Self-Driving Cars and Insurance: What You Need to Know

Side view of woman sitting in self-driving car
•••

Andrey Popov / Getty Images

Driverless vehicles are currently being developed and tested on American roads, and they're making lots of headlines along the way about both their promise and their problems. Your current car may even have some of the same features that will help guide future self-driving cars. Those in favor of the use of autonomous cars note that it may lead to safer roadways by getting rid of one of the most common causes of accidents: driver error.

But self-driving vehicles also present challenges regarding safety, risk, and how to insure these new machines. Learn what's going on now with self-driving cars—and what the future may hold.

Is There a Market for Driverless Cars?

Right now, engineers are at work creating driverless experiences, namely cars that don't need any help from you. In fact, the car or SUV you drive today might include features that will be built into self-driving cars in the future. Testing and deployment are in the works in many states, including Arizona, Florida, New York, Ohio, and California. But self-driving vehicles are not quite yet ready for purchase by just any consumer.

Levels of Automation

There are five automation levels with varying car features, according to the Society of Automotive Engineers and the National Highway Traffic Safety Administration (NHTSA).

  • Level 1 mostly depends on the driver but may offer warnings or some automated assistance, such as adaptive cruise control.
  • Level 2 is automated in part, with a host of advanced driver-assistance systems (ADASs) that control the car's speed and braking.
  • Levels 3 to 5 increase the car's amount of control over braking, steering, and route choice. Many companies are already working on self-driving vehicles at level 3 and above. But the NHTSA notes that we are "many years" from the market that gives the general public access to purchase fully automated cars.

"Currently, we only have level 2 or partially autonomous vehicles available commercially," said Marc Gordan in an email to The Balance. Gordan is the senior director of the Connected Car team at LexisNexis Risk Solutions, which provides data and analytics solutions to the insurance industry. These ADASs can navigate highways and traffic and perform basic tasks, such as changing lanes and entering and exiting parking spaces, he noted.

But the systems are still evolving. "The main difficulty for the roads of [the future] is that a fully autonomous vehicle must handle those elements in addition to busy city streets and poorly lit and twisting country roads throughout the range of seasons—all without fail," Gordan explained.

The Road to Progress

"Introduction of autonomous vehicles is expected to be slow," said Karlyn D. Stanley, who studies self-driving vehicles as a senior policy analyst at the RAND Corporation, to The Balance. "The lifespan of a conventional vehicle is 11 years, so the composition of cars on the road is going to be a slow transition. It's not going to happen overnight."

As part of her work at the think tank, Stanley spoke with 43 experts across the insurance and self-driving vehicle industries for a December 2020 RAND report, "Autonomous Vehicles and the Future of Auto Insurance." Most felt that self-driving vehicles would first appear on the scene in the fleet model, such as those found in ride-sharing or delivery services. They also noted that while self-driving cars will likely cost more at first, the expense is balanced by the size of a fleet, which may also cost less to insure due to the scale.

What Are the Risks of Self-Driving Vehicles?

A number of firms are now working on autonomous driving technology and testing vehicles, including WeRide, Argo, Zoox, Lyft, Cruise, Waymo, and others. Many of these partner with or have been bought by well-known automakers, including Honda, Ford, and General Motors. But self-driving vehicles won't be taking over country lanes and highways anytime soon. There are still quite a few hurdles and challenges. Self-driving cars and the changes they bring to the road present an array of new risks, and legislators, drivers, and insurers all need to account for these risks.

Safety 

In June 2021, NHTSA began to enforce new rules around self-driving cars. Manufacturers and operators of vehicles equipped with ADASs or levels 3-5 automated driving systems must now report any and all crashes promptly. In California, any collisions that cause injury, death, or damage must be reported to the state's Department of Motor Vehicles.

With these new rules in place, just a couple of months later, as of August 2021, the state had fielded more than 300 reports. As a result, automakers are trying to fix safety concerns, as well as working on methods to better track how human habits and responses affect a car's safety.

Despite the low number of daily driver-error accidents, autonomous-vehicle accidents make headlines. In 2018, a pedestrian in Arizona was killed by a test car operated by Uber Technologies that had a human driver at the helm. The National Transportation Safety Board report cited the human driver's failure as the most likely cause of the crash, but it also stated the vehicle failed to classify the pedestrian or predict their path across the street.

Cybersecurity 

Self-driving cars will generate, collect, and retain large amounts of personal data about their users. Many cars will communicate with one another and with roadway infrastructure while on the road. As a result, there are valid and yet-unsolved concerns around who owns and can view this data and whether it should be private. The car will also rely on technology for safe operation, which means it could be the target of hacking through its electronic system.

How Will Insurance Work With Self-Driving Cars?

In a growing and changing industry, the insurance landscape around self-driving vehicles will continue to evolve as well. We will gain a better understanding of how automation interacts with the driver. This, in turn, will help figure out who's liable in a crash: the human driver, the machine or software, or the automaker. As it stands now, a patchwork of federal and state laws and guidelines govern the testing and operation of self-driving vehicles, along with how they should be insured.

"In the future, automakers will likely absorb more liability, but it will be interesting to observe how [the] year, make, and model fit into the overall picture," Gordan said. "Similar to other industries impacted by innovation, insurance carriers will look to protect their revenue in changing time."

Liability might shift from the driver or buyer of the car to the automaker, for example, and insurance carriers might create new products for consumer purchase, he said. "As the vehicle absorbs more driving responsibility or more variables enter the equation, like smart streetlights, there are bound to be changes to how the ecosystem manages risk."

The NHTSA offers federal guidelines for automated driving systems, while states are in various phases of regulating testing, public road operation, vehicle data privacy, and insurance.

