Risk Insider: Martin Frappolli

The Future of Motoring

By: | March 15, 2017 • 3 min read
Martin J. Frappolli, CPCU, FIDM, AIC, is Senior Director of Knowledge Resources at The Institutes, and editor of the organization's new “Managing Cyber Risk” textbook. He can be reached at [email protected]

The advent of driverless cars on demand, such as an autonomous Uber, might reduce the total number of cars on the road by 90 percent. Take that statistic and imagine that you are Ford, Toyota, CarMax or Midas.  You have a big chunk of a big market.  What happens to your financial future if the market shrinks by 90 percent?

However, even as the car count falls, the total number of miles driven may actually increase.  When human error is removed from motoring, accidents are eliminated and traffic jams minimized with the choreography of movement by autonomous vehicles. Passengers may willingly accept longer journeys and commutes because the ride is smooth, stress-free and presents no demand to stay engaged with the road.

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How many miles do you put on your car annually? The average American drives less than 15,000 miles each year; our cars are idle most of the time. The main reason that autonomous cars on demand will permit such a reduction in car count is that autonomous vehicles will be in much more frequent use.

A car will pick you up and take you to work, then pick up some children to go to school, then take some seniors to the mall, then deliver some packages for Amazon.

By some estimates, the future driverless Lyft car or ZipCar will cover ground at a rate approaching 300,000 miles each year. Without some dramatic advance in the durability of vehicle engines and suspension parts, an autonomous on-demand car will be used up in less than a year.

What is the downstream implication for car insurers?  At first blush, it looked grim.

So for carmakers, the total product demand may not change much at all. One might expect, though, that the shell of the car — doors, hood, trunk — might be reclaimed and outfitted with new power trains and suspensions, and put back on the road.

What is the downstream implication for car insurers?  At first blush, it looked grim. Auto insurance is, after all, primarily about financial compensation for damage resulting from human error. When you remove human error, the accident rate should plummet. When you reduce the car count by 90 percent, it would seem that the total market size also shrinks dramatically.

However, if the annual miles for each vehicle is 300,000 instead of 15,000, the exposure is dramatically larger. And for the transition period when the roads will be shared by cars with human operators and autonomous cars (whether owned individually or part of an on-demand fleet), collisions won’t entirely vanish.

In the long run, it’s all very promising for human safety, convenience and for the environment; cars can be made lighter and smaller when there is no need to make them crash-proof. Established carmakers may have time to adjust as we move from an ownership model to an on-demand streaming model, much as consumers have already done with music and movies.

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But at some future point, human error will be eliminated from motoring. We will look back on the first 125 years of the automobile as a brutal and primitive time, and wonder how we endured the carnage inflicted by human operators.

Auto insurers need to prepare to transition to that future. Accidents will be rare, and it’s probable that autos will be owned less by individuals and more by commercial firms operating fleets of autonomous cars on demand.

Not only will exposures be dramatically different, but all the data and skills we now use to underwrite auto will be obsolete. No crystal ball has a perfect vision of this future, but every auto insurer should be studying and planning for it.

More from Risk & Insurance

More from Risk & Insurance

2017 RIMS

Cyber Threat Will Get More Difficult

Companies should focus on response, resiliency and recovery when it comes to cyber risks.
By: | April 19, 2017 • 2 min read
Topics: Cyber Risks | RIMS

“The sky is not falling” when it comes to cyber security, but the threat is a growing challenge for companies.

“I am not a cyber apocalyptic kind of guy,” said Gen. Michael Hayden, former head of the Central Intelligence Agency and National Security Agency, who currently is a principal at the Chertoff Group, a security consultancy.

Gen. Michael Hayden, former head of the CIA and NSA, and principal, The Chertoff Group

“There are lots of things to worry about in the cyber domain and you don’t have to be apocalyptic to be concerned,” said Hayden prior to his presentation at a Global Risk Forum sponsored by Lockton on Sunday afternoon on the geopolitical threats facing the United States.

“We have only begun to consider the threat as it currently exists in the cyber domain.”

Hayden said cyber risk is equal to the threat times your vulnerability to the threat, times the consequences of a successful attack.

At present, companies are focusing on the vulnerability aspect, and responding by building “high walls and deep moats” to keep attackers out, he said. If you do that successfully, it will prevent 80 percent of the attackers.

“It’s all about making yourself a tougher target than the next like target,” he said.

But that still leaves 20 percent vulnerability, so companies need to focus on the consequences: It’s about response, resiliency and recovery, he said.

The range of attackers is vast, including nations that have used cyber attacks to disrupt Sony (the North Koreans angry about a movie), the Sands Casino (Iranians angry about the owner’s comments about their country), and U.S. banks (Iranians seeking to disrupt iconic U.S. institutions after the Stuxnet attack on their nuclear program), he said.

“You don’t have to offend anybody to be a target,” he said. “It may be enough to be iconic.”

The world order that has existed for the past 75 years “is melting away” and the world is less stable.

And no matter how much private companies do, it may not be enough.

“The big questions in cyber now are law and policy,” Hayden said. “We have not yet decided as a people what we want or will allow our government to do to keep us safe in the cyber domain.”

The U.S. government defends the country’s land, sea and air, but when it comes to cyber, defenses have been mostly left to private enterprises, he said.

“I don’t know that we have quite decided the balance between the government’s role and the private sector’s role,” he said.

As for the government’s role in the geopolitical challenges facing it, Hayden said he has seen times that were more dangerous, but never more complicated.

The world order that has existed for the past 75 years “is melting away” and the world is less stable, he said.

Nations such as North Korea, Iran, Russia and Pakistan are “ambitious, brittle and nuclear.” The Islamic world is in a clash between secular and religious governance, and China, which he said is “competitive and occasionally confrontational” is facing its own demographic and economic challenges.

“It’s going to be a tough century,” Hayden said.

Anne Freedman is managing editor of Risk & Insurance. She can be reached at [email protected]