By Jeff Reeves
It’s hard to imagine life before our nation’s love affair with the automobile. Car culture has been a fixture of American life for decades, from drive-in movies to Hot Wheels toys to Disney’s “Cars” franchise.
But in the late 1800s, horses were the main mode of transportation. And that was just fine with most of the United States.
As automobiles arrived on the scene in the early 20th century, most people thought they were a more dangerous and troublesome alternative. The label “horseless carriage” was as much a validation of the current mode of transportation as a moniker for this new technology, and the populist rallying cry shouted at drivers careening by on streets was, “Get a horse!”
After all, cars were expensive toys of the elite that would never supplant the status quo. As one St. Louis reporter scoffed in 1936, the idea that “any kind of vehicles will be able to compete with railroad trains for long-distance passenger traffic is visionary to the point of lunacy.”
History, however, shows just how misguided those sentiments were.
Just 20 years after the publication of those derisive comments, some of the most iconic vehicles of all time, from the Ford Thunderbird to the big-finned Chevy Bel Air, were rolling across fresh asphalt in every corner of the United States. And as a result of this technological revolution, we saw the entire fabric of American life adjust—from roadside billboards and drive-in movies to the birth of suburban life and the daily commute.
And now, as we enter 2018, the notion of self-driving cars has moved out of science fiction and into automobiles all across the country.
Of course, for all the change and progress offered by the advent of automobile ownership, there were plenty of optimistic and half-baked predictions about how car culture would continue to evolve. (A few of the more outlandish ideas include the Ford Nucleon concept that would theoretically be powered by nuclear energy and the barely seaworthy Amphicar, among many others.)
This is worth remembering as we enter 2018, with the American automobile industry appearing poised to take a giant leap forward. While many early adopters and futurists believe autonomous vehicles will become commonplace very soon, human-driven vehicles are very much the norm in the here and now.
So how fast will things actually change on our roadways?
And more important, are American motorists and businesses ready?
Vehicle Technology Is Already Having a Big Impact
Perform a quick internet search for “self-driving car video” and you can see for yourself that autonomous vehicles are a reality right now, and not just a pipe dream.
But admittedly, the scale is incredibly small; California, the nationwide leader in this emerging technology thanks to the major tech companies headquartered in Silicon Valley, still boasts fewer than 300 registered vehicles in the entire state.
It’s helpful, then, to think about the impact of autonomous cars and related technology beyond simply the number of vehicles on the road.
Technology Is Preventing Motor Vehicle Deaths
Big safety improvements in the 1980s started the long-term decline in car-related deaths in America. But technological innovations over the past decade or so have built on this trend in a big way, even if those systems haven’t been able to work together in fully autonomous vehicles. (See sidebar, page 21, for a discussion of degrees of automation.)
Thanks in part to high-tech collision avoidance, backup cameras, and lane detection, traffic fatalities in 2016 tallied just 37,461—down 16 percent from 44,599 in 1990 despite a population that increased by almost 80 million Americans across the same period.
Considering that the comprehensive costs of fatal motor vehicle crashes in the United States tallied over $830 billion last year alone, a continued reduction in lost lives and the very real loss of capital is a significant trend.
Ride Sharing Is Ascendant
Eager investors and smartphone-reliant millennials have already seen the real-world impact of ride-sharing services like Lyft and Uber. Investment bank Goldman Sachs recently estimated that some 15 million ride-hailing trips occured each day around the world in 2017—and in just 13 short years, that will increase more than sixfold to 97 million by 2030 to become a roughly $285 billion global market.
And because the natural next step for ride-sharing is to hitch a ride with an autonomous vehicle instead of a human driver, you can expect autonomous cars to play a big role in this shift.
Self-Driving Cars Are High-Tech Incubators
Safety improvements and expanded ride-sharing behavior are obvious developments brought about by the advent of autonomous cars, but other improvements are less intuitive.
For instance, the computer vision technologies deployed in autonomous cars continue to evolve; these systems have applications that range from piloting airborne drones to running facial-recognition software.
Similarly, the problem-solving at the core of a self-driving car is driving artificial intelligence advances that can be used in a host of industries outside transportation. In fact, autonomous mining and farming equipment are both already in limited use, showing how the technology scales beyond the highway.
