Self Driving Cars May Save Auto Insurance

By now, you’ve probably heard some of the hype surrounding self-driving cars; from Elon Musk’s vision of the future to the numerous concerns from lawmakers. The autonomous car will drive down the costs of transportation as we will no longer need people behind the wheel of taxis, Ubers, or buses. The technology will also eliminate the need for parking garages since drivers can send their cars home when not in use. While that seems like a distant vision; carmakers are surprisingly close to bringing autonomous cars to market, and for business owners and insurers alike, they couldn’t come sooner.

If your business has any sort of fleet of autos you are probably keenly aware of the insurance industry’s ongoing struggle with commercial auto insurance. Insurance companies have been consistently raising auto rates across their commercial books and businesses, especially in the transportation industry, have felt the effects.

There are several factors as to why the commercial auto insurance industry has been performing so poorly, but one stands out: the drivers. You can point to more miles being driven, rising costs of litigation, even how the more advanced technology used in cars increases the costs of repairs but all of those would be moot if we had a population of perfect drivers who never got in accidents. Like a ship’s Captain, the driver bears the ultimate responsibility of the car and is thus responsible for the auto insurance woes.

Theoretically, self-driving cars should be safer than those manned by human drivers for obvious reasons. Computers don’t get tired, lose focus, drink or get road rage; however, we all know that technology doesn’t always work in practice as it should in theory. We’ve already seen the first fatal accident involving a self-driving car. Plus, the autonomous cars will no doubt be sharing the road with other human drivers, adding a layer of unpredictability.

Insurance is fundamentally grounded in statistics. Insurers compile a tremendous amount of data on their policy holders, and use that data to infer the probability other policyholders will get in an accident, and how much it will cost. That is at the core of how rates are determined; past data dictates that a driver of a certain age, driving a specific make and model of a car in a given region has X probability of being in an accident. It’s complex, confusing, and imperfect, so insurers are constantly reviewing their data and tweaking algorithms in order to operate at a profit. This is still the case with nearly one hundred years and hundreds of millions of drivers worth of data.

By virtue of their business model, insurers can’t rely on anecdotal evidence that self-driving cars are safer; they’ll need lots of hard data. Without credible information on how self-driving cars act on the road, insurers will likely have one of two initial reactions. 

The first option for insurers is to decline to offer coverage of autonomous cars, either by declining applicants with those types of vehicles, or adding wording to their auto policy specifically excluding coverage while the autonomous function is on. Currently, the auto policy has language specific to who is driving the car for coverage to be in force. It will be interesting to see how the courts interpret it in regards to autonomous driving. In case of an accident, is the person behind the wheel technically driving, or was the computer the legal driver? Insurance carriers may argue that if full control is given to the computer, their customer wasn’t the one driving. The policyholders, on the other hand, would argue the opposite in what could be an important precedent-setting lawsuit once it happens. Courts typically side with the insured in matters of policy interpretation but there’s no way to predict what the legal decision will be right now. In order to avoid costly legal battles, insurers will use specific policy wording to very clearly state their intention to not cover accidents while autonomous function is on.

Alternately, some insurers may respond to the risks associated with this new technology by raising rates. In the absence of the volume of data they need for ratemaking algorithms, insurers will initially err on the side of caution and estimate higher accident probabilities. Over time, if autonomous cars truly are safer, insurers should lower their rates commensurately. The originally skeptical insurers may then join the market after compiling credible data on the safe operation of autonomous cars, thus further lowering rates.

Either way, the most dangerous part of a car (the driver) is essentially removed from the equation and six-figure auto liability claims may become a thing of the past. My prediction is that the failure of autonomous technology will be treated as a manufacturer’s defect, much like if the brakes failed, and claims will shift from the driver’s auto policy to the car-makers Product Liability policy. This reduction in Auto claim payouts will result in rates stabilizing and Auto Policies once again becoming profitable for insurers and affordable for insureds.   

Hidden Exposure to Intellectual Property Litigation

In today’s rapidly changing, 'disruption' economy it can be tough to discern whether you are infringing on another’s intellectual property as processes are constantly improving and changing. Finding out the hard way can be a costly mistake. According to the American Intellectual Property Law Association, intellectual property lawsuits cost an average of $4.4 million between defense costs and potential damages. This is problematic as, chances are, every company uses intellectual property at some point in their operations or supply chain and may not even realize it. It should then be alarming that coverage for intellectual property infringement is specifically excluded in the Personal and Advertising Injury part of the Commercial General Liability Policy. Companies are then left with a severe, uninsured exposure that they may not even know they have.

