
Driverless Cars Threaten to Crash Insurers’ Earnings - jseliger
http://www.wsj.com/articles/driverless-cars-threaten-to-crash-insurers-earnings-1469542958
======
paulmd
The other bubble that driverless cars are going to pop is ticket revenue.
There are a lot of police departments and cities who have structured a lot of
their budget on heavy-handed enforcement of motorists.

That's going to decline significantly once driverless cars are scrupulously
following the rules of the road. And any tickets that get written will be
going against a giant corporation like Google, with detailed information about
what the car was doing at the time of the supposed infraction, a lot more
financial ability to fight the ticket, and a lot more incentive to protect
their reputation.

~~~
ryandrake
What makes you think Google will fight my ticket on my behalf? Surely, it
would benefit them to have traffic laws written to clarify that the occupant
is still liable for any laws his self-driving car breaks.

Also, as the other commenter said, the laws will adapt. The purpose of traffic
laws is to maintain $X level of revenue, so if revenue starts to drop, local
governments will increase the number and complexity of traffic laws until
revenue is back to the expected level.

~~~
seizethecheese
The end state for driverless cars is most likely not individual ownership.
Large companies will probably own fleets of cars available for hail. In this
world, the fleet owners would probably develop a rigorous process to cost
effectively fight traffic tickets.

Even if local governments tried to increase the complexity of traffic laws,
the fleet owners would increase spending on fighting tickets; this would
result in an arms race which would be costly for the local government. It's
much easier to extract rent from the little guys.

The worry I have is of increased enforcement of local non-traffic laws to make
up revenue.

~~~
ryandrake
I'd expect it would be cheaper in the long run for those large companies to
influence laws to move ticket liability over to their customers rather than
take on the expense of fighting traffic tickets themselves.

~~~
seizethecheese
Possibly, but that's assuming no aspect of consumer choice in the survival of
ride hailing systems. If customers had to worry about tickets, they would
quickly migrate to a competitor which assumed liability.

~~~
pyre
The same way that competition ensures things like Net Neutrality because
consumers vote with their wallets?

~~~
seizethecheese
Most people don't care about net neutrality. Most people will care about
having to pay tickets in self-driving car fleets.

------
nappy-doo
I'd expect the WSJ to know better -- this article (while technically correct)
miscategorizes how insurance works.

First of all, the article states that premiums will go down -- a reasonable,
but not proven thesis. We don't know what will happen to insurance volume or
prices, both of which go into calculating total premiums.

Secondly, the article doesn't really describe to readers how insurers make
money -- almost no auto insurers make money directly on premiums. They make
money on the float they get from premiums. Competition prevents most from
making money on premiums directly, with some exceptions (GEICO, with the low
cost sales model comes to mind). A reasonable assumption is that float will go
down (again not proven), but we're also in an extremely low-interest-rate
world right now -- something that's tough on insurers anyway.

But almost neither of these points matter.

Auto insurance is a required by most states (some states allow you to have a
bond instead of insurance). It's mandated. These laws have to be repealed, and
likely will remain intact for years while the transition to driverless cars
happens. Similarly, liability and insurance will be required for malfunctions,
tampering, and bugs.

