Insurance Does Not (and will not) Make AVs Acceptably Safe

I frequently hear arguments that insurance will make autonomous vehicles (AVs) safe. For example, : "the insurance company issued a policy, so the AV must be safe," and "economic pressure from insurance premiums will ensure safety." While it is true that insurance premium pressure (and companies) will mitigate egregiously dangerous AVs, they have nowhere near enough power to enforce safety acceptable to many stakeholders in an industry of risk-takers chasing a trillion-dollar market.

Insurance policies do not make you safe

Getting an insurance policy does not mean you are objectively “safe.” You can insure plenty of things that might be considered risky by everyday standards: skydiving injury insurance, commercial rocket launch payload insurance, marine piracy insurance,[1] and life insurance for front-line military personnel are all routinely issued.

An insurance company issuing a policy does not mean any particular activity in general or AV in particular is objectively safe. Rather, it means that the insurance company thinks it understands the risks well enough to set a policy rate that is, on average, economically attractive (profitable to the insurance company) across the members of the risk pool.

Taking a lot of risk? Expect a higher premium. But you will still get an insurance policy for high-risk activities so long as the insurance company feels comfortable it can estimate likely future losses and charge accordingly.

To be sure, the insurance industry does support improving safety. Historically, the insurance industry has spawned activities to create safety standards and help their customers manage risks.[2] Organizations such as the Insurance Institute for Highway Safety (IIHS)[3] are both active and vocal in support of vehicle automation safety. Insurance companies typically have a loss prevention activity to support their clients as well. So these remarks should not be interpreted as indicating industry disregard for safety.

Nonetheless, the economic reality of the situation is that you can get insurance for activities that are objectively dangerous so long as you are willing to pay the required premium. With a multi-billion dollar war chest for AV development and aggressive timelines to deploy, reducing insurance costs is nowhere near the top budget item of concern until well after deployment. Higher insurance premiums are unlikely to drive safety improvements very hard until the industry is operating at significant scale. And even then, other issues discussed regarding risk mitigation incentives will still apply.

Low premiums do not necessarily mean low harm

A crucial aspect of insurance for vehicle crashes is that total cost of insurance bundles together harm to people as well as property damage. For personal policies the contributing costs are broken out into several categories. But if you are tracking business profitability what matters is the total insurance cost, which includes both harm to people and property damage. If the property damage risk far outweighs the risk of harm, there is reduced economic pressure to mitigate harm to people.

An everyday example of divergence between insurance premiums and fatality rates can be seen in motorcycles.

Overall, motorcyclists account for 14% of all traffic fatalities, with those fatalities occurring nearly 27 times more frequently than for passenger cars on a per-mile basis.[4] Even though motorcycles are 27 times more dangerous in terms of risk of death per mile, motorcycle insurance costs about half that of car insurance. This difference is attributed to motorcycle crashes causing much lower equipment damage bills (both to the motorcycle and any other vehicle hit) that more than offset the cost of increased fatalities.[5]

Based on motorcycle insurance alone, it is clear that insurance cost can be a poor prediction of occupant harm because of the influence of property damage on insurance rates. Cheaper insurance does not necessarily mean a vehicle is safer. By the same token, more expensive insurance on an expensive-to-repair vehicle chock-full of crash safety technology does not mean such a high-end vehicle is less safe.

In short, insurance rates are not necessarily predictive of safety.

Insurance premiums will not force acceptable safety

You can perform risk management exclusively by purchasing insurance and doing no risk mitigation whatsoever, so long as you can afford the premiums. People and businesses do precisely that on a regular basis.[6] However, there is economic pressure for sophisticated companies to perform risk mitigation to lower insurance premiums – to a point.

