Driverless car graphic

Risk & Innovation

How Autonomous Cars Are Driving Innovation

August 11th, 2016

Overview

Up to 21 million autonomous cars could be sold globally in 2035, with total unit sales reaching 76 million in the intervening period. Some have predicted that by 2050, more than half of US traffic will be autonomous.

These cars are, without question, on their way. Seven states in the US – California, Nevada, Florida, Michigan, Hawaii, Washington and Tennessee, plus the District of Columbia – have legalised the testing of autonomous vehicles. In Europe, the UK has been a field leader (thanks in part to chance – the UK failed to ratify the 1968 Vienna Convention on road traffic which stipulated the necessity of having a driver behind the wheel) and trials of driverless vehicles are currently taking place in Bristol, Milton Keynes and Greenwich. Singapore is running similar schemes.

This change is coming – but what do businesses need to know? What will living in this new world of driverless vehicles mean for the auto industry, for insurance, as well as for broader society and the economy as a whole? And what can other industries learn from how car manufacturers are responding to this new technology?


In Depth

Traditional vehicle manufacturers will naturally be the first to be disrupted by new driverless technology, and this disruption will take several forms. The first question is: are the incumbent manufacturers going to be the people driving the development and construction of these new vehicles, or are newcomers going to take over car production?

A New Era Of Auto Manufacturing Partnerships

Making up for a lack of existing digital expertise could necessitate the formation of new strategic business partnerships. This works both ways – Silicon Valley heavyweights may be able to provide a lot of the backend digital technology, but may lack the manufacturing or distribution infrastructure to break into the industry on their own.

The development of strategic partnerships between established automakers and tech firms is already beginning to happen. Although the prospective relationship between Apple and car makers BMW and Daimler has cooled recently (BMW is now working with several smaller companies), relationships continue between, Microsoft and Volvo, Google and Fiat Chrysler, Uber and Carnegie Mellon University and Lyft and General Motors.

These partnerships are likely to become the new corporate reality as the worlds of tech and cars merge, and could prove a model for other industries. Rather than worry about disruption from new entrants, and try to compete with new digitally-driven entrants to the marketplace on their terms, could partnerships be a better, mutually-beneficial solution? This would allow the partners to maximize the benefits of their comparative advantages – be that their established presence in the market or their expertise in emerging technologies. So far, this approach seems to be working for driverless technology – though it is still early days.

Changing Models Of Vehicle Ownership

Secondly, and perhaps more pressingly for the auto industry, is the need to adjust for suppressed consumer demand as the spread of autonomous vehicles transforms models of car ownership. Uber and the other on-demand mobility providers are pointing the way forward here – when fleets of autonomous cars are available at a moment’s notice, driving themselves to your door like a taxi, why actually to pay to own and maintain one yourself?

The increasing digitalisation of cars will also be a factor. Having to deal with rapid successions of software and hardware updates as development accelerates could shorten the viable lifetime of the average car. And why then bother making such a big-value purchase when and better model is likely to come along in six months?

This trend might start slow, but could become particularly pronounced as Millennials – already used to the on-demand economy and wary of making big purchases – enter middle age. “When Millennials have kids and move to the suburbs, they will subscribe to a mobility service that provides them with an autonomous vehicle, instead of buying a car outright. And then manufacturers might stop selling to individuals, but start providing vehicles to companies in the mobility business,” says Michael Stankard of Aon Risk Solutions.

Shifts In Insurance Liability And Cover

Insurers too will face a radically new business landscape. If an owner is no longer responsible for driving a vehicle, they can’t be expected to be liable for damages, with the possible exceptions of failing to properly maintain or update the technology governing the car’s behaviour.

Instead, what will begin to happen is corporations will take over a much bigger share of liability – and consequently insurance responsibility – from consumers. Manufacturers already have a degree of liability, when accidents result from mechanical faults with the vehicle – but these currently make up only 5 percent of incidents. Fast forward to a fully driverless world, with driver error all but removed, that 5 percent will be getting pretty close to 100 percent.

The increased safety of driverless cars means premiums will be lower, making the environment harder for insurers even as the vehicles themselves are likely to become more expensive to repair, due to their greater reliance on high technology. In the 14 biggest car markets, premiums could fall by as much as $20 billion by 2020, according to SwissRe.

