I find often people get so caught up in everything going on around them that it’s hard to step back and notice the big picture. The most obvious call to me to be made in the insurance sector is that auto insurance is entering a long term decline.
In fact, the awareness of this risk is one of the many reasons Informed chose to specialize in home insurance instead of auto. While I have admittedly been early with this view (it’s one I have held for close to 10 years now), I still think the way we drive in this country will undergo major changes that materially reduce the demand for auto insurance.
Certainly companies in the industry are aware of these threats (Progressive buying ASI in 2014 was a tacit admission of the risk to auto) but they have moved to the backburner in recent years. Just because it hasn’t happened yet, doesn’t mean it won’t happen ever. In fact, it makes people complacent and they get surprised when the change eventually sneaks up on them (sort of like inflation has).
Yes, to some degree this is about our self driving future, but there are other key trends that are important as well. Let’s look at some of the issues:
Increasing Auto Fatalities
Deaths from auto accidents are up 12% yoy and nearly a third over the last decade. What happened to safer cars and ever declining frequency?
Normally, moderately increasing loss costs are good for insurance. One of the concerns back in the day was frequency was getting too low and shrinking exposure which is unhealthy for industry growth. Compare that to health insurance where trend is always increasing and thus revenue grows and you can create operating leverage.
However, while increased accidents, in a vacuum, may be positive for auto insurance economics (as long as they are predictable and not unexpected), we have two big problems to deal with first.
First, while the only alternative to needing health insurance I guess is to upload your conscience to the metaverse and live virtually, there is an alternative to driving a car and putting yourself at risk. You can let the car drive you.
While there is a lot of public fear over autonomous vehicles, the reality is they will reduce traffic deaths. Once people come to realize self driving cars are safer, they will displace human drivers and the need for most parts of an auto insurance policy.
Second, increased traffic deaths attracts regulatory scrutiny. Public officials will feel pressure to put in new policies to reduce fatalities. What is the best option they have to do so? More safety features that prevent reckless humans from driving poorly? The grim statistics have proven that doesn’t work well enough anymore.
No, regulators will realize they need to accelerate the transition to self driving cars for safety reasons. In the same way that the government provided financial incentives to EV producers, they will decide to pay rebates to buyers of self driving cars. This is inevitable.
As an aside, this is very bearish for litigation finance firms who have been making hay on large commercial auto verdicts. Trucks will go driverless before passenger vehicles. Yes, this will crush commercial auto premiums too but the bigger losers will be the lawyers who will lose access to jackpot justice.
Lack of Interest
Younger generations are less interested in driving. Only 60% of 18 year olds have a license vs. 80% forty years ago. Getting a license isn’t a rite of passage anymore.
There are more alternatives to driving for that crowd. The most obvious one being Uber, but also delivery services.
You don’t need to drive to pick up your dinner. You have an app direct a paid driver to deliver it to you. You don’t need to drive to Walmart to buy things. Amazon delivers it to you.
It’s no longer necessary to drive to get things you want, so why get a license? And to state the obvious, if you don’t drive, you don’t need insurance.
We’re not all going back to the office. Obviously, commuting is one of the main reasons to drive (and main causes of accidents). If you work at home half the time, you are driving half as much.
By the way, if you are commuting half as much, maybe you consolidate to one car to save money. For those few times where you need two vehicles, well, you call an Uber.
Furthermore, using cars more efficiently is another reason to accelerate driverless vehicles. It’s more efficient to have the driverless car drop me off at work, return home, then take my wife to work and return home rather than have two cars parked in a lot all day.
Cost of Ownership
If you haven’t noticed, car prices have gotten more expensive. If you can get by with a one car household, it’s a big savings. Add in that the cost of repairing a car after an accident is rising due to part shortages. Throw in the increased rate of accidents and higher court judgments and the cost of insurance (per mile) will continue to rise.
Oh, and interest rates are headed higher, so the 0% financing days are a thing of the past. Twenty years ago if driving got more expensive, you didn’t have much choice. You still had to get in the car each morning to get to work.
Now? Not so much. Maybe you work at home. Maybe your order in. Does it make sense to pay more for a car that you use less? Not really.
If you don’t own a car, you don’t need to pay insurance on it. If you own one, but drive it less, you can save on insurance by going usage based. You may also trade down to a cheaper car which will lower your physical damage premium.
EVs are more complicated to repair. Mechanics are less familiar with them, there isn’t a large aftermarket of replacement parts, and batteries are expensive to replace. This will all pressure severity.
While insurers can price for this, it will probably take them some time to refine their models. They also risk losing share to embedded efforts from OEMs trying to leverage their own (theoretically more accurate) data.
But the bigger issue is Tesla and Uber’s plans to develop “robofleets” of self driving cars. If we’ve established usage will decline for the reasons above and, economically, EVs don’t make sense if they sit in a garage most of the day (since given the lack of fuel costs, the savings increase with miles driven), then the best way to increase utilization is to “rent” self driving taxis that take you to and from destinations rather than drive yourself.
Once again, the logic for autonomous vehicles wins out. First, we improved safety. Now, we improve the ecomomics of car ownership.
This all will lead to a rethink of our national highway system. Dedicated self driving lanes will appear (first for trucks, but later cars) which will make our road traffic behave more like airline traffic. Even if you want to drive, you will be assigned a “flight plan” where you get assigned to a lane and have to maintain your speed in the flow of traffic.
All that money invested in telematics…goodbye. We don’t need to predict driver behavior anymore. It will all largely be the same. Time for a new underwriting model!
Sure, maybe I watched too much of the Jetsons growing up, but this is not science fiction anymore. Why would I buy auto insurance in this future? If I’m one of the remaining human drivers, I may need to protect against someone going rogue and hitting me but the frequency of that will drop tremendously.
One of the basic fundamentals of valuing companies is forecasting its cash flows out into the future. What is the terminal value of an auto insurer? It’s pretty small, isn’t it?
Why isn’t the auto insurance business the next AOL or Blockbuster or Sears? It is not hard to envision a world where it doesn’t exist.
From a public policy perspective, is it more important to have a thriving auto insurance industry that pays the advertising bills for media conglomerates or have fewer people dying in their cars, more efficient use of cars with its attendant climate benefits, higher GDP and productivity as people can do more productive things than steer a car around, and significant financial savings as people spend less on transportation and can redirect that money towards other consumption.
I’m pretty sure the politicians aren’t going to go out of their way to save the auto insurers. Make hay while you can, because the future is bleak.