’s part. If this doesn’t sound like a difficult enough task as it is the question of liability and the implications for insurance companies becomes even more difficult when we consider the transition period where we have both human operated vehicles on the road along with partially and fully autonomous vehicles. It could be very difficult to argue whether human error caused a crash or a technical failure and finding a way of accessing this will need to be addressed. Insurance companies will need to be able to provide a new form of insurance for autonomous vehicles while also providing traditional vehicle insurance and both will need to be separated in terms of claims and for pricing actuaries to examine the profitability of their pricing. This could lead to double the workload!
Will Other Types of Actuaries Be Affected?
It is clear general insurance pricing actuaries will face the most drastic changes and challenges due to autonomous vehicles but other types of actuaries will see some changes too. Reserving actuaries calculate what cash an insurance company should hold in order to be able to pay out expected claims. Since general insurance companies will see a reduction in claims it is likely that their reserving actuaries will see a reduction in their necessary reserves. Incorporating past claims experience to calculate their reserves could pose a challenge for the first number of years due to a lack of data in relation to autonomous vehicle claims and they will need to be careful not to overestimate the improvement in claims experience each year as autonomous vehicles are gradually rolled out.
As I have mentioned road deaths are expected to hugely decrease therefore actuaries should experience a decrease in mortality across all ages. Life policies could expect a slight decrease in premium due to a decrease in the likelihood of death while pension policies may experience a slight increase in premium due to a longer expected pay out period as a result of longer survival. Actuaries can also expect the ‘accident hump’ in the mortality curve to become less prominent. This is the part of the mortality curve that doesn’t follow the general increasing across ages mortality trend and in which mortality increases slightly before decreasing again across the age range of approximately 15-30. A big part of this is due to younger and newer drivers being more reckless when driving and having less experience on the road resulting in more accidents.
Health insurance companies should also experience a decrease in claims that health actuaries will need to take into account when pricing due to the reduction in injuries and necessary healthcare associated with road accidents.
So although roll out of autonomous vehicles is still a while off yet it is clear that there are many factors that need to be considered before they can be offered to the public. General insurance companies and in particular the actuaries that work for them will need to begin planning for how insurance for these vehicles will be approached so that when the manufacturing and technical side of the vehicles has been perfected a lack of planning and consideration by actuaries doesn’t hold back the process of getting them on the road and making a beneficial impact within society!