Because of these trends, among others, the insurance industry is already preparing for the self-driving car revolution even if there are only a few hundred cars on the roadway at present.
For instance, as early as its 2015 annual report, Allstate warned investors that it could see significant losses if the publicly traded insurance giant didn’t adequately prepare for this sea change. Specifically, Allstate called out “potential technological changes, such as driverless cars or technologies that facilitate ride or home sharing, [that] could disrupt the demand for our products from current customers, create coverage issues or impact the frequency or severity of losses, and we may not be able to respond effectively.”
In other words, while the widespread adoption of this new technology may not be around the corner, we are already seeing the impact—and that means the time for preparation is now.
Most Big Questions About Self-Driving Cars Are Answered
Automakers and policymakers will assuredly experience issues that were unanticipated or previously overlooked, of course. But all serious automotive analysts agree that self-driving cars are a forgone conclusion, and the question is not if the technology will succeed, but when.
Chris Nyce, a partner at consulting giant KPMG, has researched the prospect of autonomous vehicles extensively. He recently published a white paper on the topic, “The Chaotic Middle: The autonomous vehicle and disruption in automobile insurance.”
In his mind, perhaps the only open question is how insurance will evolve—the rest is just a matter of time.
“There has been broad support among regulators for this technology, because it’s a public health issue when 40,000 people are dying on the roads in a given year,” Nyce said. That potential benefit makes it very difficult to imagine a world where the government limits the spread of self-driving cars.
Furthermore, he adds, those most likely to be resistant to self-driving technology are the oldest Americans, who will age out of the driving population before we have to worry about them significantly impeding adoption.
“I certainly talk to people who say, ‘I always want my hands on the wheel,’ but they tend to be older people,” Nyce said. “Baby boomers are aging, and we always talk about our parents and how hard it will be when we need to take their license away. But resistance to adoption gets squeezed.”
For instance, KPMG models anticipate that the majority of urban travel from 2020 to 2024 will be taken via on-demand and ride-sharing services like Uber and Lyft and that we will start to see widespread adoption of technology even if there isn’t a noticeable race to upgrade for the new technology.
“The average age of a car is 11 years, so once the technology is available, 9 percent of the fleet turns over in a given year,” Nyce said. He added that statistics show newer cars get driven more hours and more vehicle miles, too, so even a modest share of total vehicles with self-driving capabilities could mean a significantly higher share of total travel.
To top it all off, the track record of self-driving cars in limited tests has been exemplary. Consider that in October, General Motors and its Cruise self-driving unit reported 13 total crashes that month across its testing fleet of 100 autonomous cars—with all of the incidents indicating the autonomous technology was not at fault. Most involved impatient drivers rear-ending slowing GM cars as they approached a stop sign or a pedestrian in a crosswalk, and a few others involved everything from distracted drivers on cellphones to a drunk on a bicycle running into a Chevy Bolt that wasn’t even moving.
“All our incidents this year were caused by the other vehicle,” Rebecca Mark, a spokeswoman for Cruise, told Reuters in a recent article.
Theoretically, the technology pipeline could fall apart. For instance, automakers have been plowing capital into research and development after back-to-back records for U.S. auto sales in both 2015 and 2016, and leaner times may necessarily result in less funding for these long-term efforts. And of course, a high-profile crash could create new political roadblocks or chill consumer perceptions of autonomous vehicles.
But at present course and speed, manufacturers and regulators alike are rapidly moving toward a future where autonomous vehicles are the norm on American roadways.
Where Do Autonomous Vehicles Go From Here?
The potential impact of self-driving cars is clear, but big questions remain about how quickly automakers will force the issue—and how quickly their customers will sign on.
Not to mention, of course, the willingness of lawmakers and regulators to facilitate either trend.
Automakers Target 2020
Electric car manufacturer Tesla is well-known for its Autopilot autonomous technology, and its brash CEO Elon Musk has predicted we are only about two years away from a car you could sleep in while it drives itself.
