In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche
Buffett’s classic theory is that insurance companies can generate a lot of float from the premiums. The idea is that large numbers of people send in premiums every month, so as long as the amount of payments taken in exceeds the claims paid out, the insurer has a big pile of extra cash it can tap.
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Many observers, including Allstate (NYSE: ALL) CEO Tom Wilson, think autonomous cars will make the roads far safer by greatly reducing the number of accidents. The idea here is that most crashes are caused by driver error or bad driving, which autonomous cars would eliminate or greatly reduce.
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If that prediction is true auto insurance costs could drop by as much as 80% because accidents are the main risk ensured for. By the year 2040 your auto insurance bill could be $10 or $15 a month for a brand new car!! Naturally that won’t do Progressive (NYSE: PGR) and Allstate’s (NYSE: ALL) profit margins much good.
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Auto insurance could be a gateway for selling other products, such as disability insurance, bonding, life insurance and health insurance, to networked transportation drivers and others in the gig economy. The potential profits to be made could be enormous; a survey that Edelman Berland conducted for the Freelancers Union found that 53 million Americans, or 34% of the population, are involved in some sort of freelance work.
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The whole telematics issue raises the interesting question of whether auto insurers are still a good investment. Value investors like Warren Buffett have long thought of auto insurers that way because of all the float their premiums generate, but is that still true in the face of all the competition in today’s insurance industry?
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