The future of the auto insurance industry

[JBird]

Would people really feel safe or comfortable with a computer guiding their cars? Besides, even on planes and trains where everything is highly automated and human input is designed and forced to be minimal, humans still have to be at the controls.

 

Clearly the effectiveness and reliability of the computer system matters a great deal in answering that question for any specific situation. But given a computer system with enough quality and reliability, there's very little I wouldn't let it do. I'd go so far as to say I'd let a computer-operated machine perform surgery on me. And I don't see any reason why a computer system can't be more safe and effective than a human driver.

[StubbleJumper]

OK SJ, I getcha -- tone down the scaremongering  ;D ;D

 

Points well made, probably not a big deal.  And as Buffett is still so positive on GEICO, I'd say the truth is far closer to your not-a-big-deal scenario than my what-if scenarios.  ;)

 

As for the 92% CR, again you are right to question it's sustainability, but my understanding (prior to reading about AVs!) was that their direct model is so difficult to replicate, that GEICO is increasingly gaining scale and efficiency advantages over the competition, a virtuous circle.  Plus they've been investing so heavily in the last few years (for future growth) that if anything their reported CR is overstated.  Do you think that's not the case, or are you perhaps just being conservative?

 

 

I can't really speak to Geico's operational efficiencies and whether they are fully replicable by other firms.  The only observation is that a 92 CR and 5 percent investment returns leaves a fair bit of incentive for others to (unwisely?) bring new capital to the industry.  The death-knell for good returns in the insurance industry are good returns.  For this reason, even the old man would probably be happy with any sub-100 CR over the longer term and 92 is unthinkable (isn't it?).

 

SJ

[Uccmal]

Interesting topic, if a little premature. 

 

It takes deeper thinking than just whether people will have accidents or need insurance.  Will we even need to own cars?  Doesn't it make vastly more sense to operate as fleets. 

 

Today, you drive 40 miles to work,pay for parking, drive home, and park your car in your driveway where it sits for hours unused.  Or, you drive to the train station, pay to park, take the train to work - the car sits idle most of the day. 

 

My family operates two cars, which sit in the driveway most of the time.  With a fleet concept, you pre book a car to come get you, drive you to public transit, pick you up etc.  The car goes on to take someone else for shopping during the day, and so forth.  With all electric vehicles, and modern composite materials, the maintenance requirements become minimal, allowing the vehicle to run 18 hours a day, and then take itself to a cheap car park for recharging,or a garage for required maintenance. 

 

The mode switches dramatically from owner operators to cell phone type service plans, and pay per use.  You can bet that somewhere in GE, and Google this idea is being worked up right now.  GE is the world's largest car leaser.  It is a paradigm shift that is underway, rather than just a change in the needs or ways that insurers operate.  Obviously, it is still premature but I suspect it is on its way.

 

I like driving okay, but on long trips or in heavy traffic I would be happy to do something else,while the car takes me somewhere, without the stress of dealing with a cabbie or a fat guy taking half my seat. 

[Peregrine]

Would people really feel safe or comfortable with a computer guiding their cars? Besides, even on planes and trains where everything is highly automated and human input is designed and forced to be minimal, humans still have to be at the controls.

 

Clearly the effectiveness and reliability of the computer system matters a great deal in answering that question for any specific situation. But given a computer system with enough quality and reliability, there's very little I wouldn't let it do. I'd go so far as to say I'd let a computer-operated machine perform surgery on me. And I don't see any reason why a computer system can't be more safe and effective than a human driver.

 

That's interesting. I think that most people, knowing that any small mistake while driving can mean life or death, would choose to have their fates placed in their own hands rather than a computer's even if in theory the possibility of life-threatening accidents is lower in the latter case. I agree with you that the efficacy of such technology will play a major factor in driving behaviour.

[jeffmori7]

There were some interesting discussions in another topic about this.

 

Here is a link I posted back then:

 

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/anyone-think-rental-cars-(and-possibly-firms-hertz-avis-etc)-are-the-future/msg132542/#msg132542

[Liberty]

Would people really feel safe or comfortable with a computer guiding their cars? Besides, even on planes and trains where everything is highly automated and human input is designed and forced to be minimal, humans still have to be at the controls.

