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Will Technology Kill Auto Insurance?

The auto insurance industry has been experimenting with technology and tools that are completely changing the way we think about cars.

Self-driving vehicles, ride-sharing and vehicles that include their own insurance in the sticker price are all recent innovations — innovations whose long-term effects are not yet known.

With the rise of autonomous vehicles and ride-sharing came questions about liability and its related coverage: Who will insure self-driving cars? Who is liable in a ride-sharing accident scenario? As vehicle fleets replace individual ownership, who should carry the coverage necessary to pay medical bills, repair costs and other losses in case of a crash?

The changes on the horizon have prompted some commentators, like Deutsche Bank’s Joshua Shanker, to predict that today’s auto insurance industry simply won’t exist in 20 years.

Is the demise of auto insurance imminent? Is it likely? Here, we explore the pressures on traditional auto insurance and the ways the field may shift in the next one to two decades.

Self-Driving Cars: Who Will Insure Them?

Self-driving cars are predicted to change the driving habits of entire nations — and to significantly reduce the cost of auto insurance. A 2015 study by Metromile and Ferenstein Wire estimated that self-driving vehicles would save their owners nearly $1,000 a year on insurance premiums on average, according to Gregory Ferenstein.

The study was based in part on data showing that, as of 2015, none of Google’s self-driving vehicles had been in an accident caused by the technology, only by human error, reported Adrienne LaFrance at The Atlantic. Since then, there have been notable instances of tech errors leading to accidents, including the March 2018 death of a pedestrian. More on that in a minute.

Still, many commentators have drawn the same conclusion from the data: Prevented accidents mean prevented claims, which will reduce premiums. Even big name investors like Warren Buffett have made such predictions with regard to self-driving vehicles, CNBC’s Elizabeth Gurdus reports.

See also: Industry 4.0: What It Means for Insurance  

The Reality on the Ground

Yet the reality may not be so easy to achieve. For one thing, self-driving cars have yet to be tested in the same wide range of conditions human drivers face daily, says Peter Hancock, a professor of psychology and engineering at the University of Central Florida. Seeing how these cars handle bad roads, inclement weather and similar challenges is essential to understanding whether they’ll really replace human drivers — and how to insure them if they do.

In 2015, Volvo CEO Håkan Samuelsson said that Volvo would accept “full liability” for any losses occurring when a Volvo vehicle was in full autonomous mode, indicating a future in which liability coverage for self-driving vehicles is a question of product liability, not driver behavior.

Yet, to date, other automakers haven’t rushed to join Volvo in making a similar promise. While Google and Mercedes have self-insured, as a rule “auto manufacturers are not that keen on taking on the insurance risk,” says Rick Huckstep at the Digital Insurer. Automakers have spent billions of dollars on developing automated technologies, and “they didn’t do this to then have to carry 100% liability for whatever happens on the road.”

Revising Timelines

Even if self-driving cars adopt a commercial liability or product liability approach to coverage, thus eliminating the need for individual drivers’ coverage, a 10- to 15-year timeline may still be ambitious, says Simon Walker, group chief executive at First Central Group. The technology, while ever more widely tested, is not yet commonplace.

Determining regulatory, licensing and liability questions will likewise take years; attempts to start that process now have met with uncertainties because the tech isn’t in common use. Customers will need to gain confidence in autonomous vehicles, and their driver-required cars will have to age their way onto the scrap heap.

All this is unlikely to happen in just 10 years, or even in 20. And with 10 to 20 years, auto insurers have time to adapt. Some have already begun, in fact. Julia Kollewe at the Guardian cites Adrian Flux, a U.K. insurer, which in 2016 announced what it called the first-ever auto insurance policy for driverless vehicles. The policy covers not only the conventional situations other policies address, but also autonomous-vehicle-specific topics like software updates, satellite or navigation system failure and loss or damage from hacking.

