Mitigating Insurance Risks and Enhancing Risk Management Strategies for

Autonomous Vehicle (AV) Technology- Literature Review

[Author Name(s)]

[Instituitional Affiliation]

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 CHAPTER TWO

LITERATURE REVIEW

2.0 Introduction
This chapter focuses on the theories and assumptions that may be relevant to the
topic under study. The chapter thus considers the roles of such theories in meeting
the study's objectives. The chapter shall also include the literature that includes
previous research and studies related to the topic and its variables. The chapter
then summarizes the literature review and critiques while pointing to the gaps in
the material where necessary.

2.1 Theoretical Review

Insurance risks and insurable risks are always related to the management
strategies of managing the risk, the features of the item to be insured, policy
regulations, insurance premiums, coverage, and data analytics and predictive
modeling that may be used to assess the risks associated with AVs (Dambra,
2020). Scholars have devised various schools of thought that either support or
challenge the perceived relationship between these variables. This section will
focus on the theories and models that show relationship between risks associated
with autonomous cars and risk management strategies.

2.1.1 Risk Management Theory

Regardless of the type, risk has become a significant concern for managers
at various levels. Most managers have dealt with the risk proactively before a
peril, uncertainty, or hazard occurs (Blundo, 2021). Various organizations have
thus adopted the "art of risk management" and an integrated approach. The risk
management theory upholds that managers should consciously and continually

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monitor risks with the organization's strategic objectives (Skotnes, 2021). Risk
management theory is thus relevant to managing risks in AV technology as there
is a need to increase the chances of success for autonomous technology vehicles
in the transport sector. The risk management theory, therefore, upholds various
essential concepts of risk management. It identifies and assesses the risks
associated with putting AVs on roads and what such risks may mean to the
insurance policies given to other road users affected by a defection in the
driverless vehicle (Sheehan, 2017). In assessing the risks, the theory upholds the
importance of identifying those that may be liable in case of accidents by the
vehicles. Data analytics and modeling techniques are essential in accurately
quantifying risk in the assessment and identification stage.

2.1.2 Moral Hazard Theory

The moral hazard theory upholds that there usually is a shift in behavior
when individuals are insured and are aware of it. In such cases, the individuals
expose themselves to perceivable perils. The theory can have two views in the
case of AVs. The first is that operators and owners of AVs can handle their
vehicles with complacency and blame it on the autonomous system of the vehicle
because it is insured and the policy cover will the damages resulting from any
accidents. In other cases, the manufacturers can introduce autonomous systems
without giving a chance to improper operation. The manufacturers thus shift the
liability to the owners of the AVs. Such moral hazards are risky to the operator,
who may not have access to complete information about their property. The need
to advance technologically and reduce accidents caused by human error has seen
the technology adopted even when the owners completely understand the system
and its behavior (Morris, 2020). The cycle of blame drags to another loop of
shifted liability as the owners also shift the liability to the autonomous systems in

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case of accidents from their lack of understanding. Moral hazard theory explains
individuals' behavior typically aimed at shifting liability and risk without any
comprehensive policy on who takes responsibility.

2.1.3 Technology Adoption Models (TAM)

AVs are relatively novel products. TAM can be applied in introducing

these commodities to the market. TAM can be proper in assessing how various
players will react to AVs and their subsequent adoption. AVs are adopted
depending on various variables, especially those dependent on adopting new
technologies. Insurers, drivers, and other stakeholders will likely accept AVs
depending on their usefulness, ease of use, and other advanced features. TAM
will thus reduce the chances of the concepts of moral hazards theory when the
right stakeholders as consulted continuously to assess the performance of AVs
over time (Nastjuk, 2020). When the vehicles are collectively accepted by the
stakeholders' social influence, system characteristics and individual factors that
may affect the acceptance are deliberated, and an agreement is easily reached. The
stakeholders will develop suitable insurance policies distributing risks and
liabilities as necessary.

2.1.4 Liability Allocation Models (LAM)

In the event of an accident by an AV, it is never easy to settle on whom to

hold liable. The liability is generally stretched between the owner, manufacturer,
software developer, driver, and other parties who may be part of the AV's larger
ecosystem. It is, therefore, complicated to tell whom to indemnify and whom to
compensate where necessary. In such a case, it is unclear who to hold liable for
compensating potential aggrieved parties. Liability models are, therefore, helpful
in determining whom to hold liable and who and how to indemnify the

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beneficiaries (Minond, 2023). LAM will reshape the former liabilities allocated
by previous laws that presuppose human error as the cause of accidents, thus
holding them liable.

