For most people today, insurance feels like a contemporary need, a system of policies and payments built for a modern age, but the rules that guide your car insurance policy date back further than the car parked in your garage. In a most fascinating way, the history of car insurance policies parallels the evolution of personal transportation. In fact, it begins not with the loud and thunderous roar of a modern day automobile, but with the calm and moderate clip-clop of a horsedrawn carriage. This history tracks the advancements of society from a bustling and rudimentary automobile to a self-driving car, with silent technologies and modern automation. From a sputtering automobile to a self-driving electric car, insurance car policy history. The history of protecting ourselves, our property, and each other through insurance on the road. To understand where we are going we must first look back, and this is the history of car insurance and personal transportation.
The Early History of Vehicle Insurance: Horses and Carriages
Before automobiles were invented, the streets were filled with horse-drawn carriages. While these horse-drawn carriages were not as advanced as the automobiles of today, they still posed some of the same dangers, since the horses could run away and cause an accident. Other dangers included losing control of the carriage, having it stolen, or even crashing into other carriages or pedestrians. It became obvious that some form of financial protection was necessary, and thus the first form of vehicle insurance was created.
In the late 1800’s, Britain was the first place to issue insurance for horse-drawn carriages. One of the first pioneers was the General Accident and Employers’ Liability Assurance Corporation that was started in 1885 in Scotland. This type of insurance was the first of its kind, and it was meant to cover the financial costs of injuries or damage to other people’s property that could be caused by the horses or carriages that were in the policyholder’s possession.
This early insurance form served as a luxury, mostly secured by rich individuals and businesses whose stakes were significant in lawsuits. Nonetheless, the significance of this form of insurance cannot be overlooked. It created the foundation of the tenet that driving on public roadways entails a legally defensible risk. By the end of the 19th century, a new invention was on the verge of changing history for the better, and for the worse.
The Horseless Carriage Arrives: The First Auto Policies
The first automobiles were notoriously unreliable, loud, and a dangerous novelty in the vehicular market. Automobiles, like other vehicles, were on the roads with horses. Also, they rode concurrently with pedestrians and cyclists, which created an unpredictable and risky road use situation. Car accidents were a common occurrence, and the law had no operational structures in place to effectively deal with road accidents.
The first car insurance policy has been credited to Gilbert J. Loomis of Westfield, Massachusetts. Loomis was an early car enthusiast who built a one-cylinder gasoline-powered car in 1897. Loomis was worried about losing money if someone was injured by his vehicle or if property damage. He sought insurance protection and took out a liability policy with the Travelers Insurance Company for a $7.50 premium with $1,000 worth of coverage. This was the first transaction in the auto insurance business.
The following year in 1898, Dr. Truman Martin of Buffalo New York was the first person to get into a car accident with an insurance claim. He ran into a cyclist and his Travelers policy covered his costs. This year also saw the first policy that covered physical damage to the car itself, and also insured the owner against loss of investment in the automobile.
Pricing for early policies was based on rod manual policy treaties underwritten on provisional evaluations of the prospective policyholder and the automobile to be covered. The practices, and policies used were essentially guesswork because there were no radial standards, no forms, no actuarial tables, and none of the pertinent information necessary to evaluate the risk accurately for loss monetization. It was a formative period for an industry having had little experience quantifying the risk of an emerging novel and complex technological innovation.
The Epoch of the Automobile: Its Adaptable Production and Its Prescriptive Coverage
When Henry Ford developed the production line the Model T was affordable for a large proportion of the US consumer population. A dramatic increase in the number of motor vehicles on the American roadside ensued. The number of formally registered automobiles in the US ballooned in the decade of the 1910s to over eight million vehicles and for the first time in history the registered vehicles in the US surpassed the 500 thousand mark.