 

Clearly the effectiveness and reliability of the computer system matters a great deal in answering that question for any specific situation. But given a computer system with enough quality and reliability, there's very little I wouldn't let it do. I'd go so far as to say I'd let a computer-operated machine perform surgery on me. And I don't see any reason why a computer system can't be more safe and effective than a human driver.

 

That's interesting. I think that most people, knowing that any small mistake while driving can mean life or death, would choose to have their fates placed in their own hands rather than a computer's even if in theory the possibility of life-threatening accidents is lower in the latter case. I agree with you that the efficacy of such technology will play a major factor in driving behaviour.

 

This happens all the time over the course of history. At first, people don't trust a new technologies. Then they see it in action over and over again, they get used to it, and after a while they stop thinking about it and trust it. People who grow up with it don't even question it. It's the transition periods that cause these hesitations.

 

I'm sure it happened with ATMs at first. Do I want to give my money to a machine? What if it swallows it and doesn't credit my account? What if there's a problem, who do I talk to? What if I make a mistake on the buttons and screw everything up? How can I trust what's happening inside of the machine? etc.

[WhoIsWarren]

OK SJ, I getcha -- tone down the scaremongering  ;D ;D

 

Points well made, probably not a big deal.  And as Buffett is still so positive on GEICO, I'd say the truth is far closer to your not-a-big-deal scenario than my what-if scenarios.  ;)

 

As for the 92% CR, again you are right to question it's sustainability, but my understanding (prior to reading about AVs!) was that their direct model is so difficult to replicate, that GEICO is increasingly gaining scale and efficiency advantages over the competition, a virtuous circle.  Plus they've been investing so heavily in the last few years (for future growth) that if anything their reported CR is overstated.  Do you think that's not the case, or are you perhaps just being conservative?

 

 

I can't really speak to Geico's operational efficiencies and whether they are fully replicable by other firms.  The only observation is that a 92 CR and 5 percent investment returns leaves a fair bit of incentive for others to (unwisely?) bring new capital to the industry.  The death-knell for good returns in the insurance industry are good returns.  For this reason, even the old man would probably be happy with any sub-100 CR over the longer term and 92 is unthinkable (isn't it?).

 

SJ

 

My understanding is that the industry generates a CR of 100%+....but that the direct insurers such as GEICO and Progressive are simply able to offer the same service for cheaper.  The good returns don't attract in new capital because the new capital is on a much higher cost structure. 

 

This argument seems logical to me, which is why I was giving GEICO the benefit of the doubt.  But I'd be interested to hear if others have done the analysis and think otherwise....

 

Cheers

[jeffmori7]

A really interesting article on self-driving car, and some great insights on Google X :

 

http://www.newyorker.com/reporting/2013/11/25/131125fa_fact_bilger?currentPage=all

[WhoIsWarren]

Interesting that the topic of self-drive cars (AKA Autonomous Vehicles) came up at the Annual Meeting. 

 

It came up as part of an answer on usage-based insurance.  Below are someone's notes (not mine) on the question and answer -- see link.  The answers are similar to what we worked out -- probably a long way off, but potentially dramatic.  Perhaps someone present at the meeting can flesh this out.

 

http://www.scribd.com/fullscreen/222378257?access_key=key-1dl9ygksfduxt5zix4ib&allow_share=true&escape=false&view_mode=scroll

 

Q: GEICO and usage based pricing?

 

WB: Progressive does “snap shot”, which is the most known usage based pricing. There’s no doubt that knowing the habits of your drivers will help you evaluate the  propensity of loss. It’s easiest to know with life insurance—at 90 and at 83, someone is more likely to die than someone at 20. There are various variables in insurance and you try to assess those variables and set the  proper price for the policy. If you lived in a state with 1 person, there would be a lot less likelihood of getting into an accident. Usage info is trying to figure out the likelihood of that particular driver to be in an accident. We think we have a lot of very good and important variables. I feel very good about GEICO’s management and their ability to evaluate risk. But we ought to keep asking ourselves can we do it better?

 

When you get to the self-driving car, that is a real threat to the auto insurance industry. If that leads to less accidents, then that is very good for society and not good for the auto insurance industry—but in any case we would not be thinking about selling GEICO.

 

CM: These changes can take quite a while. Self-driving cars might take a while.

 

WB: But we could be wrong.

 

CM: We could be wrong.

 

WB: But if we are wrong, we’ll be wrong together. GEICO will be doing more business in ten years than it is doing now