2.2 Empirical Review

In this section, the study reviews literature materials written on AVs and relevant
insurance strategies

2.2.1 Threats of Covering AVs

Kester (2022 studied the future of automobility. The study aimed to

explore the expectations, challenges, and activities that involve the development
of AVs (AV). The study was prompted by the rate at which automobile vehicles
transform the transport sector in Europe and the rest of the world. The study was
based in Europe, focusing mainly on the UK and the Netherlands. In addressing
the challenges, the study looked into the role of insurers in developing,
integrating, and adopting Avs in the transport sector of developed countries. The
study points out that whereas vehicles reduce human-induced accidents, there lies
the question of who is to be held liable for any accidents. Liability thus shifted
from the drivers to the vehicle, given that a software system would control the
vehicle and not the driver.

Bhaktina et al. (2021) studied AV interaction analyzing the information security

of the passenger of the AV. The study aims to assess the safety and privacy of
passengers who use autonomous technology vehicles. The technology is relatively
new, and thus insurers lack historical information on the nature and severity of
any accidents. Therefore, the number of hazards and perils that insurers may incur
in case of accidents needs to be known. The lack of information has discouraged
many firms from providing such vehicles as they are still determining what they

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are insuring and what to expect in case of an accident. Shifting liability and lack
of historical information threaten the insurance of AVs as policy providers still
need to develop the proper policies for Avs.

2.2.2 Economic and Moral Effects of Covering AVs

Rayn (2020) conducted a study on the future of transportation, considering

the ethical, legal, economic, social, and impacts of self-driving vehicles in the
future. The study aimed to determine the impacts therefore of covering such
vehicles. The study finds various pitfalls of covering the vehicles in the future,
given the risks that potential users will face. The issue of shifting liabilities has
been one primary consideration since it is still being determined who will be
indemnified and on what bases. There are no policies to ensure that those affected
by an AV get compensated for damages. Bellet et al. (2019) studied emerging
risks and ethical-legal challenges for human-machine interactions. The paper’s
objective was to cross-examine the liability regimes and applied ethics to consider
when providing coverage for AVs. The paper concludes that it is vital for insurers
to consider the implications of AV and their liabilities before developing a proper
policy structure to cover them. The outcomes of the study show that there is a
need for future studies to set up clear frameworks to be followed when
indemnifying, compensating, and covering individuals for issues that result from
AVs.

2.2.3 Efficiency of Existing Insurance Plans for AVs

Most insurance plans cover motor vehicles because the insurance structure
is simple and easy to understand. It is easy to determine the liable individual in
these cases; thus, indemnities are provided in line with the specified frameworks
and regulations. AVs have, however, taken away that by taking most or all the

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drivers' roles, thus making them not liable in the event of an accident. Khan et al.
(2022) point out that AVs have reduced the number of accidents mainly resulting
from human complacency. Avs, however, have shortcomings as the connectivity
between them can be bugged, thus leading to collisions and unprecedented
accidents. The current laws allow an injured party to sue for damages only if they
can prove that the driver of the vehicle was negligent at the time of the accident.
AVs have no drivers, which is yet to be reviewed in the new laws.

2.2.4 Alternative Insurance Plans to the Novel Dangers of AVs

Writing about AVs and liability law, Kubica (2022) points out that AVs
are likely to reduce the number of accidents by 90% while upholding that most
accidents occur due to human error and ways of life. AVs are thus considered to
be in a pole position to prevent accidents, thus standing the chance of ruling out
the need to insure vehicles against accidents. This potential of an AV, in this case,
still hangs in the thread as factors such as cyber security, chances of external and
unprecedented control, and breach of owner's privacy still raise issues about the
success of this technology.

2.2.5 Shortcomings of Existing Policies and Risk Management

Strategies to Overcome Them

In a study titled Three Riks Management Options for AV Makers, Reilly

et al. (2018) questioned the role of the policies covering other motor vehicles in
absorbing the risks that autonomous motor vehicles pose to the makers. The study
upholds that the manufacturers are left to cater to those affected by accidents
involving AVs through confidential settlements without any necessary precedent
for assigning the liabilities thereof. The policies suggested by the study aim to
mitigate litigation risks while reducing potential liability lawsuits. The paper

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suggests indemnity agreements between AV manufacturers and autonomous
system developers. In such agreements, the legal authorities will investigate all
the parameters of the crashes before holding anyone liable.