The general population of US citizens had street legal roadable motor vehicles, and therein lay the problem: for such a large number of automobiles there were no attempt to control or limit the increase of motor vehicle accidents. As a result automobile accidents became an economic, social, and legal problem of great full public concern. The voluntary substancial potentially provided the system misinformation became limited. There was a need for a more systemic accounting and management of the legal and social economic perdition of road accidents, in large part of economically disadvantage road accidents for motor vehicles driven by road users and legally bound automobile drivers in the USA.
Consequently, legislation that mandated insurance became popularized. In 1925, legislation that required drivers to show proof of financial responsibility after accidents became law in Connecticut, yet it was Massachusetts that in 1927 made it historically compulsory for all vehicle owners to have liability insurance. It was a drastic change that altered auto insurance from a personal choice to a public requirement in order to legally drive a motor vehicle.
Following decades of insurance coverage, liability insurance became a mandatory requirement for driving a motor vehicle in other states. This time period also gave way to unique models of insurance coverage to be offered such as the ‘no-fault’ system. No-fault insurance was introduced in the 1970s, and was created in an attempt to simplify the litigation process that often followed accidents. In a no-fault system, a driver’s insurance would pay for their lost wages and medical expenses after an accident, regardless of fault. This system contrasted the traditional insurance system known as ‘tort’ or ‘at-fault,’ where the driver of the at-fault insurance would be liable for all damages and responsible for everyone’s losses.
1945-1975 Expansion of Auto Insurance
The expansion of the suburbs and the post-War economic boom led to industrial advancement and proliferation of the automobile. This rapid advancement gave rise to the more mature auto insurance industry. Insurers began to adjust their policies to cover more than basic liability and physical damage. Insurers began offering what it termed to be “packages”. The current auto insurance industry insures the following coverages:
- Collision: Insurance coverage encompasses damage to the policyholder’s vehicle in the event of an accident.
- Comprehensive: Includes coverage for loss or damage due to non-collision events like theft, vandalism, damage due to fire, or animal strikes.
- Uninsured Motorist: This coverage extends to damage or loss to the policyholder’s vehicle if an underinsured driver strikes the policyholder.
- Medical Payments Coverage: This insurance coverage encompasses medical costs associated with the policyholder and their passengers, regardless of whose fault the accident was.
The expansion of offered coverage facilitated a more sophisticated approach to determining premiums. Insurers began collecting more data in order to better forecast and assess risk. This was the greatest milestone in underwriting to date. Rather than a flat rate, premiums were calculated based on the following:
The driver’s age and gender. Statistical and historical data posits that young male drivers are statistically more inclined to be involved in and cause accidents.
The driver’s record. Each instance of a ticket or an accident where the driver was at fault increases the policyholder’s premium.
Vehicle Type: More expensive sports cars had higher insurance rates compared to family sedans.
Location: Urban areas with higher traffic and increased theft rates posed more risk than rural areas.
Safer drivers are rewarded with lower insurance rates while more risky drivers are charged higher premiums and rates. This data driven approach allowed the insurance industry to price policies more accurately. It was a numbers game.
The Digital Revolution: Computers, Telematics, and AI
Every sector of the economy underwent a revolution with the arrival of the computer age in the later decades of the twentieth century. Insurance was no exception. The ability of computers to process large data sets enabled more efficient claims processing and more precise actuarial calculations. The days of manual underwriting and paper files were coming to an end.
The 1990s was a decade of the internet and a time when consumers insurance company interactions were commencing a new phase. Insurance quotes could be obtained online, and policies could be compared and purchased with no agent interaction. This new ability increased competition and transparency to the insurance industry, and the pressure was turned onto the insurance providers to improve their pricing.
The most significant technological advancement, however, happened in the 21st century with the new technology of telematics, also called usage-based insurance (UBI), which uses GPS and onboard diagnostic to track an individual driver’s behavior in real-time. Small devices plugged into the car, or smartphone applications, track the following metrics:
– Distance traveled
– Time of day
– Braking and acceleration patterns
– Speed
For the first time, insurers could move beyond demographic predictors of risk (age, location, etc.), and instead, individual behavior patterns could determine cost. Significant discounts could be earned by safe drivers, avoiding risky behavior, and, or late-night driving. This significant transition represents a shift from “who you are” to “how you drive.”
