Insuring autonomous vehicles. Collision of the old & new.
|Consider the following fun facts in what has traditionally been a slow growth, low margin, highly regulated, mature industry known as Insurance.
§ Last year Warren Buffett said the following in response to a series of questions on CNBC regarding Elon Musk and the impact that autonomous vehicles could have on his insurance businesses. In particular, the Property and Casualty Auto Insurance business, GEICO that Berkshire Hathaway owns and operates.
” I think it’s a long way off, but there’s no question. Anything that makes cars safer is very pro-social, and it’s bad for the auto insurance industry. But nevertheless, the auto insurance industry has always worked on making cars safer. I mean, they’ve led the way on things like seat belts and all that. But if there are no accidents, then there’s no need for insurance.
And I think there will be a big reduction in accidents over a longer period of time. And of course there already has — cars have been made way, way safer, but now when you start making the driver safer, that would be a big, big jump, and that will happen some day, and when it happens there will be a lot less auto insurance written.”
§ Berkshire Hathaway Vice Chairman Charlie Munger, noted that “people are gonna want to drive faster than the speed limit, and so forth, and the software’s not gonna allow it. Safer driving, safer cars, fewer accidents — good for humanity, bad for the liability business, it turns out.”
§ Bill Gates got into the prediction game of the timing and mass adoption of autonomous vehicles (aka self-driving cars) “It’s certainly more than 15 years off before it’ll be a meaningful percentage of cars driven.”
§ Insurance executives consider as a real possibility that companies such as Google, Mercedes and Volvo will accept responsibility for liability involving their self-driving vehicles. 55% of insurance executives surveyed by KPMG consulting believe that Google will distribute insurance products, and 23% believe it will compete as an insurance company. The same highly respected consulting firm – KPMG- predicted nearly two years ago that the insurance property and casualty would shrink to less than 40% of its current size within 25 years.
§ Watch this State Farm Commercial (youtube). It is also from last year and is striking in its clear message, which I will paraphrase as stating: The risk you pay us to cover will not exist someday. But, no worries, we will still be here to help you in other ways.
§ And finally, Carriers such as Allstate are including the threat of autonomous vehicles/driverless cars as a business risk factor for the first time in their 10-K filing.
So, what do these smattering of fun facts mean to our investment choices?
Well, that insurance is fun again. Just kidding. For most of us, it’s not fun and will never be so. That is why Insurance will continue to be sold, not bought. And which is why State Farm and other large insurers will be just fine with agents hand holding us. We will continue to be risk-averse and compelled to buy these products by state regulators, car and mortgage lenders, and even employers.
That said, the industry is clearly entering into a very different dynamic in what has been a relatively dormant industry. As noted in our most recent Insurance report – which includes coverage of all S&P 1500 listed Insurance industry carriers – ‘FinTech’ innovations are on fire.
Interesting themes we have identified and that are detailed out in our industry reports include …
o Claims management & Drones
o Policy underwriting & Blockchain [ownership, property]
o Policy pricing & Telematics – i.e. premiums linked to your driving actions
o Ongoing policy pricing/monitoring & Connected Car/Home: Internet of things devices in cars, phones, windshields, homes, safety devices, and a long list of connected things that track you and your property
But, nothing comes close to the impact of autonomous vehicles.
It is a new risk pricing paradigm whose impact seems to be under-appreciated. In fact, we would go as far as to state that underwriting knowledge accumulated over the last 100 years is rapidly irrelevant.
Exactly when this will hit the proverbial ‘tipping point’ is of course unclear, but if 15 years is a reasonable time frame – as Bill Gates stated -, then it is around the corner.
Autonomous vehicles upend the how, what, and who of risk based pricing. It is going to be fascinating to follow.
A few thoughts on what to expect.
How risk is priced:
How to insure potentially imperfect software that is carrying things with variable risk loads.
Software is the new driver. And unquestionably there is risk that will be factored into the software and the connected network environment it inhabits.
Vehicle policy will be priced according to many as yet unknown factors. Will it include the reputation of the software manufacturer, the installed version, the upgrade cycle? What if a vehicle owner bought the ‘cheaper’ software? Or didn’t upgrade to the better version? Will it include any measures factoring of driver risk profile.
Does this now promote a level playing field for usage based pricing? Will we as a society allow moving vehicles on our streets without best-in-class safety measures, software, intelligence? Is regulation now irrelevant, or even more of a mess? These are truly captivating questions that will be tackled.
Of course, this will challenge the very foundation of accepted risk/return and our need for transportation as a society. This could very well force us to reconsider what risk we are willing to accept across types of vehicles, location, passengers.
What is priced – what is the policy we will be purchasing…
As the State Farm commercial suggests, current risks categories will diminish. But, other insurable risk categories will emerge. The impeding tsunami of Internet of Things will provide many opportunities to underwrite all types of new ‘risks’ – such as software malfunctions – in and around the transportation category. And possibly with higher margins. We are already seeing this in small ways; e.g. cyber security, hacking, ransom ware insurance.
Who underwrites the risk:
Insurance carriers bring significant distribution and claims management assets to the table. But, is it the skill set that matters in this new environment? The unknowns are too numerous.
We are not convinced that Google wants to get anywhere close to this unless required to seed other high margin initiatives. But, there are plenty of known and yet unknown companies with world class predictive analytic platforms that could enter this market rapidly if desired and take on the underwriting risk: New capabilities center upon data capture, real time analytics, embedded sensing, and of course software systems.
What role will Carriers play? Will they build or acquire the connected car ‘brains’,? Or is the threat overstated? Will carriers maintain fundamentally the same role?
Vehicle manufacturers – be it Apple, Google, Tesla, Intel, GM, or Ford – could build and sell their smart intelligent devices, of which vehicles will be but one more in their portfolio. And carriers would continue to underwrite policies to achieve acceptable profit margins according to regulatory expectations.
We will continue to monitor with interest. We are at the starting blocks of the race, with the starting gun raised, and with most of the likely competitors – expected and unexpected – on the blocks, ready for the sprint.
So, given the certain uncertainty and relatively long time frame from an investor perspective, we are placing our bets with insurance carriers showing positive signals in responding to this new environment.
Our most recent quarterly review and scoring of publicly traded companies shows Allstate in particular with a relatively high score relative to industry peers. Across the broader Property & Casualty Insurance industry, AIG is most certainly on our radar as clearly the innovation leader, with XL Group Plc as an up-and-comer.
As always, detailed findings and reports on this and other industries including Industrials, Consumer Discretionary, Oil & Gas, Health Care, and Financials are available to Piercing View members. Join us!
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