In a world of driverless cars, however, accidents would no longer be caused by a careless driver.

Article originally published by InsideCounsel.com on January 23, 2017.

Ford Motor Company has announced plans to issue $2 billion dollars of debt in order to boost its spending on self-driving cars, mobility services and electric vehicles.

The announcement was made just days before the governor of Michigan signed a legislative package that allows cars without steering wheels or drivers to be tested on the state’s highways. Florida already allows testing of driverless cars. As driverless cars seem more and more inevitable, the U.S. insurance industry is faced with a massive disruption to its largest line of  business.

The National Association of Insurance Commissioners (NAIC) reports that in 2015, U.S. property and casualty insurance companies were paid $231 billion in automobile insurance premiums. Automobile insurance constituted 39 percent of the 2015 premium volume written by U.S. insurance companies for all lines of property and casualty business. While this is a staggering number, it is not surprising given that almost all states require drivers to purchase automobile liability insurance to protect the victims of accidents caused by negligent drivers.

In a world of driverless cars, however, accidents would no longer be caused by a careless driver.

Rather, garden variety car crashes would be the result of a defective product. When accidents happen, instead of one driver suing the other driver for negligence, both drivers will sue the automobile manufacturers because the cars themselves failed to prevent a collision.

As a result, drivers will no longer have a need for automobile liability insurance, but car manufacturers will have products liability exposure for every collision.

Accordingly, the U.S. insurance industry can expect a decline in automobile insurance premiums and an increase in products liability insurance premiums ($3.6 billion in 2015 as reported by the NAIC).

This reallocation of premium and risk will also be shaped by what legislative approach each state adapts in anticipation of the shift in responsibility for automobile accidents from drivers to automobile manufacturers. The McCarran-Ferguson Act exempts the business of insurance from most federal regulation leaving insurance regulation to the states.

Thus, each state will have to consider a variety of issues:

• What types of automobile insurance will be required for owners, manufacturers, and sellers of driverless cars? 
• Will states require that passengers have some ability to control the car, thus introducing the potential again for some driver-related liability? (California currently requires a human to be aboard driverless cars for testing, and the vehicle must be equipped with a steering wheel and brake pedals.)

The National Highway Traffic Safety Administration (NHTSA) has urged the states to coordinate their regulations to avoid a patchwork of rules that could hinder driverless car development.

The insurance companies that write automobile business will not just sit back and allow this significant source of premium to shift to products liability markets. Auto insurers can be expected to develop specialty products to offer to drivers and car manufacturers.

In addition, major changes to the underwriting work force can be expected. Much of automobile insurance underwriting is automated based on formulas that consider a driver’s age, driving history and geographic location.

On the other hand, professional underwriters analyze products liability coverage because it is more complicated due to the long-tail nature of products liability claims, which can arise years after a manufacturer sells a product that causes bodily injury or property damage. The need for experienced products underwriters to assess these new and emerging risks can be expected to increase dramatically.

The real question may well be whether automobile liability insurance will be necessary at all if cars drive themselves and the technology makes road travel safer. Accidents will no longer be caused by impaired, distracted, or sleep deprived drivers. The NHTSA believes automated vehicles hold the potential to reduce significantly traffic injuries and deaths.

Only one thing is certain: it will no longer be business as usual for U.S. automobile insurers.

The article originally appeared on InsideCounsel.com, at: http://www.insidecounsel.com/2017/01/23/us-insurance-market-braces-for-a-seismic-shift-due