Risk Management in the Driver’s Seat: Navigating the World of Automated Vehicles EMR001
Speakers: • Jonathan Charak, FCAS, MAAA Associate Vice President, Zurich Insurance Vice Chair of the Automated Vehicle Taskforce, Casualty Actuarial Society http://www.linkedin.com/in/jonathancharak • Kay Wakeman Research Analyst for Highway Loss Data Institute • https://www.linkedin.com/in/kaywakeman
Learning Objectives At the end of this session, you will understand: • Vehicle symbol pricing models A • Will you receive a discount for purchasing an automated vehicle?
B • Risk minimization introduction strategy
C • Summarize crash avoidance technology’s current risk profile • Front crash prevention • Adaptive headlights • Lane departure warning
D • Predicted timeline for the fitment of crash prevention technologies • Electronic stability control & front crash prevention timelines • IIHS front crash prevention testing
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Casualty Actuarial Society - Automated Vehicle Task Force Mission • Further the understanding of risk surrounding automated vehicles to help ensure the product is brought to market as safely and efficiently as possible • Actuaries’ role: To facilitate better decision making where there is risk and uncertainty
Source: http://www.casact.org/about/
A Vehicle symbol pricing models
Assuming automated vehicles decrease losses: • “Will auto insurance decrease?” vs. • “Will I receive a discount for purchasing an automated vehicle?”
A Vehicle symbol pricing models
Auto insurance level setting… Cost based pricing approach • As auto insurance losses decrease, premiums eventually decrease Projected Loss Ratio 𝐑𝐚𝐭𝐞 𝐂𝐡𝐚𝐧𝐠𝐞 = −1 Target Loss Ratio Law of large numbers • Risks grouped by characteristics • Rates charged based on group rating • Actual discount determined by vehicle rating
Rating Characteristic Examples • Driver age • Location • Driving history • Mileage • Vehicle
A Vehicle symbol pricing models
… and some Automated Vehicle Caveats Lower frequency ≠ lower losses • Higher severity can offset any frequency reduction • Pricing cares about loss reduction Lower frequency risk ≠ fewer accidents • Increase miles driven may offset lower risk Safer cars ≠ safer drivers • Drivers may adjust habits (e.g. cell phone usage)
A Vehicle symbol pricing models
CAS partnered with a national personal auto carrier… Goal: To understand the discount that current credibility methods will provide insureds who purchase automated vehicles Analysis Vehicle symbol: option 1
• Assume a brand new vehicle
Vehicle symbol: option 2
• Assume update to a current vehicle
– No initial prior year factor, growth trend impacts credibility
Source: CAS Automated Vehicles Task Force yet-to-be released analysis, expected publication 2016
A Vehicle symbol pricing models
Current methods may only provide 15% discount to new AVs
Option 1: Brand new vehicle
Loss Reduction 50% 75% 100%
Number of Exposures
Yr
25%
2,500
1
0.5%
0.9%
1.3%
1.8%
5,000
2
1.4%
2.6%
3.9%
5.1%
7,500
3
2.8%
5.1%
7.4%
9.7%
10,000
4
4.4%
8.0%
11.6%
15.2%
Source: CAS Automated Vehicles Task Force yet-to-be released analysis, expected publication 2016
A Vehicle symbol pricing models
With a larger discount for existing vehicle symbol types Number of Exposures Option 2: Update to a current vehicle Maximum vehicle premium discount
Actual
Actual
Loss Reduction Yr
25%
50%
75%
100%
1
4.3%
7.4%
10.5%
13.6%
2
7.1%
13.7%
20.0%
26.3%
3
9.7%
18.2%
25.7%
35.4%
4
11.1%
21.0%
31.0%
41.2%
1
7.4%
15.0%
22.7%
30.6%
2
12.2%
24.7%
37.5%
50.5%
3
15.8%
31.9%
48.3%
65.6%
4
18.8%
38.0%
57.6%
77.6%
Source: CAS Automated Vehicles Task Force yet-to-be released analysis, expected publication 2016
A Vehicle symbol pricing models
Analysis leads to the following conclusions Model Analysis • Current models will take a long time to reflect loss performance • Optional equipment is unidentified Next Steps • New models will have to be developed • Actuaries will need much more data
Source: CAS Automated Vehicles Task Force yet-to-be released analysis, expected publication 2016
A Vehicle symbol pricing models
Fair pricing of risks benefits all Risk priced too low
Risk priced too high
Vehicle Sales & public safety
• Encourages sales of AVs • Safety not as strong as discount indicates
• Discourages new technology in vehicles
Mfg’s actions
• Remain manufacturing • No incentive to take insurance risk
• Enter market: Properly priced risk transfer helps encourage sales
Financial • Disastrous to financial Results performance
• Disastrous to financial performance
• Data is needed to for insurer to properly price • Manufacturer has data – may not know how to assess risk properly Source: CAS Automated Vehicles Task Force yet-to-be released analysis, expected publication 2016
