Yesterday, Tesla announced its fourth recall in two years. Following a two-year—and still ongoing—investigation by the National Highway Traffic Safety Administration into Tesla’s Autopilot system, the electric vehicle (EV) manufacturer has added more alerts and safeguards to ensure driver awareness while the Autosteer function is enabled.

The recall involves an over-the-air software update to over 2 million vehicles sold by Tesla in the US. Administering a “three strikes” system to its Autopilot system for the first time, Tesla users will now face “eventual suspension from Autosteer use if the driver repeatedly fails to demonstrate continuous and sustained driving responsibility while the feature is engaged,” according to a company statement.

“Automated technology holds great promise for improving safety but only when it is deployed responsibly,” the NHTSA told The New York Times about the recall. “Today’s action is an example of improving automated systems by prioritizing safety.”

Though it might not appear so at first glance, at the core of the regulator’s inquiry is the question of liability—both legal and actuarial. That is, who’s to blame when an automated, or semi-automated, system fails: the driver, the manufacturer, the system’s engineer, or someone else altogether? Who pays for damages and losses?

The NHTSA’s statement above suggests that it sees both drivers and manufacturers at fault. Automated vehicles (AVs) require more safeguards, the regulator asserts, but drivers must also be held responsible for how and where they use these systems. However, that calculus may shift over time, especially if vehicle technologies become more automated (as the chart below categorizes).

Farooq Sheikh, Head of Insurance at Unqork, told me that an increase in vehicle automation may trigger a sea change in how cars are insured. 

“It’s a shifting liability from individuals to corporations,” Sheikh said. “It’s going to go from individual liability to product warranty… there’s a rising liability associated with car manufacturers as [automated technologies] get better and better.”

Writing in September, McKinsey predicted that this shift may generate substantial ripple effects in the insurance industry by 2030. A theoretical decrease in accidents thanks to automation would “exert downward pressure on premiums,” while forcing insurance carriers, insurtechs, and original equipment manufacturers (OEMs) to create new kinds of insurance products. The move toward product-based liability, not driver-based liability, could compel AV manufacturers to create “OEM-certified” repair networks, ensuring that parts and systems are maintained in line with risk-mitigating standards.

But it’s not September anymore. After one of its AVs hit and dragged a pedestrian in San Francisco more than 20 feet, GM’s Cruise lost its license to operate in California, and indefinitely suspended its operations tout court. The state’s Department of Motor Vehicles claimed that Cruise “misrepresented” the safety performance of its AVs, further validating public activists’ mobilization against AVs, which, organizers say, hindered-first responder activity more at least 55 times in just six months.

In other words, at least at present, AVs may exert an upward pressure on premiums from a safety perspective. What’s more, the underwriting mechanics of AV-focused insurance products may create higher prices for consumers. AVs’ parts are more complex (and therefore expensive) than old-school vehicles’ components; they require more specialized maintenance, and these mechanics are in short supply. 

AV insurance hinges upon product warranty rather than driver liability; it therefore covers a more expensive vehicle than a traditional car—meaning a potentially greater loss—and depends upon expensive and limited labor to remain in satisfactory condition. OEMs may attempt to offset those costs through pricier insurance products, as well as by building in the cost of potentially catastrophic failure into the sticker price of new AVs and replacement parts.

Facing a PR fallout and increasingly dire prospects of ever expanding in the US, AV manufacturers have doubled down on their lobbying efforts. In a letter last week to Transportation Secretary Pete Buttigieg, a who’s-who of auto-industry lobbying groups framed public investment in AVs as a question of national security.

“The Department’s support for AV development is crucial to maintain our nation’s competitive edge and secure our position as a global leader,” the industry coalition asserted. “The U.S. stands at a critical juncture in the AV race, with countries like China aggressively investing and advancing the technology.”

These manufacturers want a more comprehensive federal framework for AV regulation, rather than just a state-by-state one. The NHTSA had floated implementing a temporary rulemaking mechanism called AV STEP by the end of this year. It would let the agency green-light the use of autonomous vehicles lacking traditional parts like steering wheels and pedals.

But AV STEP appears no closer to a launch at the end of this year than it did at the start of 2023. And macroeconomics may play an underreported role in this molasses-like regulatory momentum. 

Why should we care?

Among other side-effects—surrounding road safety, AI and privacy, and the threat of structural employment through automation—AV-driven disruption may induce inflation, at least in the short term. That’s the last thing the Biden Administration wants. While AV-focused manufacturers continue to struggle in a non-zero-interest environment, public investment (both regulatory and financial) may make another category of goods—cars and the insurance products attached to them—increasingly expensive in consumers’ basket, especially if the AV industry achieves the reach it aims for. This is in no small part due to the outsized shift this technological development may cause from an insurance and risk perspective. 

With people in the US now two to five times likelier to die in a collision than residents of countries with similar economic indicators—a trend Buttigieg has dubbed “a national crisis”—we may see AVs stay parked in Level 3 of the automation journey (see MarketWatch’s chart above). With public investment returning to more established and efficient modes of transportation, including rail, the insurance industry may face a far more underwhelming tidal wave of “disruption” than McKinsey anticipates.