Intellectual Property refers to “creations of the mind, such as inventions; literary and artistic works; designs; and symbols, names, and images used in commerce.” Its broad definition can create confusion

When developing your intellectual property, it’s important to make sure you’re not inadvertently infringing on another’s IP. In many cases, considerable time and resources may be spent only to find out that another company is claiming your work infringes on their IP. The vetting process is further complicated by the rise of non-practicing entities (NPE’s), or what are referred to as “patent trolls.” NPE’s are companies that hold various patents but don’t produce any products or services. They exist by threatening lawsuits to companies that may be infringing on their patents and offer settlements just below the cost of defense. For defending companies, it is markedly cheaper to settle than to hire an attorney and fight in court, thus perpetuating NPE’s ability to acquire more patents and attack other companies.

On the flip side, you invested a lot of time, hard work, and energy into developing your intellectual property and you can’t afford to let another company come along and infringe upon it. However, you also can’t quite afford the $4.4 million price tag that an intellectual property suit brings. The moral hazard is evident; theoretically, a company with larger assets could infringe on a smaller company’s IP; knowing that the smaller entity does not have the resources to enter into litigation.

Often overlooked is the intellectual property your business relies on from vendors and suppliers. A common example is any sort of software that your company licenses. A less common example is a part your company buys from a supplier that is used in your finished product. That supplier may have a patent on either the machinery or the process used to make that part. If they lose that patent in an IP suit you may have to find a more expensive supplier. Finding a new supplier isn’t as easy as picking up the yellow pages. There are search costs, negotiations, product differences, and logistical concerns that can place an undue burden on an organization that has to unexpectedly switch.

Addressing your intellectual property exposure should be part of your enterprise wide risk management program. You should take an internal audit of your software licenses, suppliers, and your own intellectual property; determine your reliance on them and develop the appropriate risk management measures to address those exposures.

As part of your risk management program, you may consider purchasing insurance. The most common is Defense Coverage, which simply covers your defense costs and potential damages you may owe.  Several carriers are also offering Enforcement Coverage that pays your legal costs of suing others who infringe on your IP. In addition, there is coverage available for your reliance on another company’s intellectual property. Some of these policies also offer coverage for your indirect costs of losing an IP suit - like your loss of income or costs associated with creating new IP.

Addressing IP exposures, and the applicable insurance, is very complex and requires a thorough review and understanding of the coverage provided by certain policies as well as a knowledgeable broker to guide you through the process.

Rise of the Robo-Broker

Over the past couple years, we have seen the advent of the robo-advisor in the financial services industry. Companies like Betterment or Advizr use software to automate the financial planning and advice they provide for customers. The benefit is clear: automation allows the company to operate with less overhead and then passes those savings along to the customer. Naturally, companies are trying to replicate this model in the insurance industry with robo-brokers but will that be a good thing for business owners?

A robo-broker will probably be an online portal where you can enter in your sales, class codes, etc. It will most likely offer suggested limits or coverages based on your industry and cookie-cutter risk management techniques. It places your company in a box. It boils your business down to its SIC code and assumes you operate in the exact same manner as all of your competitors. The problem is you don’t. Your business is unique, your employees are unique, your goals are unique and your risk management program should be as well. Since the computer treats your company as a generic class code, it cannot help you anticipate and mitigate your unique loss exposures. A generic risk management program is considerably less effective than if it was tailored specifically for your company.

Another aspect of robo-brokers is the automation of your policies, which isn’t necessarily a good thing. The ‘set it and forget it’ mentality works with personal finance because your goals, and how to achieve them, rarely change. Insurance, on the other hand, should be as fluid as your company. The world your business operates in is constantly changing and as your company reacts to it, so should your risk management program.

By the nature of the insurer-agent relationship: a robo-broker will not save you, the policyholder, any money. As you probably know, your insurance agent is compensated by the insurance carrier with commission. Insurance carriers pay a standard commission for each line of business to all of the brokers they work with and this commission schedule is filed with the government. Insurance agents are also not legally allowed to give up commission in order to get a lower premium for the client. So, a robo-broker who uses software automation to decrease its payroll and other costs does not, and legally cannot, pass those savings to the policyholders.

Now think back on your professional relationship with your current agent, could that be handled by a computer? Could everything your agent does for you be substituted by inputting some information online and having a robot take care of the rest? If yes – you may have a serious problem.

Knowing that a robo-broker may actually be a detriment to your risk management program by offering the bare minimum service and not saving you money, why would you accept a human broker who does the same? The majority of brokers all have access to the same insurance carriers, either direct or through a wholesaler. All of your competing brokers can each get you the same policy for the same price so the difference between them is their value to you. You should pick a broker based on his or her individual expertise and trustworthiness. You want a broker who works to help your company achieve its goals throughout the year, not just drops off a renewal annually. If you want to get away from automated risk management, whether it’s by a computer or human, call Insurance Solutions & Services today.