B Risk minimization introduction strategy
The goal of introducing any new product is to maximize profits Profits = Revenue – Cost Cost = Cost of goods sold + liability cost 𝐈𝐧𝐜𝐢𝐝𝐞𝐧𝐭 𝐞𝐱𝐩𝐨𝐬𝐮𝐫𝐞 𝐢 Liability Cost = 𝐧𝐢=𝟏 × 𝐈𝐧𝐜𝐢𝐝𝐞𝐧𝐭 𝐟𝐫𝐞𝐪𝐮𝐞𝐧𝐜𝐲 𝐢 × (𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐢𝐧𝐜𝐢𝐝𝐞𝐧𝐭 𝐬𝐞𝐯𝐞𝐫𝐢𝐭𝐲)𝐢
B Risk minimization introduction strategy
A risk (cost) minimization strategy will involve three steps 1
Change paradigm
2
Identify & quantify all risks
3
Develop a comprehensive introduction strategy that minimizes overall cost
Source: CAS Automated Vehicles Task Force yet-to-be released analysis, expected publication 2016
B Risk minimization introduction strategy
The following assumptions are required Item
Requirement
Technology assumptions
• Technology will not operate in inclement weather • Accurate up to date maps of surrounding environment • All other errors will be random & error rate lower than human more technology would equal less loss
Manufacturer assumptions
• Primary goal is to minimize frequency – Product liability costs: 60% to claimants vs. 40% to lawyers • Secondary goal is to minimize severity
Source: CAS Automated Vehicles Task Force yet-to-be released analysis, expected publication 2016
B Risk minimization introduction strategy
Restating the NMVCCS improves understanding risks of AVs Comments • Data – Source: 2008 National Motor Vehicle Crash Causation Study – Data is old & insufficient • Identify & quantify all risks • Quantify risks & correlations • Supplement data with judgment Source: http://www.casact.org/pubs/forum/14fforum/CAS%20AVTF_Restated_NMVCCS.pdf
B Risk minimization introduction strategy
Introduction strategy
• Includes an emergency response button
Operation Details
• Company owned public transportation service – human cannot take control
Vehicle Design
One approach for introduction could be… • Operates in small location (major city; favorable climate; lots of hospitals)
– Conduct trials prior to broad introduction in city – Fleet size large enough for scale, but will not drown out other options
• Designed to minimize risk to pedestrians and passengers • Eliminate unnecessary features • Fleet will not run in inclement weather • Service regularly • Expansion to new cities will be dependent on results on preceding cities Source: CAS Automated Vehicles Task Force yet-to-be released analysis, expected publication 2016
B Risk minimization introduction strategy
Which would help minimize the following risks (1/2) Item
Description
Behavioral / skill deterioration
• Avoid: risk eliminated, no pass off
Infrastructure
• Minimize: defined operating area
Weather
• Avoid: operating area & shutdown protocol
Vehicle issues
• Company ownership reduces frequency • Restricting area reduces costs
Other driver interactions
• Minimize: pre-testing fleets and defined operating area
Physical Impairment
• Operating area to reduce severity with proximity to hospitals
Source: CAS Automated Vehicles Task Force yet-to-be released analysis, expected publication 2016
B Risk minimization introduction strategy
Which would help minimize the following risks (2/2) Item
Description
Animal
• Operating in a city reduces interactions
Hacking
• Removing driver may increase risk • Restricted area impact unknown
Random Errors
• Removing driver may increase risk • Restricting area and speed reduces severity • Success measured in errors per trip
Unknowns
• Restricting area reduces number of unknowns
Severity
• City imposes natural speed limits and minimizes distance to hospital • City increases pedestrian interactions
Source: CAS Automated Vehicles Task Force yet-to-be released analysis, expected publication 2016
B Risk minimization introduction strategy
Implications of potential introduction strategy Conclusions of scenario • Introduction will be locally rapid, globally disjointed • Technology will follow parallel development paths • Liability may initially reside with the manufacturer for level 4 AVs • More data is required to help refine analysis
The insurance industry can benefit from more involvement Insurance industry has value to add • We are leaders in risk analysis • Insurance industry has inherent incentive to assess risk fairly – Quantification and pricing of risks – Ensure claimants are compensated fairly and efficiently Insurance industry officials like you can play a key role in helping the technology come to market as safely and efficiently as possible CAS’s automated vehicle task force is performing studies to further the understanding of risk surrounding the technology
Thank you
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