Autonomous vehicles: the Bank of England takes a Prudential View

With Parliament taking a break for the summer we now have to wait until the Autumn for the Bill that will provide the legal underpinning of the changes to UK motor insurance that anticipates the introduction of autonomous vehicles. The notes to the Queen’s Speech in June explain that the main objective of the bill is “to ensure that compensation claims continue to be paid quickly, fairly and easily, in line with longstanding insurance practice.” No doubt the Bill, whenever introduced, is going to be very similar to the Vehicle Technology and Aviation Bill that my BLM colleague Alistair Kinley discussed when that was introduced in (but did not survive) the last Parliament.

This technology seems likely to have an impact over the next ten or twenty years comparable to that of the smart phone on the last ten. It will certainly have a positive impact on this blogger whose mobility is much more likely to continue as he (hopefully) progresses through his eighth and ninth decades. This may seem a long time but this is the time frame of ongoing research of the Bank of England (BoE). The Prudential Regulator of the Insurance Industry is interested in the market disruption of a £15.6bn market of a compulsory product where a failure of a large insurer could cause significant disruption to the mobility, transport and consequently the economy of the UK.

The ongoing BoE research comprised an initial survey (acknowledged to need refinement) and a model that was based on a central estimate that by 2040 80% of new vehicle sales will be of autonomous vehicles. It acknowledges that ownership models will change as the “sharing economy” develops. Younger drivers will become much less likely to own vehicles (ownership by under 20s being likely to plummet by 49%). Individual vehicles will travel further (up 41% to 11,500 miles per annum) whilst the UK “fleet” will only grow marginally (2%) despite an increased population (16%). The nature of claims will change. A reduction in the financial loss is noted between non-autonomous (3.9p per vehicle mile) and autonomous vehicles (2.3pvm) but it is anticipated that bodily injury claims will represent a greater proportion (60%) of that smaller total cost for AV than driven vehicles (46%). The outcome for the industry from safer vehicles colliding less often is predicted (or should that be “guesstimated”) to be a 21% decline in the private motor market.

BLM has undertaken a good deal of work in this sector and we agree with the BoE that business models of the insurance providers will change. Policies in the sharing economy will become more flexible and the annual policy will become less important as usage based policies are needed. The nature of the policy will also change as the risk passes from user error to product malfunction and cyber risk. Consequently partnerships between insurers and manufacturers and the tech sectors will evolve and become more important – and no doubt there will be considerable friction around ownership of the customer relationship.

Many, many issues arise from the inevitable rise of the “driverless” vehicle. The forthcoming Automated and Electric Vehicles Bill touches on a small but very important aspect of the changes that will follow – providing the risk sharing that has to be in place to encourage the consumer to acquire and manufacturers to develop these vehicles. However, the BoE’s report is based on a “central forecast” of the responses of the experts and its tentative conclusion is of a manageable adjustment of a 21% decline to 2040. However, it notes that the responses varied quite markedly with the tech sector anticipating greater AV adoption than insurers. Couple this faster adoption with greater AV mileage and better safety assumptions and the BoE model predicts a 41% decline in the market for motor insurance requiring a much greater adjustment for insurers. Can the industry cope? Probably: though we may need the assistance of the BBC’s new Time Lord with her slightly erratic AV to help us predict the future.

I was pleased to first publish this blog on the BLM Policy Blog on 27 July 2017