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Automobile insurance is a big industry with $199 billion revenue and more than 250,000 employees. Given more car purchases and higher interest rates, auto insurance providers will enjoy some good time in next few years. The pricing competition is also set to cool as the economy slowly improves. Everything seems right for State Farm, Geico, and their competitors. However, the technology advancements will disrupt the industry soon.

In their 2004 book The New Division of Labor, MIT and Harvard economists Frank Levy and Richard Murnane argued that an algorithm couldn’t drive a car because of the stream of unstructured data the vehicle would need to handle. It was not a surprise that they made such an argument because of the miserable failure of 2004 DARPA Grand Challenge of autonomous vehicles. None of the robot vehicles finished the route of the Grand Challenge in California’s Mojave desert. In fact, the best vehicle finished only 7.32 mile.

But things have bee changing very quickly as the technology progress is always beyond most people’s imagination. Just one year later, five driverless vehicles successfully completed the course of 2005 DARPA Grand Challenge, which includes three narrow tunnels and more than 100 sharp turns. The 2007 Urban Challenge had extended those successes to a mock city environment.

Today, numerous major companies and research organizations are testing autonomous vehicles in multiple countries. A couple of weeks ago, Audi showed off their driverless car in the 2015 CES. Even the graphical chipset vendor Nvidia showed off their Tegra X1 powered computers for driverless cars in the same event. In 2013, Nissan already announced that it will market autonomous vehicles by 2020. Meanwhile, Google Self-Driving car expects a possible release from 2017 to 2020. In fact, Google’s self-driving vehicles have logged nearly 700,000 autonomous miles by April 2014.

Although they still have some limitations (e.g. cannot handle heavy rain and snow-covered roads), driverless cars are inevitable and they are approaching us quickly. State Farm and Geico, are you ready for the transformation from human to machine driving?

Why should they be concerned? One may say that cars still need insurance coverage no matter if they are driven by human or computers. But can you still charge the same premium as we can confidently believe that self-driving cars will have lower accident rates? At least, we don’t have tired or drunk machine drivers. In fact, human error accounts for 90% of road accidents, according to the International Organization for Road Accident Prevention. A Google driverless car was involved in a crash in August 2011. Ironically, the car was being driven manually at the time of the accident.

With the lower premium, the revenues of insurance companies will surly shrink. They may hope to maintain the same level of profit because of the lower accident rates. But it will be unlikely because of the cutting-throat competition. Interestingly, the insurance companies will not be able to demand a higher premium from 16-year-old “drivers” as now because they be less experienced.

More importantly, do the self-driving car owners need to buy insurance? When an accident happen, the owner is just a passenger. What wrong-doing should s/he be responsible for? It is not clear if the self-driving car owners should buy the insurance given the existing law, some of which dates back to the era of horse-drawn carriages.

Let’s imagine that the accident be caused by broken hardware or software bugs. Then the car manufacturers seem be the right one responsible for the defects. They may have two options:

  • Buy the insurance for all their products from the providers, but at a heavily discounted fleet price.
  • Maintain their own insurance pool, just like what some big companies do with their health insurance.

No matter which option, the revenue and profit of automobile insurance industry will take a hit. And it doesn’t have to wait until all of us “drive” an autonomous car. In a 2014 US telephone survey by Insurance.com, over 75% of 2000 licensed drivers surveyed said they would be very likely to buy or at least consider buying a car with autonomous capabilities. When the possibility of much cheaper car insurance as a result of improved safety was introduced, consideration rose to 86 percent. If some insurance providers simply close their eyes on this challenge, think about Kodak. Mr. Buffett, have you thought about the future of Geico?

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