The most recent advancement of these technologies (ML, artificial intelligence), is the integration into the insurance process. Impactful time savings with insurance claims processes are achieved when AI algorithms assess photos of an accident scene to instantly determine damages and report cost to repair. Improved fraud detection has also greatly reduced the time claims spend in system approval. AI is insurance more quickly, and more intelligently through individualized programs than ever before.
Green Shift: The Challenge of Insuring Electric and Hybrid Vehicles
Like the internal combustion engine, the rise of electric vehicles also requires the industry to adapt, and, once again, the industry is being forced to change. The process and parameters to insure electric vehicles differ from as is done in traditional gasoline vehicles. Technology and cost of repairs differ plus the risk profile is different as well.
New underwriting models had to be created by the insurers based on these unique parameters. For instance, the extremely high-tech batteries in EVs can cost tens of thousands of dollars to replace, driving comprehensive and collision insurance coverage to be extremely costly. Fixing repairable damage to EV cars also requires specialized training and more expensive equipment, meaning a minor fender bender on an EV is more costly to repair than on a conventional car.
Additionally, EV cars possess their own unique sets of risks. The fact that an EV’s operation is silent poses a more dangerous risk to pedestrians that are acclimated to the sounds of an approaching vehicle. The lithium-ion batteries, although in general safe, contain a small but serious risk of fire that is hard to extinguish and would be a liability in an accident. New risks are being added to the equation that insurers must justify in their pricing and coverage.
As consumers and governments adopt green technology to mitigate climate change impacts, the market for electric vehicles (EVs) will continue to grow substantially. The insurance sector, however, must adapt to provide the needed expertise and insurance offerings that accompany this change to sustainable modes of transportation.
Looking Ahead: Autonomous Vehicles and Other Advancements
The journey of car insurance has always been one of transformation. Adaptation and change to new technologies are the norm, whether it be the transition from horse-drawn carriages to the Model T, or the change from traditional vehicles to those equipped with telematics. Today, however, we face the greatest change of all: the introduction of autonomous vehicles (AVs).
Autonomous vehicles promise a significant reduction in traffic accidents and fatalities, as 90% of traffic collisions are due to human error. A world with fewer accidents and fatalities is a safer world. However, it presents a fundamental challenge to the traditional auto-insurance model, which is built on estimating the risks associated with human error.
For the industry, this poses a number of important questions for the future:
Who takes responsibility in the case of an accident? If a self driving vehicle crashes, is the owner the liable party? What if it is the vehicle’s manufacturer, the software developer, or the supplier of the network the vehicle operates on? The ownership of the liability will likely shift from the individual driver to the technology corporations, fundamentally altering personal automobile insurance to a business liability insurance for technology.
How will the cost associated with risk be determined? If everybody in the vehicle is a “passenger” in a self driving vehicle, how can an insurance company assess and measure risk? The determining factor of the premiums will probably be based on the safety history associated with a particular make and model of an AV, the software protection from cyber attacks, or the distance traveled by an individual.
What will insurance policies cover? In an autonomous future, the bets will be different. A cyber attack that immobilizes a fleet of vehicles poses far greater of a threat than a simple collision. The design of insurance policies will have to be focused around the new technology reliant risks.
The future of auto insurance is very different than today’s auto insurance. In particular, it will be more integrated with product liability and tech and more likely sold as a service with the car.
The incredible complexity of car insurance embodies the evolution of auto liability, from a simple liability policy on a horse and buggy to the world of today with advanced tech and AI. This transformation over the past century reflects society’s continual innovation and progress on mobility, and the advanced insurance will be ready to adapt to society’s insatiable quest for technologically advanced and flexible road alternatives.