That may sound like the posturing of a hard-charging tech executive, but it actually mirrors the timeline targeted by more conventional automakers. Honda has said it expects to deploy Honda driverless taxis at the 2020 Olympics in its native Japan and aims to have fully autonomous personal cars on the market by 2025. Toyota and Hyundai have also targeted 2020 as the date that their Level 4 driverless technology—that is, high automation that doesn’t require any human intervention—will be publicly available.
Logistics Operations Are Likely to Lead
Honda’s 2020 goal for driverless taxis is noteworthy not just because it’s two short years away, but because it stresses a business-use case. The potential for self-driving vehicles will likely first be fully realized in a logistics setting, not by individual consumers commuting to the office in a personal vehicle.
To that end, European truck giant Volvo has already deployed a self-driving trash truck in Sweden with aims to better serve urban areas thanks to added safety features. In America, Ford Motor Company has teamed up with Domino’s to test self-driving pizza delivery cars in Michigan (though there will still be a human behind the wheel).
A mass market for autonomous vehicles is still many years away. But businesses will be all too eager to lead the charge as early adopters to increase safety and reduce logistical costs.
Policies Welcome a Self-driving Future
Adoption of self-driving vehicles has occurred without too many speedbumps. That seems like a trend that could persist, especially after a recent bill known as the AV Start Act (S. 1885) received unanimous approval in late November from the U.S. Senate Committee on Commerce, Science and Transportation.
The bill would allow companies to produce up to 15,000 autonomous-only vehicles, then raise the cap to 80,000 in three years and remove the total cap altogether after four years. Noticeably absent from the bill is a federal requirement for human control as a fallback.
That’s an encouraging glide path for the technology, even if new legal challenges and political pressures are certain to emerge over time.
Obviously, There Will Be More Uncertainty Ahead
As with all technology, of course, there are likely issues that will appear that haven’t been anticipated or fully appreciated.
For instance, the rise of mobile technology is widely attributed to a small uptick in traffic fatalities in 2016 compared with 2015, as distracted drivers check their smartphones while driving instead of checking their mirrors. Surely when smartphones began going mainstream 10 years ago this wasn’t an issue on the minds of tech companies or regulators, but it is indeed on their radar now.
One potential area of trouble may be the idea of ethical controls for self-driving cars, with one German organization stressing that it’s important to set priorities that give preference to human life over animals or property. If the car is in charge, what decisions will it have to make—and who will be held accountable if those decisions hurt someone?
Another potential pain point is the loss of jobs thanks to the creative destruction of this new technology. The very same AV Start Act that paves the way for more innovation on autonomous passenger vehicles has a very notable exception for the trucking industry thanks in part to labor unions and fears over potential lost jobs for those who currently drive big rigs. We may see some resistance appear not only out of mistrust for the technology itself, but simply as a way to defend other areas of American life that will be hurt.
There will assuredly be uncertainty ahead for self-driving cars, and even the most comprehensive analysis of the topic is sure to miss something.
What Does This Mean for the Auto Insurance Industry?
The pace of change as we move toward self-driving cars will remain debatable, but the end result is pretty clear. After a period of testing and limited early adoption, autonomous vehicles will become more common and accepted—and then, eventually, the standard way Americans get around.
But that period of transition will require some big changes in the insurance industry, both to facilitate this innovation and to properly assess risk as self-driving cars get up to speed.
The Casualty Actuarial Society’s (CAS’)Automated Vehicle Task Force tried to tackle this issue in a soon-to-be-published paper on possible changes to insurance premiums as autonomous vehicles become more widespread. A few of their findings include:
Premiums Won’t Plummet: Just because you have a self-driving car that avoids accidents it doesn’t mean your fellow motorists will. As such, “A vehicle that reduces losses by 50 percent will only receive an 8 percent discount after four years,” according to the CAS. “If completely crashless, the discount will only be 15 percent.”
Big Scale Will Eventually Result in Big Savings: However, if adoption is rapid and manufacturers retrofit cars in addition to offering autonomous technology on new models, things could be much different. “The more vehicles with the technology, the greater the discount will be,” the CAS notes, estimating that “a completely crashless car could earn up to a 78 percent discount after four years.”