Here are some of the main concerns still pending:

Insurance Frameworks and Liability

Most experts Stanley spoke with thought that today's auto insurance would adapt to self-driving cars and that there wouldn't be any major changes in the near future. For businesses, the fleet insurance model seemed most practical and easiest to achieve. With this framework, an automated car maker might sell or lease a group of self-driving cars to a delivery service, which would then either self-insure or add the fleet to a corporate policy to pay for liability claims. Repairs would be performed in-house. This model tacks on a way to reduce costs.

At this time, insurance is regulated at the state level. As a result, legal treatment of these issues is inconsistent from state to state. Many states are wading deeper and deeper into insurance and liability concerns about self-driving cars. And some states have no laws on the books at all.

In Washington state, laws require the testing company to have at least a $5 million umbrella liability policy to cover any accidental injury, death, or property damage. Virginia does not require liability coverage. And in Oklahoma, there is nothing on the books about liability coverage at all.

Repair Costs 

While accident rates may decrease, repairing a self-driving car after a minor fender bender could add up for insurers, the RAND report explained. Self-driving cars rely on many sensors and cameras and will likely need specialized auto shops that can repair and calibrate this equipment.

"This isn't something you can handle in your garage," Stanley said. Standard fleet operators like those that run taxi services or rental vehicles already use in-house repair shops and can more easily deal with maintenance. The manufacturers of self-driving cars may follow this model and adopt central repairs.

Cybersecurity

Most experts feel there will be more demand for cybersecurity insurance, according to Stanley's report. However, the insurance industry thought they could meet demand and set accurate rates. Policies in the future might include or allow you to add a cybersecurity rider to your annual contract for a self-driving vehicle.

Claims and Safety

Insurance companies are still trying to weigh the benefits and risks of current automated processes to help set accurate policy rates. Whether claims will go up and down also depends on how automation influences safety. Insurers are often looking to ADASs for clues.

"We found that ADAS-equipped vehicles show a 27% reduction in bodily injury claim frequency and a 19% reduction in property damage frequency," Gordan said. "The coexistence and combination of features—more common on new models—can influence outcomes," he said.

Gordan added that people who buy cars with these features expect their auto choice will positively impact their insurance premium, or in other words, that they'll save money. "The benefit for consumers is great because we've seen reductions in claims and, on average, discounts of up to 10% off their insurance premiums on average," he said.

Insurers may look to driving behavior data and ADAS variables when underwriting a policy and setting prices. These may include such factors as whether the ADAS is on or off, how it's set up, whether the driver is wearing a seatbelt, or if the headlights are on.

The Highway Data Loss Institute also found that technological improvements reduced insurance claims for property damage and bodily injury. This often took place when more than one feature was engaged. This is mainly the case in second-level automation, such as forward collision warning, lane departure warning, and automatic emergency braking. 

But there may be a few twists in the road en route to a safer, less costly outcome. A recent study from IIHS found that drivers using adaptive cruise control along with lane-centering technology often set the speed above the speed limit and paid less attention to the road or the act of driving. This seems to negate any safety gains. Other automated safety features can be turned off when dealing with curves in the road.

What Is the Future of Driverless Car Insurance?

"Driverless cars are in our future; there's no question about it," Gordan said. "How and when will be the big questions to consider as intricate planning and collaboration are required to build smart city infrastructure, artificial intelligence advancements, regulatory impacts and, of course, consumer acceptance."

According to one study, 35% of those surveyed said they'd be more likely to buy a self-driving car if doing so led to lower insurance rates.

Frequently Asked Questions (FAQs)

How do self-driving cars work?

Autonomous cars rely on a number of sensors, computers, and cameras to guide them through the streets to arrive at the final destination. For example, GPS sensors could direct a car to the nearest gas station, while a camera and sensors would detect objects, predict their actions, and respond to them. These objects could be people crossing the road, a bird swooping by, or the fuel station's pumps, just to give an idea.

When will self-driving cars be common?

Self-driving cars won't be ready for market in the very near future, according to the NHTSA. Manufacturers are addressing tech- and cybersecurity-related issues, and a great deal of testing must occur before self-driving cars are placed on the showroom lot. But some future features of self-driving cars are ready and in action now. These include sensors that detect and act like emergency braking, lane assist, and cruise control that adapts as it drives.

Why do we need self-driving cars?

The NHTSA counts a few major perks. These include:

  • Increased safety due to reduced human error (which is the main cause of car accidents)
  • More efficiency and convenience due to reduced traffic
  • Increased mobility for older people and people with disabilities that prevent them from driving a motor vehicle

Article Sources

  1. Insurance Institute for Highway Safety. "Autonomous Vehicle Laws."

  2. National Highway Traffic Safety Administration. "Automated Vehicles for Safety."

  3. RAND Corporation. "Autonomous Vehicles and the Future of Auto Insurance," page 27.

  4. State of California Department of Motor Vehicles. "Autonomous Vehicle Collision Reports."

  5. National Highway Traffic Safety Administration. "NHTSA Orders Crash Reporting for Vehicles Equipped with Advanced Driver Assistance Systems and Automated Driving Systems."

  6. Congressional Research Service. "Issues in Autonomous Vehicle Testing and Deployment," page 13.

  7. Washington State Legislature. "Mandatory Liability Insurance."

  8. Insurance Institute for Highway Safety. "Speeding Behavior While Using Adaptive Cruise Control and Lane Centering," page 3.

  9. Governors Highway Safety Association. "Autonomous Vehicles Meet Human Drivers: Traffic Safety Issues for States," page 8.