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Will Autonomous Cars Drive Down Your Premiums?

Whether you like it or not, you’re paying for the risk that others pose on the road. Car insurance companies base customer premiums in large part on accident rates of all drivers; in 2011, police responded to more than 5.3 million wrecks, according to the National Highway Traffic Safety Administration.

U.S. drivers lose about $819 a year in medical costs, lost productivity, travel delays, workplace costs, insurance costs, and legal costs because of these wrecks, the NHTSA says. Don’t think at least part of that amount doesn’t show up in your car insurance premiums.

Autonomous – or self-driving – cars could help cut these costs. While the technology long has been in the science fiction spotlight (think how KITT took over for The Hof in Knight Rider or how the Batmobile responds to Batman), companies such as Google and Nissan are on track to bring it into reality and onto our roads – maybe as soon as 2015. By the time humans are almost completely removed from behind the wheel – which many experts expect could be the case by 2040 – the world could be virtually accident-free.

That means the risk-assessing algorithms big insurance companies have spent centuries perfecting may very well become obsolete, and premiums reflecting the new normal must be recalculated. How substantial could the change be? The NHSTA says human error is responsible for 95% of wrecks. Research firm Celent predicts that by taking human error out of the equation, consumers could pay up to 80% less for liability insurance premiums by 2022.

Accelerating toward a driverless future

Still think self-driving vehicles are a pipe dream? Consider that more than 30 car models from various manufacturers already feature autonomous components to help reduce the risks associated with human drivers:

Autonomous emergency braking systems: Anti-lock brakes have been a standard feature in most vehicles since the early 1970s but recently have evolved into advanced systems from Fiat, Audi, Volkswagen, and others that monitor the proximity of your vehicle to other objects and brake for you if you get too close. The feature is expected to reduce accidents by as much as 27%.

Adaptive cruise control: Since 1995, Audi, Volkswagen, Toyota, and other automakers have improved this intelligent form of cruise control that’s designed to automatically change speeds to keep pace with the car in front of you. The NHTSA says speed-related accidents cost Americans about $40 billion annually; spread that amount out among about 210 million drivers and it comes to about $170 a year per motorist.

Pedestrian/Animal detection: Volvo debuted an advanced detection system this year that uses sensors to warn drivers of sudden deer crossings, dangerous pedestrian/cyclist conditions, and more. This could be especially beneficial for reducing collision rates in rural U.S. states, where 1 in 40 people typically hit a deer while driving, according to State Farm insurance data.

Lane departure warning systems: Nissan has offered this technology since 2001, and today it’s available from manufacturers such as Toyota, Honda, Audi, and more. Using video, laser or infrared sensors, a car is able to either alert the driver if the vehicle begins to leave its lane or take automatic corrective actions (steering, braking).

Driver fatigue/Distraction alerts: Volvo launched the first Driver Drowsiness Detection system in 2007, and other manufacturers such as Ford, Mercedes-Benz, Toyota and more followed soon after. Systems typically monitor the car’s movements and display concerns via text, audible alerts, and vibrations – some can automatically take corrective actions.

Taking the wheel of the insurance industry

There’s no doubt we’re on the fast track toward a driverless future, and even a small fleet of autonomous vehicles could have a big impact on national insurance premiums. Some experts predict a 20% adoption rate of incremental driver-assist safety technology (such as the features listed above) would result in enough accident rate reductions to trigger a significant reduction in insurance premiums across the board. Celent, for example, says premiums could fall 9% by 2017 and 26% by 2022.

So, if nearly all the risk on the roads is eliminated, will the entire auto insurance industry become obsolete? The short answer: No.

Fred Cripe, former Allstate head of product operations, believes the adoption of self-driving tech on the roads will be much more chaotic than its advocates predict, as human drivers will almost certainly take time to adjust to using the technology. “Any vehicle sold as ‘self-driving’ during the next 15-20 years will be operated in both self-driven and operator-driven modes. … For the first decade or so, accident frequency will not decline as much as predicted, and may even go up slightly, as the reduction from the self-driving aspect is offset by the deterioration of overall driving skills caused by less driving experience (especially since the operators will be taking over the driving duties during the most hazardous circumstances),” he writes in his blog.

Cripe, former State Farm executive Guy Fraker, and others have been outspoken that despite a long-term reduction in risk and frequency of claims, the severity and cost of a collision between two high-speed autonomous vehicles packed with cameras, radar equipment and other advanced technologies looks much higher than, say a fender-bender today between two used Toyotas.

Progressive CEO Glenn Redwick said in an investor relations conference call earlier this month that his company is using its Snapshot telematics technology – which monitors policyholders’ driving habits – to begin gathering data for how it will treat driverless cars. “It gives us some very direct insight into the vehicle,” he said. “That gives us opportunities to think about things differently, what might be insurable. … We’ll also be starting to ask, ‘What does an insurer look like in the future?'”

Among the most pressing questions for providers and consumers alike: Could the occupant of an autonomous vehicle be held liable for an accident, or should the manufacturer of the car assume all liability?

Additionally, lawmakers will have to finalize legislation soon to regulate these new autonomous technologies on the road. John D. Lee, a professor of industrial and systems engineering at the University of Wisconsin, offers another perspective about the future of traffic safety: “In 15 years, we’re likely to be in discussions whether people should be allowed to drive, because autonomous vehicles may be much less error-prone.”

The bottom line: It’s impossible to predict exactly how the introduction of this technology will play out. But with Nissan and Google both projecting release dates of additional technology in the next two years, the way we think about – and how much we pay for – auto insurance is due for a change in the very near future.

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