Back in 2014, Warren Buffett was asked at the annual Berkshire Hathaway (NYSE: BRK) meeting what he thought about the emerging technology of driverless cars.
The question was posed by an investor who was particularly concerned about the future of Berkshire subsidiary Geico — the thinking being that autonomous vehicles would significantly reduce accidents, thereby making auto insurance companies obsolete.
Buffett’s response acknowledged the eventual threat of auto insurance disruption, but only halfheartedly. While admitting that driverless vehicles are “a real threat to the auto insurance industry,” he added the caveat that this would only be true if they prove successful.
Buffett proceeded to reassure the crowd that he would not think “for one second” of selling Geico, which he then went on to praise throughout the meeting…
Speaking on the matter later, Berkshire Hathaway vice chairman Charlie Munger mirrored Buffett’s general lack of concern, questioning how long it would actually take for driverless cars to gain mass appeal.
“Some of these things happen a lot more slowly than you might be think,” Munger said. “I have a feeling that self-driving cars that have a huge impact on the market might take a while.”
But Munger and Buffett are — in all likelihood — greatly underestimating the impact and penetration of autonomous systems. While it may very well take decades for fully driverless vehicles to completely rule the road, auto insurers will be feeling the pain much earlier than that.
Death by 1,000 Knives
Before cars ever become fully autonomous, the auto industry will adopt advanced driver assistance systems, or ADAS, in many different forms. These systems will be implemented in varying time frames, culminating in massive safety improvements for drivers across the world.
Among the most impactful ADAS technologies will be automatic emergency braking (AEB) systems, which detect impending forward crashes. These systems first alert the driver to take corrective action to avoid a crash and then apply the brakes autonomously if the driver does not respond.
AEB systems have been around for a number of years now but have generally only been available in luxury models costing $40,000 and above. The number of cars on the road currently utilizing AEB has not been enough to reduce accidents to any significant rate. However, over the next half decade, this will no longer be the case.
According to an announcement earlier this week by the National Highway Traffic Safety Administration (NHTSA) and the Insurance Institute for Highway Safety (IIHS), 20 automakers have agreed to make AEB systems standard by September 1st, 2022.
Automakers involved in the deal include virtually every major brand: Audi, BMW, Fiat Chrysler, Ford, General Motors, Honda, Hyundai, Jaguar Land Rover, Kia, Maserati, Mazda, Mercedes-Benz, Mitsubishi, Nissan, Porsche, Subaru, Tesla, Toyota, Volkswagen, and Volvo. For perspective, this represents more than 99% of the U.S. auto market (AEB will also be standard on most medium-duty trucks by September 2025).
The inevitable effect that AEB systems will have on the insurance industry is both dramatic and undeniable. According to a meta-study published by the independent safety bodies for Europe and Australasia (NCAP and ANCAP) in May, AEB technology leads to a 38% reduction in real-world rear-end crashes alone.
These findings are also supported here in the U.S. According to IIHS research, equipping vehicles with both warning and auto-braking systems reduces the rate of rear-end crashes by 39% and rear-end crashes with injuries by 42%.
Considering that rear-end collisions account for approximately one-third of all vehicle collisions, it’s pretty easy to conclude that standard AEB systems are poised to dramatically reduce accidents. The overall reduction in crashes from AEB systems alone considering these figures is 12%, with a reduction in injury crashes by 15%.
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It’s also worth noting that even if an accident is completely unavoidable, having the car slow down as much as possible before impact can deliver significant reductions in accident severity. Consequently, one would expect an inevitable decline in insurance premiums as accidents become less common and less severe.
As IIHS Board Chairman and CEO of American Family Insurance Jack Salzwedel explains:
Deploying AEB on a wide scale will allow us to further evaluate the technology’s effectiveness and its impact on insurance losses, so that more insurers can explore offering discounts or lower premiums to consumers who choose AEB-equipped vehicles.
Again, this is just the impact of AEB systems — one knife of many that will lower the demand for insuring automobiles.
In addition to AEB, auto insurers will need to contend with adaptive cruise control, e-mirrors, automatic parking, pedestrian protection systems, lane change assistance, lane departure warning systems, driver monitoring systems, traffic sign recognition, and a slew of other ADAS technologies poised to make the roads a much safer place than they are today.
Buy the Disruptor, Sell the Disrupted
On top of the obvious humanitarian benefit of ADAS comes the potential monetary windfall for investors. One strategy could be to bet on the decline of auto insurance by shorting already struggling firms such as Kingsway Financial Services Inc. (NYSE: KFS). Another would be to invest in makers of ADAS system components such as Nvidia (NASDAQ: NVDA).
In any event, investors should remain aware of the ongoing disruptive nature of new technologies facing the auto industry.
Until next time,
Jason Stutman
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