2.2.6 Communication and Transparency in the AV Insurance

Landscape

Fulbright (2017) wrote extensive research on AVs regarding their legal

and communication landscape. The report upholds that there should be
communication in AVs if they are going to meet the threshold for which they
were put up through a 10-year strategy signed off by the US federal state. To
reduce the number of accidents, the study shows that there should be
communication between vehicles on the road (V2V) and vehicles to everything
(V2X). Doubts are lingering over communication as the study reports
communication (V2V and V2X) to be conspicuously absent. The study also posits
that there needs to be more transparency in cases where there is communication,
as AVs are merely systems. Unlike humans, they are exposed to cyber malice,
which can compromise their systems, making them even more vulnerable to
accidents. The ostensible lack of communication and transparency has
implications for insurers, their decisions, and policies for AVs. Insurers who have
been working closely with developers and the government agents who oversee the
development and integration of AVs into the transport sector have since had to
reconsider their decisions due to their susceptibility resulting from poor or lack of
transparency and communication.

2.2.7 Safeguarding Public and Private Interests During the Transition

to Automated Driving Technologies Securely and Sustainably

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 Wang et al. (2022) studied security and safety solutions for autonomous
and connected vehicles for environmental sustainability. The study posits that it is
the role of the developers to ensure the reliability and safety of not just the users
of AVs but also of other road users. The study attributes the security and safety
for both the public and users of AVs to practices and elements brought together
by the developers of the vehicle. The solutions provided by the developers at the
developing stage go a long way in ensuring that the vehicle is safe and secure for
the traffic. Developers need to implement artificial intelligence-based solutions to
increase AVs' connectivity, reliance, and reliability. The technology put in place
is sensor-based to mitigate any shortcomings, making the vehicle operate with
maximum precision just as if a human driver is running it. The steps, however,
pose dangers to the car, specifically on connectivity issues which open up holes
exploitable by cyberattacks. Developers have continued researching how to make
vehicles better and more secure. The developers are exploring mitigation
strategies that particularly pay attention to sensors, controllers, and connection
mechanism

2.3 Thematic Review

Most studies on risk mitigation strategies focused on similar themes, including
shifting liability, lack of policy framework, implications on other road users,
efficiency and relevance of current insurance policies for AVs, and
communication. These themes are related in most studies, and all aim at
explaining why there are no comprehensive insurance plans for AVs. For
instance, shifting liabilities makes it hard for insurance firms to decide whom to
indemnify in the event of an accident, and the law enforcers hardly know whom
to hold liable for accidents that involve AVs, therefore, defining why it is hard to
insure AVs, under the current policies

2.4 Research Gaps

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Whereas the studies have tried to point out the flaws that make AVs challenging
to insure, there are various gaps that they still need to address. The studies insist
on the integration of AVs in the current transport system. It is, therefore,
inevitable that AVs will share the roads with motor vehicles. The studies,
however, need to address the possible implication of this relationship. Moreover,
the studies need to pay more attention to the human aspect of AVs. However,
AVs will affect people, from drivers who will lose their jobs to software systems
that will run autonomous cars. The attitude of stakeholders on the issue of AVs
must be considered to ensure its acceptance. The studies also ignore the decision-
making and ethical dilemmas likely to arise from the exclusion of key
stakeholders in the issue of AVs. This study will explore the gaps and address the
ignored issues, including human aspects, dilemmas and decision-making, and the
interplay between autonomous and motor vehicles.

2.4 Conclusion
The literature review focuses on theories applicable to the adoption and insurance
of AVs, reviews the literature on insurance strategies for AVs, and points out the
gaps in those various literature materials. The review focused on two theories and
two models, including risk management theory, moral hazard theory, technology
adaptation model, and liability allocation model. The main issues impeding the
insurance framework for AVs include shifting liability, lack of proper insurance
frameworks, and poor communication and transparency in the AV industry. The
study points out the need for more detail on the interplay between motor and AVs
in the transport sector ethical and decision-making dilemmas.

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