In principle, risk mitigation will lower your insurance premiums, but that might or might not be worth your while. If hypothetically you are spending $1 per mile to run a vehicle and insurance costs $0.05 per mile, the theoretical limit to the benefit of risk mitigation is only 5% of your costs. You might be better off from a purely economic point of view spending management attention on optimizing the other $0.95 per mile of cost. Note that safety does not enter into such an insurance-driven risk management calculation – it is purely about optimizing profits.

Yes, if insurance is 95% of your cost, you have strong incentive to reduce risk. But as insurance cost becomes small compared to other factors, there is less and less pressure to do risk mitigation to further reduce costs. This is especially true if you are in a fast-moving business where things like time to market and ability to scale the fleet quickly are an existential threat to your business vs. a few cents per mile of insurance cost. (If you only have a handful of cars on the road because they don't really work yet, a few cents per mile of insurance cost are simply not on your list of worries.)

In other words, the ability to buy insurance does not mean that an AV is safe, but rather that the insurance company has decided they are willing to get paid a certain amount to cover any potential losses, and the AV maker has decided they can afford to pay that amount while achieving their goals. If you have a company spending more than a million dollars a day on engineering costs, a few dollars extra of insurance cost for test fleets is inconsequential. Perhaps insurance costs will be optimized after deployment, but even then it is economically pressing to do so only when all the much greater business costs have been optimized on a large deployed fleet.

It is unreasonable to expect an AV developer to delay market introduction to improve safety simply to shave a few pennies per mile off their insurance costs. Rather, they will be incentivized to deploy as soon as they can to capture market share – even if they lose money on every mile driven to do so – and worry about incrementally reducing insurance costs later.

Still another consideration is that insurance companies might low-ball quotes to obtain market share. The theory is that if AVs become a big insurance market, it is advantageous for insurance companies to use early policies as loss leaders to in effect “buy” part of the market by establishing early relationships with AV developers. That might mean, for example, that a company could write a policy for an AV tester that is the same rate as for an ordinary vehicle even if the risk might be higher or even largely unknown. Given a fixed payout limit set by a policy cap, the worst-case downside for a crash is limited to that policy cap. The upside is preferential access to a potentially huge future insurance market.

Insurance premiums are further reduced by artificially low insurance policy cap requirements compared to the risk that is likely being taken during testing and early deployment. State laws require insurance maximums to be much lower than reasonably expected jury compensation awards, sometimes no larger than the state insurance minimum requirement for human drivers.[7]

Insurance provides a comparatively weak economic incentive to be “safer.” But as with risk management, that economic incentive runs out of steam when the expected insurance cost becomes small compared to other financial considerations and management imperatives.

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[1] Yes, this is a thing even for ships without sails and cannons. 
See: https://en.wikipedia.org/wiki/Captain_Phillips_(film)

[2] Underwriters Laboratories was founded in the 1890s to help improve fire safety in partnership with the insurance industry. See: https://www.ul.com/about/history

[3] See: https://www.iihs.org/about-us

[4] Source: https://crashstats.nhtsa.dot.gov/Api/Public/ViewPublication/812979

[5]Source: https://policyscout.com/auto-insurance/learn/motorcycle-insurance-vs-car-insurance A possible confounder is number of miles per year driven by motorcycles being less than for cars. But that is unlikely to explain the entire difference here.

[6] If you doubt this, the next time you are at a rental car counter during a quiet shift, take a few minutes to ask the attendant for their worst horror story of damage carelessly or perhaps even intentionally done to a vehicle for which someone purchased the expensive zero deduction insurance waivers.

[7] State insurance requirements for AVs range from state minimums of $25K to $50K up to a high of $5M. Even if a court verdict is higher, the insurance company is only on the hook for the maximum, with the rest of any potential liability falling back on responsible parties – if the plaintiff can manage to collect. For a list of state insurance requirements see:       
https://www.iihs.org/topics/advanced-driver-assistance/autonomous-vehicle-laws

This is an adapted excerpt (Section 4.6.3) from my book: How Safe is Safe Enough? Measuring and Predicting Autonomous Vehicle Safety