Disruptive technologies often have unforeseen effects; for example, computers, which were supposed to bring us the "paperless office," actually increased the amount of paperwork by making printing easier.
Something similar could happen with self-driving cars, which are supposed to drive down auto insurance premiums by making the roads safer. The widespread adoption of such vehicles could increase insurance premiums for some and greatly increase the number of uninsured motorists.
Many observers, including Allstate (NYSE: ALL) CEO Tom Wilson, think autonomous cars will make the roads far safer by greatly reducing the number of accidents. The idea here is that most crashes are caused by driver error or bad driving, which autonomous cars would eliminate or greatly reduce.
The hope attached to this is that vehicle premiums would fall because the number of accident claims would be much lower. In particular, the number of injury accidents, which cost insurers the most, would be reduced. That gives us something to look forward to, but there are some unintended consequences that could prevent that reality from occurring.
Self-Driving Vehicles Could Increase the Number of Uninsured Motorists
If the number of auto accidents were greatly reduced, the main incentive to buy car insurance-the fear of loss from an accident-would decrease. The major reason people buy vehicle coverage is that they are afraid they will not be able to repair or replace their cars after an accident.
Were accidents to become rare, motorists would lose the main incentive for purchasing insurance. The other big incentive for vehicle coverage-mandatory insurance laws-is spectacularly ineffective; around 12.6% of American motorists were driving without insurance in 2012, according to the Insurance Information Institute.
Over 10% of the population drives without coverage despite mandatory insurance laws in 49 of the 50 states. That rate is actually higher in some states; for example, 25.9% in Oklahoma and 23.8% in Florida, according to the Institute's figures.
We already have a hard time getting people to buy auto insurance with today's accident rates. Any significant drop in the accident rate will probably be followed by a drop in the number of insured motorists. This might occur even if there is a significant drop in the cost of insurance.
Therefore, major changes might have to be made to the auto insurance industry. One such change would be to include the cost of coverage with the car payment. This might have to occur because automakers might have to assume liability for accidents if they become responsible for the vehicle's operation as well as its manufacture.
How Self-Driving Cars Could Increase Insurance Premiums for Some
There is also a possibility that self-driving cars could lead to increased auto insurance premiums for some people. If these vehicles are really as safe as their promoters claim, insurers would presumably offer steep discounts for those that purchased one.
That could quickly lead to a two-tiered auto insurance system that would raise serious questions of fairness. Affluent people that could afford to buy self-driving cars might have far lower auto premiums than poorer or working class people that could not.
Insurers would have a strong incentive to charge more for vehicles that lacked self-driving features because they would presumably have a higher accident rate. That would mean higher insurance premiums for those that drove older, cheaper cars-in other words, the working class.
A doctor or a lawyer might pay a lower premium on her new Tesla or Mercedes, which would have autopilot, than a construction worker would on his 12-year-old Chevy. A waitress could pay a higher premium for her old Saturn than a stockbroker might for his brand new, self-driving Audi. Since the waitress and construction worker could not afford self-driving vehicles, they would not get the lower insurance rates associated with them.
This could quickly lead to a sort of class warfare on the roads with working folk angry that they have to pay more to insure vehicles than the upper class. It would also give lower income individuals another reason to drive without insurance.
If a large portion of the working class simply stopped buying auto insurance-something that has already happened in Detroit-insurers would to have to raise premiums on the more affluent to make up the difference. That means the lower premiums purchasers of autonomous vehicles expect might never materialize.
There would also be political pressure for regulatory or legislative fixes to the problem, such as caps on rates or abolition of no-fault insurance. Another potential solution would be universal no-fault insurance, which equalizes costs for all by raising everybody's rates. Some states might also try to prevent drivers from offering discounts to autonomous car owners.
Naturally, other factors, such as the public's response to self-driving vehicles, costs, and the rate of adoption, will affect the situation. One reality is certain here: Autonomous vehicles will completely disrupt the auto-insurance industry and possibly change it beyond recognition.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.