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Parking driverless car risks in captives

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BURLINGTON, Vt. — Captive insurers can be a solution to cover the emerging risks presented by driverless cars that traditional insurers have either been slow to respond to or have quoted unacceptably high premiums for.

But group captives are the best vehicle to cover the risk, which is a challenge because many of the smaller companies in the autonomous vehicles space do not want to participate in a captive with their competitors, experts said at the Vermont Captive Insurance Association conference in Burlington on Wednesday.

There are about 1.2 billion vehicles on the road worldwide, with more than 1.2 million fatalities per year, said Christine Kogut, a principal for Milliman Inc. based in South Burlington, Vermont.

“The thought is that driverless and connected vehicles can eliminate all of the negatives that we have now,” she said. “They can help us be safer, save energy, cut pollution, increase the city capacity without adding concrete, and they can provide mobility to millions of people that don’t have access to transportation. The endgame is that we can be safer and more productive, and our mobility can be more personalized, more affordable and more convenient, which is what all of us really want.”

The players in the autonomous vehicles space range from major corporations such as Google Inc. and Uber Technologies Inc., which have the capacity to spend up to $1 billion in research and development, to the middle-market companies that have raised $20 million to $100 million apiece, to the small firms that have raised $3 million to $20 million each, said Christina Kindstedt, senior vice president of Advantage Insurance Management (USA) L.L.C. in Charleston, South Carolina.

“They are very optimistic about their future,” she said. “They don’t understand insurance. When we talk to them about insurance, they say, ‘Oh, I do know that I need to have insurance coverage, even for the R&D, even in that confined test environment, but I really don’t have time to worry about that right now.’”

The insurance industry develops products and premiums by looking at the risk exposure over the past three to 10 years depending on the line of business, Ms. Kindstedt said.

“We don’t have that luxury in the AV industry,” she said. “We don’t know what laws they need to comply with. We cannot go back five years. We may have 100 cars today, but it was only five just six months ago. There are so many moving parts in the industry. The insurance industry does not know how to react.”

Ms. Kindstedt worked with a group of developers that developed an autonomous vehicle golf cart and was quoted an annual insurance premium of $70,000 in the testing stage — more than the actual cost of the vehicle.

“That’s the environment that we’re in,” she said.

“For those of us that have been in the insurance industry, we know that change is very difficult for them,” Ms. Kogut said. “However, they are most likely going to be required to change at a pace they’re not going to be comfortable with. You have these insuretech companies that are coming in and invading their space.”

In addition, Elon Musk, owner of Tesla Inc., has argued that Tesla owners should be charged less for insurance premiums than other car owners, she said. If the insurance industry doesn’t provide these discounts, Tesla will insource the risk and provide insurance, with a pilot program already underway in Asia, she said.

The “whales” such as Google have their own captives and can place the risk there, but the middle-market and smaller companies don’t want to establish single-parent captives and risk retention groups can’t write physical damage coverage, so the group captive option is best, Ms. Kindstedt said.

“Probably the biggest hurdle for them is that they understand they need a group captive, (but) they have absolutely no desire to work with each other,” she said, citing concerns expressed by developers about stolen ideas, which makes them reluctant to share exposure or loss data. “That’s a challenge. The other challenge is that those AV developers go out of business very quickly. Twenty million dollars doesn’t last forever.”

Currently, an estimated 94% of vehicle accidents are caused by human error, but with an increase in driverless vehicle usage, the cause of accidents will shift from human error to software issues, resulting in a shift of applicable insurance from personal auto to products liability, Ms. Kogut said. In 2015, Volvo Car Group become the first company to declare it would accept full liability whenever one of its cars in autonomous mode had an accident — a move quickly followed by other major players.

“Certainly, there are a lot of gray areas, and the rules and the laws in allocating this liability could have a significant impact on both consumer acceptance and the deployment of this technology,” she said.