Better Data – And Rising Cyber Risk

However, there are some silver linings for insurers. The data troves provided by cars operating as connected fleets could be used to design more granular and responsive insurance packages, and better predict payouts. Earlier this year, Aon ran tests of autonomous convoy technology on roads in the Netherlands to explore precisely these issues. “The test focused on determining whether the use of Adaptive Cruise Control, Lane Keeping Assist and Blind Spot Warning contributes to a better traffic flow, less stress and safer driving experience,” explains Evert-Jeen van der Meer, Industry Director Automotive, Aon Netherlands, “It will also contribute to finding a solution for liability and insurance issues regarding fully or semi-automated transportation.”

The act of litigation could also be made a lot more straightforward for those involved, Stankard says. “There’ll be black boxes in these vehicles which will capture everything going on, so if there is an accident, there’ll be plenty of pure data to determine what actually happened, rather than resorting to hearsay.” More sophisticated data collection should also clarify identifying the source of mechanical failure and determining culpability, as well as help to curtail fraudulent ‘crash-for-cash’ claims.

But insurers will also need to step in to cover new areas of risk not previously associated with the automotive sector – notably cyber risk. Wired Magazine’s widely publicised Jeep hack, performed whilst the vehicle was in motion on a freeway, is often cited as an example of the new threats that digitally integrated vehicles will have to deal with, but new threats also mean new revenue streams. The spheres of vehicle insurance, and home and data insurance may even end up rolling together, providing big opportunities for providers in the space.

The Wider Social And Economic Impact

Cars are so integral to our world that the ripple effects of mass automation will be felt well beyond the roads themselves.

Take, for example, the potential impact on urban planning. It is estimated that cars sit unused for 95% of the time. That’s a lot of real estate tied up in driveways and parking spaces that could be profitably redeveloped, once the cars are removed from the equation.

Productivity could also increase in personal terms, as passengers can work while commuting rather than pay attention to the road. Morgan Stanley has estimated that around $422 billion could be generated from these kinds of productivity gains alone.

Meanwhile, more than 3,000 people die every day in road traffic accidents around the world – that’s 2.2% of all death globally. These deaths – as well as the non-fatal injuries caused in road accidents – could be drastically reduced by this technology.

But while on the one hand there is the very real possibility of a cleaner, safer and more spacious and productive future, there are dark clouds too.

Like every other disruptive technology, the negative of driverless cars can be summed in one word: jobs. On-demand taxi services have already demonstrated that technology can put huge downward pressure on wages, but driverless commercial fleets could do away with an enormous global industry altogether.

Approximately 3.5 million work as professional truck drivers in the US alone, and all of these jobs are at serious risk. In some places it’s already happening. This is to say nothing of the millions more employed in secondary industries, from petrol station attendants to depot operators, to factory workers.

The impact on employment will expand beyond the auto sector as well. “We’re going to need fewer first responders, fewer emergency room workers; we’re going to need fewer police, we’re going to need fewer liability attorneys,” says Stankard. “There are a lot of industries that will be substantially impacted if this technology works and we end up with 95 percent fewer accidents. That’s a tremendous benefit to society, but it will also impact a lot of workforces that are designed round these facts.”

Risks – And Benefits

Overall the potential gains from the introduction of driverless – or driver-assistance – technology are considerable.

Fewer accidents will mean fewer deaths – but also fewer injuries, and less lost productivity due to injury recovery time, as well productivity boosts from better-managed road networks with reduced congestion that will be enabled by computer-assisted navigation. Economically, the total value of the space could be up to $1.3 trillion. And the rate of progress tells us that there is no going back now.

But for the millions employed in driving, making, servicing, regulating and insuring cars and drivers, the next 20 years are going to be challenging. “Given the speed at which the technology is moving forward and the mutual dependence of various players, finding the next step is an issue on its own,” says van der Meer. With some driverless technology already on our roads, the time to plan for your response is now.


Talking Points

“If the situation was reversed, and we had automated vehicles today and someone proposed to let people drive cars, what would the reaction be? You would be basically asking that 33,000 deaths per year be allowed on highways as part of a policy plan. There’s no way on earth anybody would accept it.” – Glen De Vos, Vice President of Global Engineering, Delphi Automotive

“Many people in the industry want things to be safer and they want cars to be more accessible. There’s a divergence of opinion of how to get there.” – Gill Pratt, Head of Toyota Research Institute

“Volvo believes the insurance industry will have no choice but to react to these seismic challenges to its existing business model by fundamentally restructuring – or face competition from new entrants into its market from technology-savvy disrupting companies.” – Håkan Samuelsson, CEO, Volvo


Further Reading

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