If this U.K. company can do it, says Julia Eddington at the Zebra, so can U.S. companies, although they may face more complexity due to the overlapping world of state and federal regulations. As of mid-2018, however, 29 states had enacted driverless vehicle liability laws, according to the National Conference of State Legislatures, which could pave the way for faster adaptation by existing auto insurers.

Improved Safety Features: Are Crash-Proof Cars Possible?

Self-driving cars aren’t the only way that technology may end the need for auto accident coverage. Safety technology is improving, as well, and Volvo’s promise to cover liability for its cars while in autonomous mode isn’t the only goal the automaker has set to change the vehicle liability landscape.

In 2008, Volvo announced an ambitious plan: to create a crash-proof vehicle that would result in zero injuries or deaths, and to do it by 2020. In 2013, according to Viknesh Vijayenthiran at Motor Authority, and again in 2016, Volvo announced its intention to stay on track to create its injury- and death-free vehicles by 2020.

Volvo still has a little more than a year to reach this goal, and its statistics indicate the company is on the right track. Volvo won a 2018 Which? Award in the U.K. for “the company’s solid safety record that put it ahead of other short-listed candidates.”

Awards and strong statistics are evidence that Volvo is moving in the right direction when it comes to safety, but until this technology is perfected, insurance coverage remains a necessity — and completely autonomous driving technology still has a long way to go.

A Car and Its Coverage: A Package Deal?

Tesla is also betting on the safety of its technological advances, and in a way that presents an additional challenge to traditional insurance companies: by including auto insurance coverage in the sticker price of their vehicles.

Tesla is experimenting with selling “insurance and maintenance included” vehicles in Asia, according to Business Insider’s Danielle Muoio. The price for insurance and maintenance incorporates Tesla’s data about the car’s safety features, including its autopilot system. By including the insurance price in the car, Tesla says, the company believes it offers a better deal to consumers, because many auto insurance companies don’t account for the autopilot system in the same way Tesla does.

Tesla may have a point. “If you’re hoping to shave down your premiums, buying an automated vehicle might not be the right move,” Shift Insurance head of business development Raphael Locsin tells Entrepreneur. However, some companies do consider certain other driver assistance features, like electronic stability, when calculating discounts.

Insurance companies’ hesitation may be prudent at the moment. A March 2018 Tesla crash with the autopilot turned on proved fatal for the driver, according to Jack Stewart at Wired.

Selling vehicles, autonomous or otherwise, with the insurance included in the sales price offers a hybrid approach between purchasing coverage from traditional auto insurers and placing the burden on automakers to cover their vehicles as consumer products. While Tesla has gambled on the approach, it remains the only automaker to do so; even the products-liability model has had more buy-in from the makers of self-driving vehicles and their technology.

“Insurance included” models seem the least likely of the self-driving insurance options to threaten the traditional auto insurance industry in the next two decades. Yet they indicate a willingness of companies to take risks to try new models, which are worth noticing.

What to Expect in the Near Future

Self-driving vehicles piloted by technology that prevents accidents is a powerful vision of the future. It provides a sense of excitement and hope.

It also provides challenges to traditional auto insurance companies, many of which are already struggling with auto insurance premiums in a world where many people have eliminated vehicles from their lifestyles. For a $220 billion industry that supports more than a quarter million jobs, the threat is significant, says Patrick Lin at Forbes.

Yet technology’s death knell for auto insurance may not be as close as it appears.

Driver involvement in vehicle operation is likely to be a necessity for many more years, and drivers will need insurance as long as they must take the wheel. Human error will continue to be a factor in accidents. And demand for insurance against theft, acts of nature and technological glitches will persist even in a world where cars do their own driving.

What’s in Store for Blockchain?

Blockchain, blockchain, blockchain! What does that mean for insurance? No one knows yet, but that doesn’t stop blockchain from being one of the hottest topics in the insurance industry right now. This week, I take a look at the direction this puck is heading.

Hype or reality?

