Technology Creates Insurance Challenges

By Richard A. McGrath, CIC, LIA

Technology is changing not only how we live, but how we insure ourselves and our property.

That’s been the case in the past – air bags and computer chips have made today’s cars safer than ever before, while cellphones have made the highways more dangerous. But the impact of these technological advances will pale in comparison with the impact of technology that’s evolving today.

One example is telematics, the technology used to develop GPS navigation systems, which can also be used to monitor driver behavior. Telematic technology monitors the computer that controls the vehicle’s engine to determine distance driven, speed, time of day while driving, braking force and other factors. Based on the results of telematic monitoring, an insurance carrier can assess the risk that a driver will have an accident and can set premiums accordingly.

Insurance based on the technology, known as usage insurance, hopes to attract safe drivers who don’t mind having every move they make while driving monitored. Telematics relays information to auto insurance carriers in order for the driver to receive discounts, such as vehicles that are driven less often, in less risky ways and at less risky times of day.

As of the end of 2013, 5.5 million drivers were covered by telematics-related usage insurance and ABI Research estimates that the number could exceed 107 million by 2018.

Insuring Driverless Cars

If telematics technology seems intrusive, you can take consolation in knowing it’s likely to become outdated pretty quickly. You can’t monitor a driver’s behavior if there is no driver, so telematics insurance will become unnecessary if and when driverless vehicles become widespread.

Some even believe that driverless vehicles will make auto insurance companies unnecessary. Computer chips “don’t drive drunk, they don’t text, they don’t forget where they’re going or daydream,” as Motherboard put it. They may lack the ability to reason, but they don’t talk to passengers, listen to the radio, run stop lights or speed.

Google, which is investing in driverless cars, predicts that “autonomous” vehicles will reduce accidents by 90 percent. Google Chauffer, a redesigned computer-driven Prius, has traveled more than 500,000 miles without an accident. However, as anyone who has used software knows, technology is not infallible. Once driverless cars become widespread, they may reduce accidents, but they will not eliminate accidents.

When driverless vehicles are widely used, the auto insurance business may shrink, but it is unlikely to become obsolete.

According to Chunka Mui, author of The New Killer Apps, “Auto insurers, which collect more than $200 billion in premiums each year in the United States, would initially see profits rise as accidents declined and payments to customers dropped, but would eventually see something like 90 percent of premiums disappear. Health insurers would also have to give up revenue as car-related injuries plummeted. Governments would lose fines, because cars would obey all traffic laws, but police forces would need fewer officers on the road, and prisons would need less capacity as drunk drivers kept their freedom.”

Insuring Pilotless Aircraft

In addition to driverless vehicles, we’re heading toward commercial use of pilotless aircraft, known as drones or unmanned aircraft systems (UAS).  While drones are being used successfully for military purposes, the Federal Aviation Administration has held back on allowing their commercial use.

However, they have already been used by movie directors to film scenes that otherwise might be impossible to film and Amazon is seeking to use drones to deliver packages. They are also being considered for managing crops, monitoring power lines in hard-to-reach terrain and other uses.

Drones would typically not occupy the same airspace as airplanes, but would fly closer to the ground – no more than 400 feet from the surface. Still, they would rely on technology to ensure that they do not crash and cause property damage or even loss of life.

Assuming commercial drone use proceeds general use of driverless vehicles, your auto insurance should provide coverage if a drone obstructs your view while you’re driving, although it could be difficult to prove. Your homeowner’s policy, likewise, should cover damages if a low-flying drone crashes into it.

Companies using drones will need coverage for product liability, bodily injury, property damage and invasion of privacy, as drones increasingly can collect, process and store large amounts of data. Given that they will be used to store valuable data, they will be targets for cyberattacks and will need to be insured for protection against data breaches.

A standard commercial general liability policy excludes damages caused by the operation of aircraft, so drone manufacturers and operators will need specialized coverage.

Because there is so little experience operating either driverless vehicles or pilotless aircraft, insurers will find that assessing risks and pricing coverage accurately presents a challenge.


Richard A. McGrath, CIC, LIA is President and CEO of McGrath Insurance Group, Inc. of Sturbridge, Mass. He can be reached at rmcgrath@mcgrathinsurance.com.

This article is written for informational purposes only and should not be construed as providing legal advice.

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