Reinsurers mull exclusions over controversial new technology
You could forgive the reinsurance industry for being cautious about driverless cars.
The industry uses historical data to price the risks it assumes from UK motor business. The introduction of driverless vehicles to the UK’s roads would essentially throw out the rule book and put reinsurers on the hook for risks they were not equipped to measure.
That is why, when the UK government announced last July that it would allow driverless cars to be tested on the UK’s roads from 1 January this year, a small number of companies considered putting exclusions in place in their UK motor excess of loss treaties, which cover insurers for losses they incur above a certain point.
It became even clearer that driverless cars were a reality for reinsurers in December, just before the 1 January reinsurance renewals, when some of their biggest clients started putting their names to UK driverless car pilots.
The UK government’s Autumn Statement revealed that the vehicles would be tested in London, Bristol, Coventry and Milton Keynes. Axa announced that it was overseeing risk assessment in Bristol and part of the advisory panel in Milton Keynes and Coventry. Fellow insurer RSA was chosen as the insurance partner for the London borough of Greenwich.
But, as it turned out, reinsurers stopped short of putting exclusions in place. Reinsurance broker Willis Re executive director Grange Turner says: “We have been resisting that and making sure that, for the time being, reinsurers are remaining silent on this subject for the purposes of contract language.
“Reinsurers were suggesting taking a defensive position, but I don’t think any have ended up adopting it. It isn’t a realistic position to take and the small number that were considering not covering it have realised that it is not realistic.”
Fellow reinsurance broker Guy Carpenter’s head of UK property and casualty Ian Kerton adds: “We have only seen one reinsurer seeking to introduce an exclusion of driverless cars in the 1 January renewals.”
Even so, driverless cars still have the power to severely disrupt the UK motor reinsurance industry. It could cause traditional business for both insurers and reinsurers to dry up, and obscure who is liable in an accident.
Kerton says: “The introduction of driverless cars will undoubtedly result in a dramatic change in both the motor insurance and reinsurance landscape.”
One of the biggest concerns is that because of the additional safety driverless cars promise, insurers and reinsurers will lose business. Large bodily injury exposures are the bread and butter of the UK motor market, but coverage for these risks may not be in such high demand if new technology makes crashes rare.
Swiss Re UK chief executive Russell Higginbotham says: “Once [driverless cars] really start to come to market, it will be important to see how the risk develops and how to deal with the new issues from the insurance/reinsurance perspective. Potentially, the numbers of accidents, and thus accident-related claims, could drop significantly.”
Kerton adds: “Private and commercial motor insurance premiums in the UK are well in excess of £10bn and these figures will drop substantially if the introduction of driverless cars leads to a significant drop in the frequency of accidents, or if liability substantially transfers to the manufacturers.”
He describes this as “a real worry for insurers and reinsurers alike, particularly in the current soft market cycle”.
A further concern is who is liable in an accident. If a computer-driven vehicle is not being monitored by a human, liability could transfer to the vehicle manufacturer or whoever built the car’s navigation system.
The situation becomes even more confused if driverless, semi-autonomous, and traditional vehicles are all on the same roads.
Kerton says: “Until cars become fully automated, the insurance, reinsurance and probably legal professions will potentially be left with working out how/what proportion of liability attaches to the driver of a normal vehicle, the manufacturer and driver of a semi-automated vehicle and the manufacturer of a fully automated vehicle if the three different types of vehicles are involved in the same event.”
On top of this there is the potential for catastrophic motor events that the industry has never seen. If a network of connected vehicles is subject to a cyber-attack, for example, there could me mass collisions.
Willis Re reinsurance broker Alexander Bateman says: “There could potentially also be a much larger exposure to volatility and large losses where, for example, the cars’ brain is at risk of being hacked and several thousand cars veer off the road at the same time. That sort of loss woudl be unprecedented but it’s the sort of nightmare scenario that some more alarmist parties have talked about.”
It is still possible that driverless cars will need specialist treatment from a reinsurance perspective.
While reinsurers did not exclude driverless cars from standard motor cover this time around, the vehicles may need their own type of policy.
Swiss Re’s Higginbotham says: “The question here is really whether this is standard car cover, or whether this is a prototype risk. In the current experimental/testing phase it’s more likely to be seen as a prototype.
“A reinsurer could theoretically take them on as part of a motor treaty, but more likely they would be covered in another way – as prototypes or on special acceptance.”
One thing is certain: driverless cars will give insurers, reinsurers and brokers plenty to talk about in the coming years.