Driverless Cars Are Becoming a Risk Factor for Insurers

Driverless cars could be great for consumers: frees up time to read or relax during the ever longer commutes consistent with urbanization, reduces the likelihood of accidents - and it should lower insurance costs dramatically.

Which is exactly why the insurance industry is beginning to list it as a business risk in securities filings.

Because the way their offerings are structured depends on consumers' believing it makes sense to buy insurance since almost everyone has an accident of some type eventually. But what if that possibility is dramatically reduced? No more premiums. No more industry.

And what about the ubiquitous car repair shops that populate corner of the world? Yeah, what about them?

Now it is likely that insurance will still be necessary simply for owning a vehicle because who knows what new threats may emerge. And every piece of machinery needs refurbishing or replacing at some point. But the times they are a' changin.' JL

Theo Francis reports in the Wall Street Journal:

The technology has the potential to transform consumer demand, the way policies are priced, and the all-important patterns of crash frequency and severity that insurers use to predict their risks.
Self-driving cars have crossed an important milestone on the road to reality: The securities filing.
Three insurance suppliers and an auto parts maker have warned in their most recent annual reports that driverless cars and the technology behind them could one day disrupt the way they do business.
The investor warnings aren’t meant to spell out an imminent threat. But their inclusion in the catch all “Risk Factors” section of corporate filings indicates that driverless cars are now close enough to reality that companies feel they need to flag the risks to their investors. Cincinnati Financial Corp. , an Ohio-based insurer generating nearly a quarter of its premiums from commercial and consumer auto policies, warned in the annual report it filed Friday that its forecasts could be flawed because of, among other things, “Disruption of the insurance market caused by technology innovations such as driverless cars that could decrease consumer demand for insurance products.”
Mercury General Corp. , an auto insurer issuing most of its coverage in California, said in its annual report that “the advent of driverless cars and usage-based insurance could materially alter the way that automobile insurance is marketed, priced, and underwritten.”

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Travelers Cos., one of the largest U.S. property-casualty insurers, said the technology has the potential to transform consumer demand, the way policies are priced, and the all-important patterns of crash frequency and severity that insurers use to predict their risks.
Insurers aren’t the only companies fretting. LKQ Corp. , a Chicago auto-parts maker, cited risks from the safety technologies that many see as leading the way to driverless cars. “If the number of vehicles involved in accidents declines or the number of cars being repaired declines, our business could suffer,” reads a heading in the annual report LKQ filed on Monday.
A spokesman for Mercury said its risk-factor disclosures aren’t meant to be predictions. A Travelers spokesman declined to comment, as did a spokeswoman for Cincinnati Financial.
A number of auto makers and Silicon Valley companies have driverless cars under development. Google Inc. has been testing its version for half a decade and said it could be on the roads within five years. Other companies worry regulatory concerns could hold them up into the next decade. Cost is another obstacle. But the technology is moving ahead.
The industry collected $107.4 billion in passenger car auto insurance premiums in 2013, the latest year for which figures were available, according to the Insurance Information Institute.
The automobile has been an omnipresent influence for decades, and the effects of taking the driver out of the equation could be just as far reaching. Insurers may sell fewer individual policies, or have to cover fewer accidents, but the more technologically advanced cars might be more costly to repair.
Self-driving cars could have other effects as well. Insurers expect car- and software-makers to face litigation when crashes do happen, shifting at least some of the expense from consumer auto insurance to commercial liability policies. A few big policyholders could have more bargaining clout than many small ones do, potentially putting more pressure on premium revenue.
Barclay’s insurance analyst Jay Gelb said insurers will have time to adapt as driverless cars become more common. Even if accidents become rarer, more complex cars will be costlier to fix, and insurers may ultimately benefit if accidents slow before premiums fall.
“I think it’s a good thing for insurers over the next decade,” Mr. Gelb said. “It’s hard to see how a product that has been in place for more than a century is just going to go away.”
Still, concern in the insurance industry has been building. Travelers first began cautioning investors about driverless cars two years ago, and Cincinnati Financial began adding its warning to securities filings in April last year.
The Insurance Information Institute, an insurance-industry public-relations organization, last month updated an online primer on the insurance implications of self-driving cars it created last year. It sees such cars as a natural outgrowth of a variety of advances in safety technology.
In California, the institute said, insurers are pushing for rules making clear that manufacturers are responsible for damage and injuries under a law allowing vehicles to be tested on public roads. Fewer accidents could make insurance cheaper, while driving-related workers' compensation claims would dwindle. At the same time, increasingly complex vehicles could raise the cost of repairs when crashes do occur.
“Except that the number of crashes will be greatly reduced, the insurance aspects of this gradual transformation are at present unclear,” the institute said.
Hence the risk factors. Many companies view that section of their filings as an exercise in liability protection, a place where they enumerate the many difficulties that could affect their business, however routine or unlikely. Still, changes are made or reviewed by company lawyers and rarely come by accident, said Michelle Leder, who spotted the disclosures as editor of footnoted, a service that combs filings for investors.
“The Risk Factors are always a little of everything under the sun, but they’re also real potential challenges,” Ms. Leder said. “Companies started seriously warning about cybersecurity issues five to eight years ago.”