As Long as the Industry Can Properly Track the Technology: Of course, one of the major challenges ahead for the insurance industry is tracking the rate of adoption in this technology. As the report points out, many driver-assist features are optional technologies, and that makes it hard to track them by something as simple as a VIN or vehicle model. That’s a crucial part in properly analyzing impact because “if the insurer cannot identify the vehicles with and without the technology, then having every Honda Civic equipped with technology that reduces losses by 50 percent will be viewed as the same way as having half of Honda Civics equipped with technology that reduces losses by 100 percent.”
Fair Premiums Will Help Autonomous Technology Move Mainstream: In the words of the Automated Vehicle Task Force, “Overpricing automated vehicle technology will make safer vehicles more expensive than they should be, putting them out of reach for many Americans and slowing their adoption. Conversely, underpricing these vehicles will force the other drivers—in presumably less-safe vehicles—to subsidize these vehicles’ insurance premiums.”
Those medium-term predictions about how personal auto insurance policy will evolve in the next few years mask a bigger structural issue, however, of how insurance in general may evolve in the next few decades.
“The biggest open question is the liability regime,” said Nyce of KPMG.
At current levels of technology, personal liability is still very much at play because cars cannot be reliably trusted to avoid accidents on their own. However, what happens when accident rates are at or near zero?
“There’s a chance a regulator may step in with a broad no-fault system” in an effort to lower premium costs and avoid costly litigation or court battles over injuries, Nyce said. However, he added it’s also a possibility that the industry will move wholly in the other direction and rely on product liability law wherein a manufacturer can be held accountable for defective or damaging products.
“I was at a conference and a lawyer got up and said, ‘I don’t know why everyone is worried about liability with self-driving cars. This is a classic product liability situation, and the liability system is now pretty efficient at compensating victims,’ ” Nyce said. “That’s the point of view of the lawyer, of course, and I think a lot of corporations and insurance companies would disagree with that.”
These are longer-term questions to answer, Nyce said, but the insurance industry had better start thinking about them now given that KPMG has predicted that a tipping point of sorts will hit the auto industry around 2024. That’s when technology will be deployed for mass market use and adoption will finally make autonomous vehicles a mainstream transportation option.
According to KPMG research, total auto losses are expected to decline from about $192 billion in 2017 to about $150 billion by 2024 and then plummet to roughly $80 billion by 2044 as adoption of autonomous technologies continues.
A lack of accidents and a corresponding lack of claims represent a huge change for insurers across the coming decades. And that kind of change will take years of preparation and evolution if the industry is to meet it.
What Does This Mean for Actuaries?
There’s a lot of uncertainty about self-driving cars, which in turn creates big uncertainty for actuaries who work at car insurance companies. After all, their jobs exist because the industry needs their insights on how to properly price the risk of human-caused accidents on the roadways.
So what do these professionals do when faced with a future where autonomous cars greatly reduce human error behind the wheel?
The first, most industry experts agree, is to not panic or worry about your job disappearing anytime soon.
“Self-driving technology is already here in many ways,” said James Lynch, chief actuary at the Insurance Information Institute. “But driverless vehicles in which human beings are not responsible for any activities of the car—when you simply get in the back seat and take a nap—are a long ways away.”
Lynch points to a 2016 crash in Florida where a driver was killed while operating his Tesla Model S sedan in computer-assisted “Autopilot” mode—but which, despite the software’s name, still requires drivers to regain control of the vehicle in the event of difficulties. A nearly yearlong investigation into the event found that Tesla’s software repeatedly warned the driver to take control of the vehicle before the fatal crash.
The fact that only a very limited number of vehicles like the Model S have “conditional automation” and we are still in the learning phases of truly autonomous technology shows just how far we are from widespread consumer adoption that would create a serious threat to the industry, Lynch noted.
“There is a thought that the individual will no longer be responsible for accidents, but that day is not coming soon,” he said.
And even if your vehicle is truly self-driven, there is still a need for comprehensive coverage that protects against things such as a tree falling on the hood or a need for insurance against other motorists who may not have a policy themselves.
Another important factor is that even if the technology is a few years away, most motorists are far from ready to turn over their keys to a machine. According to recent polls, a vast majority of Americans aren’t interested in or trusting of self-driving cars just yet; a survey conducted by auto industry group AAA showed that 78 percent of respondents wouldn’t want to ride in an autonomous vehicle—saying they would be “afraid” to do so. A separate Massachusetts Institute of Technology poll showed just 13 percent would be comfortable with “features that completely relieve the driver of all control for the entire drive”—and, in fact, only 59 percent wanted “features that actively help the driver, while the driver remains in control.”
