The National Highway Traffic Safety Administration adopted the Society of Automotive Engineers' levels for automated driving systems, ranging from complete driver control to full autonomy.

Video: The 5 levels of autonomous driving explained Watch Now

Between Tesla's announcement that every car in production will now have the capability for full autonomy by 2018 and the Obama administration's plan to invest almost $4 billion in autonomous vehicle research over the next 10 years, the race to create the best driverless car has never been hotter.

The rise of driverless vehicles is going to have a major impact on businesses and professionals. Automated vehicles could replace corporate fleets for deliveries or transporting employees, for example. And workers could gain productive hours in the day by working instead of driving during daily commutes. Innovations in this field are also poised to completely change the car insurance industry by reducing accidents--a new report predicts that accidents will drop by 80% by 2040.

But, what does "autonomous driving" really mean? In 2013, the US Department of Transportation's National Highway Traffic Safety Administration (NHTSA) defined five different levels of autonomous driving. In October 2016, the NHTSA updated their policy to reflect that they have officially adopted the levels of autonomy outlined in the SAE International's J3016 document (you can download the full, 30-page document for free here) .

SEE: US DOT unveils 'world's first autonomous vehicle policy,' ushering in age of driverless cars (TechRepublic)

The NHTSA is "working to transform government for the 21st century, harnessing innovation and technology that will improve people's lives," according to a representative. "This is an area of rapid change, which requires the DOT and NHTSA to remain flexible and adaptable as new information and technologies emerge. Amid that rapid change, the North Star for DOT and NHTSA remains safety."

It's important to remember that the levels of autonomy describe the system, not the vehicle, said Bryant Walker Smith, professor at the University of South Carolina School of Law and School of Engineering and one of the top experts in the driverless cars world. "A Level 5 automated driving system could be in a vehicle with or without a steering wheel," he explained.

Here's what you need to know about levels 0-5. The biggest difference is that, starting at Level 3, the automated driving system becomes able to monitor the driving environment.

Level 0: This one is pretty basic. The driver (human) controls it all: steering, brakes, throttle, power. It's what you've been doing all along.

Level 1: This driver-assistance level means that most functions are still controlled by the driver, but a specific function (like steering or accelerating) can be done automatically by the car.

Level 2: In level 2, at least one driver assistance system of "both steering and acceleration/ deceleration using information about the driving environment" is automated, like cruise control and lane-centering. It means that the "driver is disengaged from physically operating the vehicle by having his or her hands off the steering wheel AND foot off pedal at the same time," according to the SAE. The driver must still always be ready to take control of the vehicle, however.

Level 3: Drivers are still necessary in level 3 cars, but are able to completely shift "safety-critical functions" to the vehicle, under certain traffic or environmental conditions. It means that the driver is still present and will intervene if necessary, but is not required to monitor the situation in the same way it does for the previous levels. Jim McBride, autonomous vehicles expert at Ford, said this is "the biggest demarcation is between Levels 3 and 4." He's focused on getting Ford straight to Level 4, since Level 3, which involves transferring control from car to human, can often pose difficulties. "We're not going to ask the driver to instantaneously intervene--that's not a fair proposition," McBride said.

Level 4: This is what is meant by "fully autonomous." Level 4 vehicles are "designed to perform all safety-critical driving functions and monitor roadway conditions for an entire trip." However, it's important to note that this is limited to the "operational design domain (ODD)" of the vehicle--meaning it does not cover every driving scenario.

Level 5: This refers to a fully-autonomous system that expects the vehicle's performance to equal that of a human driver, in every driving scenario--including extreme environments like dirt roads that are unlikely to be navigated by driverless vehicles in the near future.

Why it matters

So why are the levels important? They serve as general guidelines for how technologically advanced a vehicle is. In terms of what consumers need to know, Thilo Koslowski, former analyst for Gartner, thinks that ultimately, there are three stages that will be relevant: "automated, autonomous, and driverless." It's important to distinguish between "autonomous" and "driverless," he said: "driverless is a more advanced stage of autonomous."

But while drivers themselves may be less concerned with the distinctions, the differences could be significant when it comes to issues like car insurance, which is expected to change radically in the era of self-driving cars.

SEE: Tech and the future of transportation (ZDNet special report) | Download the report as a PDF (TechRepublic)

KPMG, a consulting firm, has issued a report on how the car insurance business will be affected, since the number of accidents are predicted to go down 80% by 2040. The different levels are important because they "change the risk profile of the car," according to KPMG expert Jerry Albright. "Insurance companies need to understand how these new capabilities affect driving risk." Joe Schneider, managing director at KPMG, put it this way: "It's like a baby, going from crawling to walking to running."

Albright said, "The car becomes safer and safer as it moves towards fully-autonomous driving."

*This article was first published in January, 2016, and was updated on November 1, 2016.

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