“Self-driving cars are a real threat to auto insurance business,” Warren Buffett said at the 2014 Berkshire Hathaway annual meeting. It was a comment that didn’t get a lot of attention at the time, but suddenly now everyone seems to be talking about self-driving cars and driverless cars.
With Google testing self-driving cars on public roads, some have touted this as a bellwether for a quickly approaching age of automation that has the driver taking the back seat.
Mercedes, BMW, Audi, and Tesla are just some of the companies that are moving ever closer to self-driving cars with a host of collision avoidance features that respond quicker and more precisely than a human operator can.
As for actually being self-driving, Mercedes-Benz wowed consumers at the Consumer Electronics Show in Las Vegas this past January with its self-driving car prototype, the F 015. Mercedes even created a video of its Blade Runner-esque vehicle driving itself to the trade show.
So, if this world is approaching, what does it mean for Berkshire Hathaway’s GEICO, or other auto insurers? Are they really dinosaurs unaware that a mega-asteroid is approaching to wipe them out?
Not So Fast
Bryan Reimer, a research scientist in the MIT AgeLab and the Associate Director of The New England University Transportation Center, doesn’t think the driver is headed for extinction just yet, or even in the near future.
“These technologies show a lot of promise, however, you are not going to get into a black box and say ‘take me somewhere’ at the consumer level,” notes Professor Reimer. “New technologies will reduce fatalities and accidents, but it won’t eliminate them.”
There’s Still a Need for the Human Operator
“Higher levels of automation in the vehicle will still have humans in a supervisory role,” Reimer adds, noting that the sophisticated auto-pilot in planes still has human operators even with planes separated by thousands of feet of airspace. “The more automation, the more skill and training you need,” professor Reimer explains, pointing out the extensive training that pilots undergo. In the case of cars, “we have no equivalent educational structure in place.”
He also adds that with the close spacing of cars, which can be in fractions of a meter, and the variability of road conditions, it make roadways “a much more dynamic environment and harder to predict.” With the enormous number of cars on the road, often coming from different directions, it makes “the speed of decision-making much tougher.”
In addition, any self-driving technology will have to coexist with human drivers for a long time to come. “If everything was automated, it would be much easier,” Reimer adds, noting that we have a tendency to both “over-trust and under-trust technology.”
Google has conceded that during its test phase it has had 14 accidents over a span of six years and 1.9 million miles, but that enviable record didn’t come in the real world conditions of New York City rush hour traffic.
As self-driving cars move into the unpredictable world of everyday traffic, accidents happen. One of those accidents happened on July 1, 2015, when one of Google’s Lexus SUV prototypes was rear-ended in Mountain View, California. The crash sent three Google employees to the hospital with symptoms of whiplash.
Eleven of the fourteen accidents Google has had were rear-end collisions brought about by non-self-driving cars, highlighting the same potential danger for self-driving and non-self-driving vehicles.
A Wide Variety of Insurable Risks
Self-driving cars won’t mean the elimination of hazards. For example, there were 250,000 flood damaged cars from Superstorm Sandy in 2012, and in 2013 there were 699,594 cars reported stolen. Add to the mix everything from trees falling on cars, to vandalism, and there are not going to be many people that want to drive their new car without fire, theft and collision insurance. There certainly will be changes in insurance needs, as changes in the ownership structures mean more car-sharing and ride-sharing scenarios. The popularity of Uber and Lyft has already seen GEICO respond with ride-sharing insurance, which launched this past February, and you can expect more policy innovations as insurers meet new consumer demands.
A Safer World that Still Needs Insurance
We live in a lot safer world than we did a hundred years ago. Commercial buildings have automated sprinkler systems and fire alarms, and homes have smoke detectors and burglar alarms, yet they both still have fires and break-ins, and they still need insurance.
It’s likely that cars and trucks will too.
(This article has been updated since it was published.)
© 2015 David Mazor
Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.