June 1, 2016

Motor Insurance - Modern Transport Bill will drive motor insurers to a brave new world

Plans for autonomous vehicles will have significant impact on motor insurance

The government has suggested an insurer will be able to seek reimbursement from the manufacturer. A streamlined process, external to the current court procedures, may be required.

Will a future of driverless cars require a remodelling of the UK's motor insurance regime and the end of compulsory motor insurance as we know it? The UK's compulsory insurance regime covers personal liability for accidents, providing financial protection against first and third party losses. The insurance requirements look set to change when driverless technology becomes established.

The government aims “to put Britain at the forefront of the modern transport revolution” having pledged £120m ($173.4m) in support. Vehicle testing begins on motorways from 2017 and driverless cars are expected to be commonplace in five years.

The Modern Transport Bill, included in the Queen's speech in May, outlines the government's proposal to legislate in this area, including ensuring appropriate insurance is available. The Department of Transport advised this will necessitate a transfer of liability to manufacturers, who may support the move. Volvo has advised they will accept liability when vehicles are in autonomous mode.

The government intends to amend the Road Traffic Act 1988 to cover driverless vehicles. Compulsory motor insurance will be retained and cover will extend to cover product liability for driverless cars. There remain several issues to be determined, particularly during the period of transition.

The government has suggested an insurer will be able to seek reimbursement from the manufacturer. A streamlined process, external to the current court procedures, may be required. This will potentially create a complex and expensive claims resolution process and this may even result in coverage disputes in the motor market.

Aggregation risk

Insurers may begin to insure fleets rather than individual vehicles. Current policy wordings may need revisiting and these developing risks may need to be insured elsewhere. Insurers would also be subject to large scale aggregation risk as a result of a systemic failure affecting multiple vehicles. Additional reinsurance activity may therefore be seen in the motor market.

Accurately determining whether a manufacturer or driver is at fault will be a significant hurdle to overcome, particularly when vehicles may contain components manufactured by multiple parties. Legislative changes expanding compulsory insurance to product liability will need to consider how the regime will cover multiple entities.    

As full automation will be some years away, how will cover apply in the meantime? There has already been a wealth of US cases brought following vehicles' cruise control systems failing which highlight manufacturers’ vulnerability to lawsuits in accidents involving their vehicles and the need for a clear insurance position. Without a definitive compulsory insurance system in place, lawyers are likely to pursue claims against many different entities.  

Public confidence in the technology is still developing; 50% of consumers do not trust driverless cars. There will be motorists who will never trust the technology, or those who simply prefer to drive. As fully autonomous vehicles become the norm (estimated to be by 2045) there could be a move towards an exceptions-based insurance framework, where motorists only purchase motor insurance when their vehicle is not autonomous.

Voluntary personal insurance may also be another option, operating similarly to bicycle cover. However, in a non-compulsory regime (which has kept premiums artificially low), changes to premium calculation may effectively price some consumers out of the market.

Insurers will be consulted on these issues this summer and it will be essential they engage to provide a workable system. Motor insurance globally will be facing significant changes as this new technology develops.