IMO, P&C insurance, and specifically auto insurance's, imminent death has been
greatly exaggerated.

~~~
notahacker
I don't see insurance dying overnight, but if their cars are _solely_ used in
driverless mode[1] then it's in the manufacturers' interest to take on that
risk directly: since they're ultimately liable for [virtually] all risks cars
are compulsorily insured for[2] it makes sense to cut out the middle men and
keep that float to themselves as well as streamlining the claims process. The
ability to make mandatory insurance contingent on getting cars serviced
expensively at approved dealers is a nice little bonus. So you get the
mandatory insurance certificate with the car,[3] and a whole bunch of B2C auto
brokers and insurers are left selling policies which are entirely optional and
which consumers consider much more unlikely to be claimed on

Sure, some parts of the industry (Lloyds reinsurance syndicates underwriting
the portion of the manufacturers' liability they're not willing to self-
insure, which is probably the idiosyncratic risk of a negligence claim over
software updates) still exist, but all those B2C players are fighting for a
much smaller share of the pie which continues to decline as more people switch
to exclusively driverless cars and they don't really get stolen any more.

[1]I think this is a _very_ big if in the foreseeable future, but it seems to
be assumed by the article.

[2]there's still a market for insurance against vandalism, fires not caused by
the car itself and [to a much more limited than before extent] theft, but
that's probably not compulsory in most jurisdictions and so a much tougher
sell for the insurance companies.

[3] they could even build in the annual policy renewal fee for the design life
of the vehicle into the purchase price if they really wanted to. I'm also
assuming here that there's no legal impediment to individuals' motor
liabilities being underwritten by a division of the vehicle's manufacturers in
most jurisdictions.

------
jimjimjim
Good.

just like universal unbreakable glass might hurt glaziers.

just like getting people to commit less crimes might hurt for profit prisons.

just like people not getting attacked might hurt self-defense courses.

I realize this is perfect-world absolutist thinking but industries that exist
because of something wrong in the world shouldn't have a right to exist when
that wrong is removed.

~~~
Aelinsaar
"Institutions will try to preserve the problem to which they are the
solution." -The Shirky Principle

~~~
heimatau
Great quote. I call it corruption, self-preservation that hurts the masses,
and status quo thinking. Technology is going to hopefully disrupt all of this.

~~~
Aelinsaar
It's the only thing that can, if history is any guide. Society and "ethics"
are so often a function of our technology, however simple we now consider that
tech to be.

------
elgabogringo
The article's title is a little misleading. This would shrink the market as a
whole. Revenue would go down and earnings would go down as a result. _However_
, it wouldn't have to affect profitability.

In fact, profitability would probably go up on these policies initially since
the safety benefit would be immediate, but the implied risk in the policies
would only come down over time as the safety works it's way into statistics.

(Apologies if I'm not using correct terms. Not an actuary.)

~~~
paulmd
Only if the insurer in question is solely involved in auto insurance.

From the insurance company's perspective, they need enough of a capital
reserve to mitigate the risk of a sudden shock in payouts. Spreading across
larger geographic areas mitigates that risk somewhat, as does spreading
through multiple businesses. Auto insurance is probably a particularly nice
gig since it's relatively unaffected by things like natural disasters and
would have a relatively smooth cashflow.

So, less capital from auto insurance means more capital has to come from
somewhere else - more borrowing, if nothing else. That probably translates
into either reduced profitability, or higher premiums on other kinds of
insurance.

I'm not an actuary by any means, but that's my guess.

------
tw04
Why would they lower prices? The government mandates we MUST have insurance,
so they know they've got a continued source of business. They'll simply
increase profits. The average American has absolutely no way to correlate the
amount they pay for insurance to what it costs the insurance company.

~~~
bjterry
They can't do that because other companies will undercut them to gain market
share. They could collude to set prices, but that's illegal in the US. Also,
some auto insurance companies aren't organized as corporations, such as the
Auto Club of Southern California, which is a not-for-profit mutual. They
aren't saints, but since they redistribute most of their profits to
policyholders, they don't really have much incentive to keep prices high.

~~~
jedmeyers
Corporations have been doing illegal things for a while now. All you have to
do is to share a reasonable part of illegal proceedings with the government -
it's called a 'fine'.

~~~
JBReefer
Please don't be edgy and dismissive on HN

~~~
jedmeyers
I am not edgy, I am pointing out that just if something is 'illegal' it does
not mean corporations won't do it.

~~~
pyre
The fact that something is illegal means that there is a risk in doing it, and
a cost in hiding it. It's not quite the same situation as if colluding were
completely legal and above-the-board.

------
iamleppert
Another thing that's going to take a huge it is police departments. Many of
the initial encounters with police are by way of a traffic stop and patrol.
With a self-driving car, there's no longer "probable cause" because the car is
driving itself. This will cut off a huge source of income from the police and
at the same time reduce the need to have so many police, which, in my mind, is
a good thing. Expect entire highway patrol and regional agencies to be
shuttered.

