Listen up auto insurers. Driverless Cars? No Problem. Collision Avoidance Technology? Hold On!

The just released report by the National Traffic Safety Board (NTSB) contains some important findings on collision avoidance systems’ potential to prevent or mitigate the severity of rear-end collisions. Some of the data points are eye-popping: a predictive analysis found that this technology could prevent or reduce deaths and injuries in 87% to 94% of all accidents. A private study by the trucking firm Con-way found that these technologies reduced rollovers by 41% and rear-end collisions by 71%. Still impressive, but less startling, the Insurance Institute for Highway Safety found a reduction in claims frequency in three luxury models of 7% to 14% (without estimating changes in severity). The good news for driver and passenger safety is that auto manufacturers are competing vigorously to offer these features in their new cars and trucks (The NTSB study has a 9 page Appendix listing these manufacturers and models). The NTSB study may also nudge the National Highway Traffic Safety Administration to, someday, mandate these technologies in new vehicles. The long term implications for auto insurers though are similar to the implications of autonomous vehicles: fewer and less severe losses, resulting in competitive and regulatory pressure which will drive down premiums substantially. The auto insurance business is going to shrink. But the real question is how fast? Or to put the question more precisely, when will there be a critical mass of autonomous and collision avoidance-equipped vehicles on the road? The NTSB study is speeding up that timeline just a little bit.

Auto Insurance Vanishing? Don’t Hold Your Breadth and Don’t Close Your Eyes

On January 17 I&T posted a story about an exchange that took place at the Property/Casualty Joint Industry Forum between State Farm’s CEO, Edward Rust Jr., and an industry analyst, Brian Sullivan. Mr. Sullivan said, “It’s impossible for anyone to look at the data and say there won’t be fewer accidents than before. The technology is getting better and drivers are getting safer. I think this business is shrinking: Fewer accidents means fewer exposure.” And Mr. Rust responded, “I don’t see the risk being mitigated so much that the premium falls significantly,” Rust added. “The cost to repair a vehicle that has been in an accident is much greater. It’s not your Grandpa’s Olds.” I will judiciously say that both Mr. Sullivan and Mr. Rust are correct—but the real question is the timeframe during which each of them is correct. This year and next year and maybe the year after, there won’t be much technology-driven reduction in auto losses (and associated drops in premium). But inexorably collision avoidance technology is going to get better, and even more importantly, it will become more pervasive among the vehicles on the road. And while insured losses depends on severity (i.e. the cost to repair partial losses or replace total losses), it also depends on frequency. As collision avoidance technology (and automated traffic law enforcement, and yes eventually driverless cars) advances, frequency will drop. And in all likelihood severity will also drop—for example when an automatic braking system reduces the speed at impact from 15 mph to 5 mph. So losses will drop and insurance premiums will follow. The big questions are how much and how soon.