Last September, the World Economic Forum published a report titled, Deep Shift – Technology Tipping Points and Societal Impact. The report is based on surveys with more than 800 executives and experts about new technologies and innovations. The point of the report is to identify deep shifts in society that result from new technologies. These include areas such as 3D printing, driverless cars, wearables and artificial intelligence.

I was drawn to shift No. 16, simply called “Bitcoin and the blockchain.” By 2025, 58% of these experts and executives believed we would hit the tipping point for Bitcoin and blockchain. This was defined as:

“10% of global gross domestic product will be stored on blockchain technology.”

To put that into context, the total worth of Bitcoin today in the blockchain is about 0.025% of today’s $80 trillion global GDP.

Also of interest, especially given that it looks like Tunisia will be the first country to issue a digital currency on a blockchain, shift No. 18 was called “Governments and the blockchain.” Here, almost three out of four in the survey group expected that “governments would collect tax via a blockchain by 2023.”

It’s a reality then!

It’s certainly looks that way. And $500 million of venture capital money in 2015 can’t be wrong, can it?

The prospect of a seismic shift on a par with the impact of the Internet is compelling. That explains all the attention, predictions and excitement about blockchain. But, if we use the evolution of the Internet as a benchmark, the development of blockchain today for commercial use is equivalent to the Internet in, say, the mid-1990s, at best.

The debates on Bitcoin, on whether private or public blockchains will be used, on Sybase vs Oracle (oops, wrong century) are yet to play out. The ability of the Bitcoin blockchain to scale to handle massive volumes at lightning speed remains unproven.

Now, just as it was in 1995, blockchain technology is at an embryonic stage. Still finding its way, it has yet to prove it is a viable, industrial-strength, large-scale technology capable of solving world hunger.

That is why I am going to focus on the use case for insurance rather than the technology itself. (For one explanation of how blockchain works, go to Wired.)

The smart insurance contract

This is getting the most attention right now. The notion of automating the insurance policy once it is written into a smart contract is compelling. The idea that it will pay out against the insurable event without the policyholder having to a make a claim or the insurer having to administer the claim has significant attractions.

First, the cost of claims processing simply goes away. Second, the opportunity for fraud largely goes away, too. (I hesitate here simply because it is theoretical and not yet proven.) Third, customer satisfaction must go up!

One example being used to illustrate how these might work came from the London Fintech Week Blockchain Hackathon last September. Here, a team called InsurETH built a flight insurance product over a weekend on the Ethereum platform.

The use case is simple. In the 12 months leading up to May 2015, there were 558,000 passengers who did not file claims for delayed or canceled flights in and out of the UK. In fact, fewer than 40% of passengers claimed money from their insurance policy.

InsurETH built a smart contract where the policy conditions were held on blockchain. Using the Oraclize service to connect the blockchain with the Internet, publicly available data is used to trigger the insurance policy.

In this case, a delayed flight is a matter of fact and public record. It does not rely on anyone’s judgement or individual assessment. It is what it is. If a delayed flight occurs, the smart contract gets triggered, and the payout is made, automatically and immediately, with no claims processing costs for the insurer and to the satisfaction of the customer.

Building on this example and applying it to motor, smart contracts offer a solution for insurers to control claims costs after an accident. A trigger that there has been an accident would come to the blockchain via the Internet from a smartphone app or a connected car. Insurers are always frustrated when customers go a more expensive route for repairs, recovery and car hire. So, with a smart contract, insurers could code the policy conditions to only pay out to the designated third parties (see related article by Sia Partners).

So long as the policy conditions are clear and unambiguous and the conditions for paying are objective, insurance can be written in a smart contract. When the conditions are undeniably reached, the smart contract pays. As blockchain startup SmartContract put it, “Any data feed trusted by a counterparty to release payment or simply complete an agreement can power a smart contract.”