------
dougmwne
Isn't a healthy accident insurance industry a form of the broken window
fallacy? There's a few people in my life I'd gladly have back and shrinking
insurance companies would be a tiny price to pay.

------
chris_va
Insurance is a field in need of some disruption, regardless. A few numbers, in
case people find it interesting.

The average insurance company only pays out about 50% of its income as loss
(heavily dependent on sector, but for auto it's about right). For auto, they
all use more or less the same ISO policy docs. They mostly all use the same
call centers. Their adjustors are usually shared. Honestly, the only thing
that really changes is the marketing.

Which is why 30%+ of every dollar you pay them goes to marketing. For auto,
they are in this weird local maxima where 40% is loss, 30% is marketing, and
30% is profit. They expect to keep a customer for about 2-3 years, and then
have to repeat the whole process. It is really sad.

------
paulsutter
An improvement in safety is wonderful news. The public spending less money on
insurance is wonderful news. All the individuals busy managing an auto
insurance business have plenty of time to find a better use of their energy.

------
squozzer
Not sure how it would affect prices, but if driverless cars (let's call them
autopilot-mobiles) take over the world, they may not be owned by individuals
anyway, but instead bought as-needed from corporations (e.g. "Just $100 a
month for the Commuter Plan".) This would shift insurance industry focus from
insuring millions of individuals to thousands (or maybe only dozens) of
corporations, so they could also save money on advertising. I will miss the
gecko. And Flo (a little.)

~~~
shimon
And if it is dozens of corporations, there's no reason they wouldn't just
absorb the insurance function. Right now because insurance is bought by
consumers there's tremendous value in having a recognizable consumer-facing
brand (Gecko & Flo). But if the car provider already has the ongoing consumer
relationship, offering the insurance is a straightforward financial feature.
Plus they'll be way more informed about the risk characteristics of their
customers and vehicles. I don't see any remaining reason for separate auto
insurance companies to exist if this version of car purchasing takes over
individual ownership.

------
Artlav
Correct me if i'm wrong, but wasn't "insurance" a criminal activity a mere
century ago?

If so, why is it bad for it to disappear again?

Can't read the full article, since wsj have a competently implemented "To Read
the Full Story, Subscribe or Sign In" shield.

~~~
cloudjacker
There are many forms of gambling that were prohibited until they were renamed
in a way that appeased influential religious communities.

Off the top of my head I can think of insurance products and the futures
market.

But if you can find citations that will be very helpful for me!

~~~
sliverstorm
Insurance is used for a fundamentally different purpose, to socialize risk.

A good quote I found: _insurance transfers risks that already existed;
gambling creates risk for entertainment._

~~~
cloudjacker
A rationalization for Evangelicals. Once you realize the distinctions are all
rationalizations to appease people that require cultural distinctions, you'll
stop trying to rationalize a difference between financial chances.

Think "why am I more comfortable with gambling because my state mandates I pay
it" and think about what circumstances led to that, and then think about what
prompted you to care at all.

------
hx87
Shouldn't the drop in revenues be balanced by the decrease in payouts?

~~~
dsfyu404ed
What they get from the customer covers operating costs and payouts. Insurance
makes money by investing that mountain of cash. Smaller mountain, smaller
profit.

------
bubbleRefuge
Still think there will still be a market for old school non automated cars.
For the hobbyist or pleasure drivers on weekends. People still love their
cars.

------
BurningFrog
Other declining industries will be emergency health care and organ
transplants.

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finnh
In a perfect world, we wouldn't need insurance (everything would go right all
the time). The closer we get to that perfect world, the better.

------
dsfyu404ed
Am I the only one who bothered that seatbelts (1968) weren't included on the
death per billion vehicle miles graph?

------
thomasthomas
if the insurance companies can keep state laws in place, perhaps less revenue
but also less payouts = more profit(?)