That’s a far cry from the stance you see from advocates like Tesla’s Musk, who told the BBC in 2016 that “any cars that are being made that don’t have full autonomy will have negative value.” Musk added that in the near future owning these vehicles will be “like owning a horse. You will only be owning it for sentimental reasons.”
As Nyce at KPMG pointed out, older and less-trusting drivers will eventually age out. But that demographic shift will take time—and we are a long way from the tipping point. That means actuaries working with auto insurers have plenty of time to learn and adapt before self-driving cars are the norm.
“You should be thinking about how the expertise you’re developing can translate into other insurance disciplines,” said Lynch of the Insurance Information Institute. “Right now a big deal in auto insurance pricing is predictive modeling, so I would keep an eye on what’s happening in predictive modeling in other types of insurance. Read about it and think about it, and always be aware about where the skills you’re developing will be useful in the future in your career.”
It’s also important to remember that it’s not uncommon for actuaries to move around in multiple areas of a business or even to multiple organizations over their careers, he added.
“Often actuaries will get the opportunity within their company to grow in a new direction or help with a new business, and you should always be looking to do that whether your job has anything to do with autonomous cars or anything else,” Lynch said.
In other words, your career as an actuary is a journey—not a destination. And unlike the autonomous cars of the future, it’s best not to just put things on autopilot and hope you’ll arrive where you would like to go.
JEFF REEVES is a financial journalist with almost two decades of newsroom and markets experience. His commentary has appeared in USA Today, U.S. News & World Report, CNBC, and the Fox Business Network.
Levels of Autonomous Driving
SAE International, once known as the Society of Automotive Engineers but now a trade group serving various technical professionals, has developed a set of international standards for autonomous vehicle systems, and the U.S. Department of Transportation adopted these standards in its “Federal Automated Vehicles Policy” in September 2016.
This common framework allows consumers, automakers, and regulators to have a shared group of assumptions about how much a vehicle can do on its own and how much responsibility the driver has behind the wheel.
Here are the official levels that define how autonomous a vehicle is:
Level 0—No Automation
The federal policy defines this simply as “the full-time performance by the human driver of all aspects of the dynamic driving task, even when enhanced by warning or intervention systems.” Drivers do it all on their own.
Level 1—Driver Assistance
The driver is still almost entirely in control, but specific tasks using specific information can assist them. The functions—steering assistance or acceleration controls, for example—are limited in scope, and a human at the wheel is still necessary to deploy them.
Level 2—Partial Automation
Much of “dynamic driving” based on changeable elements is still in the hands of the person holding the steering wheel. However, the vehicle itself can finally start to take action on its own, such as steering back to the center of the lane or maintaining and adjusting speed based on traffic. In some circumstances, the driver is disengaged from both the wheel and the foot pedals at the same time. Certain circumstances will allow the driver to quickly take back control, of course, but automated driving is possible for a short period.
Level 3—Conditional Automation
This is the step change between what is commonly viewed as driver assistance and the world of truly autonomous driving. In Level 3, driving at speed is fully automated and the system begins to monitor the external environment and act accordingly. The vehicle itself still has limits, however, but now is aware of those limits and will ask for human assistance when situations dictate. The rest of the time, it takes care of the driving on its own.
Level 4—High Automation
The difference between Level 3 and Level 4 is that the autonomous vehicle may still encounter dynamic driving situations that do not have clear or obvious solutions but will be able to respond reasonably appropriately even without human intervention. Whereas a vehicle with conditional automation has a human fallback, theoretically a car with Level 4 automation can perform all aspects of driving, even when the unexpected occurs—but only “in certain environments and under certain conditions.” In other words, even if highway driving is fully automated, there may still be some surface streets with unconventional traffic patterns that require a human hand at the wheel.
Level 5—Full Automation
This is the dream: a vehicle that has full-time automation, responding to all aspects of the road environment in real time in a way that is perhaps even more effective than a person (who is prone to human error or distraction).
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