To understand this better, I asked Joshua Davis, the technical architect and co-founder at blockchain p2p InsurTech Dynamis, to explain. He said:

“You need well-qualified oracle(s) to establish what ‘conditions’ exist in the real world and when they have been ‘undeniably reached.’  An oracle is a bridge between the blockchain and the current state of places, people and things in the real world.  Without qualified oracles, there can be no insurance that has any relation to the world that we live in.

“As far as oracles go, you can use either a single trusted oracle, who puts up a large escrow that is lost if they feed you misinformation, or many different oracles who don’t rely on the same POV [point of view] or data sources to verify that events occurred.

“In the future, social networks will be the cheapest and most used decentralized data feeds for various different insurance applications.  Our social networks will validate and verify our statements as lies or facts.  We need to be able to reliably contact a large enough segment of a claimant’s social network to obtain the truth.  If the insurance policy can monitor the publishing or notification of our current status to these participants and their responses accurately confirm it, then social networks will make for the cheapest, most reliable oracles for all types of future claims validation efforts.”

Is this simply too good to be true?

Personally, I don’t think it is. Of course, a smart contract doesn’t have to be on the blockchain to deliver this use case.

However, what the blockchain offers is trust. And it offers provenance. The blockchain provides an immutable record and audit trail of an agreement. The policyholder does not have to rely on the insurer’s decision to pay damages because the insurer has broken its promise to keep the client safe from harm. As the WEF report states, this is an “unbreakable escrow.” The insurer will pay before it even knows what happened.

There’s another reason for going with the blockchain: cybersecurity!

With the blockchain sitting outside the corporate firewall and being managed by many different and unconnected parties, the cyber criminal no longer has a single target to attack. As far as I’m aware, blockchain is immune to all of the conventional cyber threats that corporations are scared of.

What happens when you put blockchain and P2P insurance together?

In December, I published a two-part article on Peer 2 Peer Insurance (here are Part 1 and Part 2). When you put the P2P model together with the blockchain, this creates the potential for a near-autonomous, self-regulated insurance business model for managing policy and claims.

Last year, Joshua Davis wrote an interesting white paper called “Peer to Peer Insurance on the Ethereum Blockchain.” He presents the theory behind blockchain and the creation of decentralized autonomous organizations (DAO). These are corporate entities with no human employees.

The DAOs would be created for groups of policyholders, similar to the P2P group model with the likes of Guevara and Friendsurance. No single body or organization would control the DAO; it would be equally “controlled” by policyholders within each group. All premiums paid would create a pool of capital to pay claims.

And because this is a self-governing group with little or no overhead, any float at the end of the year would be distributed back among the policyholders. Arguably, this makes the DAO a non-profit organization and materially increases the capital reserve for claims costs.

The big question mark for this model is regulation. There still is no answer to who will maintain the blockchain code within each DAO when regulations change. But, what does seem a dead certainty is that someone, somewhere is figuring out how to solve this.

Blockchain offers the potential for new products and services in a P2P insurance model. It should also open insurance to new markets, especially those on or near the poverty line.

For now, we must watch to see what comes from the likes of Dynamis, which is using smart contracts to provide supplementary employment insurance cover on Ethereum.

Innovation will come from new players

It has been my belief for some time that, in the main, incumbent insurance firms will not be able to materially innovate from within. As with Fintech, the innovation that will radically change this industry will come from new entrants and start-up players, such as:

Dynamis

SmartContract

Rootstock

Everledger (see previous article on Daily Fintech)

Tradle

Ethereum Frontier

Codius (Ripple Labs) (update: Codius discontinued)

This is particularly true with blockchain in insurance. These new age pioneers are unencumbered by corporate process, finance committees, bureaucracy and organizational resistance to change.

Besides, the incumbent insurance CIOs have heard this all before. For decades, software vendors have promised nirvana with new policy administration, claims and product engines. So, why should they listen to the claims that blockchain is the panacea for their legacy IT issues? But,  that is a subject for another post … watch this space!