BOE Predicts Driverless Cars Could Transform Insurance as Risk Shifts

By Scott Hamilton | June 19, 2015

Driverless cars developed by companies such as Google Inc. could transform the insurance industry if their accident-avoidance technology sparks a shift in risk transfer, according to one of the Bank of England’s first blog posts.

“As human drivers become replaced by lasers and sensors, the placement of liability may start to shift towards manufacturers,” BOE officials Neha Jain, James O’Reilly and Nicholas Silk wrote wrote on Friday. “Such developments would pose challenging questions” for the bank’s Prudential Regulation Authority, which regulates U.K. insurers.

The post appeared on Bank Underground, a staff blog that will allow officials to share commentary and analysis as part of Governor Mark Carney’s effort to increase transparency and counter groupthink. There will be no “house view” and authors will be able to differ from the BOE’s official position, external consensus and each other, blog editor John Lewis wrote in an entry marking the site’s launch Friday.

While driverless cars may reduce the number of accidents caused by human error and cut the cost and frequency of claims, insurers will see premiums shrink, the authors wrote. One outcome may be a shift in liability to car manufacturers, which may prompt tie-ups between insurance companies and producers.

“Retail motor insurance – currently based on the relationship between a driver and their insurance company – might increasingly mold into commercial, inter-company insurance contracts,” they wrote. “Regulators will have to be mindful of such potential reconfigurations.”

Deflation Risks

In another post, BOE officials analyzed the potential impact on deflation risks were policy makers unable to boost stimulus because their main interest rate was near zero. This may raise risks at longer horizons, or make bouts of deflation more persistent.

U.K. inflation was 0.1 percent in May, well below the bank’s 2 percent target, after dipping below zero in April. The Monetary Policy Committee has held the benchmark interest rate at a record-low 0.5 percent since March 2009.

“Given how low inflation is at present, the chance that the U.K. will see negative rates of inflation in the next few quarters is as high as it has been at any point since the financial crisis,” Alex Haberis, Riccardo Masolo and Kate Reinold wrote. “But an additional factor which could contribute is if one assumed a lack of space for additional monetary loosening by the MPC.”

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