Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Long Ideas

Self-Driving Cars Are Almost Here: Is the Insurance Industry Ready?

Tesla Motors (NASDAQ: TSLA) is about to offer highway auto steering and parallel autopark capabilities in the software package for its popular Model S sedan in all regions. Elon Musk himself confirmed this development in a recent tweet.

“Almost ready to release highway autosteer and parallel autopark software update,” Musk told his followers on July 31. He also confirmed that autopark will be released to drivers in all regions.

This means that self-driving cars are almost in our driveways. It also sending shudders through the highly lucrative auto insurance industry, Bloomberg Business reported. Even Warren Buffett, whose Berkshire Hathaway (NYSE: BRK.B) owns the iconic GEICO, has taken notice of the potential havoc this disruptive technology could wreak on insurers.

The Insurance Industry Is Scared to Death of Self-Driving Cars

“If you could come up with anything involved in driving that cut accidents by 30 percent, 40 percent, 50 percent, that would be wonderful,” Buffett said in March,  “but we would not be holding a party at our insurance company.”


Buffett’s worry is understandable. A 50% drop in auto accidents could lead to a 50% drop in premiums. That would cause a paradigm shift in the auto insurance industry, which has long had a license to print money. Bloomberg reported that auto insurers collected $195 billion in premiums last year.

A person who seems to be even more worried than Buffett is Allstate (NYSE: ALL) CEO Tom Wilson. After two rides in a Google (NASDAQ: GOOG) car, Wilson has become convinced that features like auto steering will literally pull the rug out from under his company’s business.

“There will be fewer cars,” Wilson said of the automated traffic of the future. “There will be fewer accidents. And it will be safer.”

It is easy to see why this scenario scares Wilson to death; fewer cars means fewer premiums, while fewer accidents will lead to lower premiums. Both developments mean less revenue for insurance companies.Another potential problem for insurers will be that as insurance premiums fall, automakers or finance companies might start offering insurance as a benefit for car buyers. Uber is already offering its drivers leasing deals that include insurance as part of the package.

Another potential problem for insurers will be that as insurance premiums fall, automakers or finance companies might start offering insurance as a benefit for car buyers. Uber is already offering its drivers leasing deals that include insurance as part of the package.

“When you’re as big as we are and insure 16 million households, it doesn’t take much of a degradation to be a real revenue issue for you,” Wilson admitted.

Auto Insurers’ Revenues Still Growing

Despite Wilson’s fears, Allstate’s TTM revenues are still growing. The company reported a TTM revenue of $35.51 billion on March 31, 2015, a $780 million increase over March 2014 when it reported a revenue number of $34.73 billion. Allstate also reported that its TTM revenue was growing at a rate of 3.09% in March 2015.


Another major car insurer, Progressive (NYSE: PGR), reported an even more impressive revenue growth rate on June 30, 2015: 11.43%. Progressive’s revenues grew from $18.59 billion in June 2014 to $20.12 billion in June 2015, an increase of $1.53 billion.

These revenue figures show us that the auto insurance industry is still growing. The advent of the self-driving vehicle is having little or no effect upon revenues yet. Despite this, the fears that Buffett and Wilson expressed are from hypothetical.

The Fears are real

When Honda Motors (NYSE: HMC) introduced a simple feature on the 2013 Honda Accord that beeped when other vehicles got too close to the car, The Highway Data Loss Institute found it had a dramatic effect on some kinds of insurance claims, Bloomberg reported. The number of bodily injury liability claims (the most expensive kind of claims) fell by 40% and the amount of medical payments made fell by 27%.

That shows us that major dips in insurance company revenue could be right around the corner as well as decreases in premiums. Other even greater disruptions to the insurance industry could follow the advent of auto-steering cars.

One potential development could be two-tiered premiums in which those with self-driving cars pay less than those with traditional vehicles. This raises serious ethical and political issues; for example, auto insurance could be cheaper for the rich, who can afford self-driving vehicles, than for the poor that cannot. Such a development would undoubtedly lead to a political outcry and efforts to restrict premiums.

Another logical outcome that has already begun is diversification in the insurance industry. GEICO and Progressive have begun offering homeowners and renters insurance for example. Insurers are looking into other products such as identify theft insurance as well. Allstate is also offering policies for Uber and Lyft drivers.

The problem with diversification is that the profit from some of those other policies is much lower than that from auto insurance. That means insurance companies may have to diversify further into other businesses, such as finance or annuities.

Auto Insurance Is Still a Value Investment

One thing is certain though: Auto insurers will continue to be a good investment and a profitable industry for the foreseeable future. Even Wilson expects the revenue from auto insurance premiums to stay about the same for a decade before starting to fall sometime around the year 2025.


That means there is no reason to sell your auto insurance stocks anytime soon. Despite the advent of the autonomous vehicles, insurance companies are still a value investment and will be for some time to come.