Will Insurance Companies be the Greatest Contributors to the Success of Self-Driving Cars?

Many still see self-driving cars as a futuristic dream, but the development of these high-tech automobiles is well under way and has been taken up as a major project by Google (NASDAQ: GOOG  ) (NASDAQ: GOOGL  ) among others.

The greatest obstacle to self-driving car sales may be popular perception rather than technology. However, if a self-driving car can be put into production, it's definitely worth considering how insurance companies could be the unlikely saviors of this new technology.

Tech development
Although self-driving cars are still in the testing stage, many smaller automated safety features are cropping up in mid- and upper-tier cars today. 

But all these features still rely on the driver maintaining full attention. For a car to be truly self-driving, it must be able to avoid accidents at rates equal to or greater than human-operated vehicles without any input from the driver.

Google's fleet of self-driving cars has shown considerable promise so far, logging over 700,000 combined miles and only being involved in two accidents (one in which a Google car was hit at a stoplight by a human-operated car and another in a parking lot when the Google car was being driven by a human).

According to data from the National Highway Traffic Safety Administration, or NHTSA, U.S. crash rates are just under 200 per 100 million vehicle miles traveled for the year 2009. Based on this figure, the average driver would be expected to get in about 1.3 crashes in the number of miles the Google cars have driven.

If not for human error, Google's self-driving cars would have spotless safety stats, showing the automated function more competent to drive than the average driver.

Fans of statistics
Insurance companies already set rates based on factors such as age, gender, and driving history, so creating a rate model for self-driving cars would not be much of a stretch. If self-driving cars continue to outperform their human-driven counterparts in terms of safety, it would not be surprising for owners of these vehicles to see significantly lower insurance premiums.

Google plans to continue testing these cars for several more years before they could see production, which will provide a greater body of data and allow bugs to be worked out. But if the record persists, these self-driving cars are poised to beat the average driver in terms of safety.

While many car buyers may ignore the crash data and insist they can drive better, insurance companies will unlikely be so quick to trust the competence of human drivers. Insurance companies seek out statistics to set rates and balance risk. Realizing that there have been roughly 30,000 fatal crashes annually in the U.S. since 2009, they are not likely to adopt a "human driver know best" attitude toward car insurance.

The winners
That, in turn, could encourage adoption of these cars. Since financial costs are typically a major factor in selecting a car, lower insurance premiums could balance out the higher up-front cost of a self-driving car, perhaps even making it cheaper over time than a human-operated vehicle.

Tesla Motors (NASDAQ: TSLA  ) is also looking to automate driving with an autopilot feature designed to drive 90% of miles. Since Tesla's autopilot has yet to even be unveiled, and therefore has far less data behind it, it may be a few years from its public launch before the electric-vehicle maker can see the benefit of selling a car that carries lower insurance premiums.

Whether insurance companies gain or lose will depend on how they set rates on these cars and if there is any difference in crash rates once non-Google people begin using them in large numbers. By charging lower premiums, insurance companies would also have a smaller float to invest; a factor that could be made up through not reducing premiums in direct proportion to the decreased risk, thereby increasing the margins on the premiums themselves. Once these cars begin to become available to the general public, it will definitely be worth watching how the insurance industry adapts to a lower risk version of the car.

The takeaway
Self-driving cars still carry a high degree of skepticism from people who have witnessed computer crashes and other technological issues. However, these vehicles have the potential to best virtually all human drivers thanks to the faster responses and greater "awareness" of surroundings, not to mention the elimination of many dangerous driving behaviors.

While self-driving cars will undoubtedly be more expensive up front due to the extra equipment involved, insurance companies could play a role in speeding up the adoption process.

It will still be several years before self-driving or even Tesla autopilot cars are on on the roads in large numbers, but the technology has the potential to save thousands of lives annually. If insurance companies recognize the increased safety of these vehicles (provided this conclusion remains valid as Google continues testing), lower insurance premiums may tip the balance in favor of self-driving cars.

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