Tesla just became the first automaker to truly show how the insurance industry is bound to change as self-driving cars hit the road.

Tesla has quietly been selling car insurance with its vehicles in Asia as part of its vision to one day include insurance in the final price of its vehicles. The move is meant to account for the fact that Autopilot makes Tesla cars much safer than traditional ones on the road today.

Tesla isn’t wrong to argue that insurance premiums should be adjusted to account for its cars being safer — the National Highway Traffic Administration found that crash rates for Tesla vehicles have plummeted 40% since Autopilot was first installed in 2015.

Tesla's quiet experiment shows how the insurance industry will need to change as self-driving cars hit the road. The general consensus is if self-driving cars reduce the number of collisions, there should be a reduction in the risk premium.

That's going to hit the insurance industry hard. The personal auto insurance sector could shrink to 40% of its current size within 25 years as cars become safer thanks to self-driving tech, according to a report by the global accounting firm KPMG.

Who's at fault?



Questions regarding liability are somewhat easier to answer when considering Level 4 or 5 self-driving cars, which refers to vehicles that can drive without any human intervention whatsoever.

Google and Ford are two companies pursuing fully self-driving cars. Ford actually plans to roll out a fleet of driverless cars without a steering wheel or pedals in 2021, showing how people won't play any role in driving fully self-driving cars.

"Under the current structure that we have today, it is the manufacturers who will bear the liability in that situation because the driver isn’t going to be doing anything," Geoffrey Drake, a partner at King & Spalding’s Tort Litigation & Environmental Group directing the firm’s Autonomous and Connected Vehicles initiative, told Business Insider.

“Presumably it will be how the computer was programmed, how the vehicle was instructed to operate, that would be causing that accident," he said.

A precedent has already been set for automakers to take full responsibility — Volvo said in 2015 that it will accept full liability in the event its self-driving car gets in a crash.

That means manufacturers will be more liable than ever before as the burden is no longer on a driver to properly control the vehicle. Attaching liability to sellers and manufacturers will be expensive, as the standard to establish a defect is vague and unpredictable.

The Tesla Model S involved in the fatal crash in May 2016. National Transportation Safety Board

Bearing that in mind, the liability question gets a bit more complicated when considering Level 2 or 3 autonomy. This is when the car can handle certain tasks on its own, like driving on a highway, but a driver is still in charge. Tesla Autopilot is considered a Level 2 system.

This issue came into focus when a Tesla driver died in a fatal accident while his Model S was operating in Autopilot.

At the time of the May 2016 accident, a Tesla Model S failed to brake when a truck was making a left turn in front of it. The car passed under the truck and, ultimately, drove off the road into a power pole, killing the driver.

Tesla wrote in a blog post following the May accident that the Autopilot system did not notice "the white side of the tractor trailer against a brightly lit sky, so the brake was not applied."

NHTSA conducted a six-month investigation into the accident and determined Tesla Autopilot was not at fault because the driver had enough time (7 seconds) to brake. NHTSA also said Autopilot shouldn’t have been expected to detect traffic crossing in front of the car.

The incident showed how a driver can still be liable for a crash in a Level 2 autonomous system, even if the car is actually driving at the time the accident occurs. But more importantly, it shows how insurance doesn't become obsolete simply because of autonomous tech, as accidents can, and will, still happen.

That being said, it's important not to conflate the Tesla Autopilot accident as proof that autonomous tech is dangerous. NHTSA already proved otherwise by showing how Tesla vehicle crash rates of plummeted since Autopilot was installed.

Widespread adoption of self-driving cars could eliminate 90% of auto accidents in the US, according to a report by McKinsey & Co.

But Tesla shows we're already seeing the number of accidents being reduced as automakers install autonomous technology in their cars, even if the cars aren't fully self-driving yet.

That means the premium prices will have to fall to account for that fact that cars are inherently getting safer.

Motor insurance accounts for 42% of Property and Casualty insurance, which is a $200 billion market in the US alone, according to the KPMG report. A comprehensive motor insurance policy usually covers loss due to theft, fire, or collision to both the vehicle itself and a third-party property. However, collision claims account for around 80% of the total claim cost, meaning they come with the highest risk premium.

Insurers are already preparing for the ripple effects of that reality. Insurers like Cincinnati Financial and Mercury Genera have already noted in SEC filings that driverless cars have the potential to threaten their business models.

The government's hands-off approach

Elaine Chao, the US Secretary of Transportation. Reuters/Carlos Barria Even though lingering questions about liability remain, Drake said it seems unnecessary for NHTSA to set regulations addressing the issue as the insurance industry seems well-equipped to adapt as self-driving cars hit the road.



Anders Eugensson, Volvo’s director of government affairs, also said it’s unnecessary for the government to set regulations determining liability.

“If you look at product liability today there is always a process determining who is liable and if there is shared liability,” Eugensson wrote in an email. “The self-driving cars will need to have data recorders which will give all the information needed to determine the circumstances around a crash. This will then be up to the courts to evaluate this and decide on the liabilities.”

Experts agree that there will be an inevitable series of lawsuits as self-driving cars hit the road that will allow legal responsibility to be determined over time.

NHTSA did not reply to Business Insider’s requests for comment for this article. But it seems likely NHTSA will take a hands-off approach as the government hasn't shown signs it will release regulations for self-driving cars, despite pleas from major automakers to do so.

NHTSA released guidelines for self-driving vehicles that ask states to develop uniform policies for self-driving cars to avoid disparate state-by-state regulations.

With the government unlikely to intervene, at least in the near future, it will be up to the insurance industry to adjust for the arrival of self-driving cars.

Tesla CEO Elon Musk made a similar point during the company’s most recent earnings call as well.

"If we find that the insurance providers are not matching the insurance proportionate to the risk of the car then if we need to we will in-source it," Musk said. "But I think we’ll find that insurance providers do adjust the insurance cost proportionate to the risk of a Tesla."