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Will Autonomous Cars Be the Insurance Industry's Napster Moment?
An anonymous reader writes: Most of us are looking forward to the advent of autonomous vehicles. Not only will they free up a lot of time previously spent staring at the bumper of the car in front of you, they'll also presumably make commuting a lot safer. While that's great news for the 30,000+ people who die in traffic accidents every year in the U.S. alone, it may not be great news for insurance companies. Granted, they'll have to pay out a lot less money with the lower number of claims, but premiums will necessarily drop as well and the overall amount of money within the car insurance system will dwindle.
Analysts are warning these companies that their business is going to shrink. It will be interesting to see if they adapt to the change, or cling desperately to an outdated business model like the entertainment industry did. "One opportunity for the industry could be selling more coverage to carmakers and other companies developing the automated features for cars. ... When the technology fails, manufacturers could get stuck with big liabilities that they will want to cover by buying more insurance. There's also a potential for cars to get hacked as they become more networked."
Analysts are warning these companies that their business is going to shrink. It will be interesting to see if they adapt to the change, or cling desperately to an outdated business model like the entertainment industry did. "One opportunity for the industry could be selling more coverage to carmakers and other companies developing the automated features for cars. ... When the technology fails, manufacturers could get stuck with big liabilities that they will want to cover by buying more insurance. There's also a potential for cars to get hacked as they become more networked."
but premiums will necessarily drop as well and the overall amount of money within the car insurance system will dwindle.
You have no idea how this works, does you? How much you pay for a service has nothing to do with how much it costs to provide a service. It's a matter of how much the market will bear. Why else do you think there are rubes out there still paying for text messages?
And the auto industry has it good, at least here in the states... I don't think there is anyplace it's legal to drive without insurance. They got you coming and going.
"but premiums will necessarily drop as well"
What evidence is there for this statement? Insurance companies are not known for lowering rates. My rates continue to go up even as the value of my vehicles diminishes and I have 0 accidents, 0 claims and 0 tickets on my record.
Ain't nothing going to happen with autonomous vehicles until they solve the rain and snow problem. Maybe California doesn't have to worry about vehicles in precipitation, but the rest of the nation does.
the major advances in civilization are processes which all but wreck the societies in which they occur - A.N. White
Insurance companies don't really make money from 'betting' against you having an accident. They make money from the fact that they end up holding huge accounts full of accumulated premiums which they then use to play in the global financial markets. There are still plenty of things that need insurance, so the industry won't exactly disappear, but I'm sure any displaced insurance industry workers will quickly find another way to play the global slot machines with your savings.
With automated cars, taxis will become much less expensive meaning that fewer people will buy cars so fewer people will need insurance. 20 years from now things are going to be VERY different...
The napster situation and the driverless cars are not analogous.
As to falling revenue... the mistake here is conflating the fees with "Profit"... that's revenue.
Technically I can make more money selling you something for 1 dollar as a percentage of expenditure than I can for something I sell for a million dollars.
Companies that sell seemingly cheap shit are often very profitable. Why? Because it easier to over bill someone for something really cheap then it is to over bill them for something really expensive.
If I sell you a candy for a dollar and it costs me 10 cents to make that candy then I'm making 90 cents profit on every dollar of revenue. Could I do that if I were selling you something for a million dollars? Much less likely. This is why for high ticket items the profit margins tend to shrink.
On the point of insurance, the profit is the revenue they take in minus the cost of paying out claims. Now they increase the fees based on two things.
1. What they estimate their claims are going to be.
2. What they think you're willing to pay which relates to what your competitors are offering, market conditions, etc.
Now if the autonomous cars crash less that means the estimated claims are going to go down. And that means costs go down. And that means that due to competition, your competitors are going to lower fees for that insurance because they can get a competitive advantage by doing that. This forces you to lower your own fees until the set price hovers somewhere above costs based on market conditions.
Now for a business to be profitable it has to make a certain percentage profit on capital expenditure. Otherwise your business doesn't make sense. Even making a tiny profit doesn't make sense because there are more profitable things to do with the same amount of capital and you'd be better off closing your business down and doing that other thing instead.
So you need a certain percentage profit. And that means since its on a percentage basis that reducing revenue doesn't actually mean you lose profitability so long as the percentage holds.
Lets say the insurance business goes from collecting 100 billion in fees to 50 billion. Okay... but if the percentage of the fee that goes to profits remains the same then the business while smaller will remain as profitable as ever.
You can't say the same for the music business. What has killed them is that the percentage profits has collapsed ALONG with the revenue. Both collapsed at once. AND the whole thing poses an existential threat to the record industry itself.
That would be a napster moment.
What is more, if anything, I could expect percentage profits to go UP as revenue declines due to cheaper policies in auto insurance. That is, I believe people will get less price conscious as the absolute fees go down. So lets say it costs me 20 dollars per person to offer this insurance to you. Could I get away with charging your 30 dollars for the policy? I could do that much more easily than if the costs were 200 dollars and I wanted to charge you 300 dollars for the policy.
See?
If anything insurance should get more profitable as costs go down. The actual percentage profits of high ticket businesses is often anemic. I've seen lots of businesses get by year after year on 2 to 5 percent profit margins and that is a TOUGH business.
Just think about that... servicing customer after customer and making 5 cents for every 95 cents you spend servicing them. But that's not uncommon.
Ideally where you want to be as a business is having as high a profit margin as you can possibly get your greedy fingers on.
50 percent... 100 percent... 500 percent. You want big fat margins. Even a little renvenue at those margins is gold because it gives you lots of wiggle room to absorb unexpected losses or shifts in market conditions.
If you're making 2 percent per transaction and things change... you could easily be LOSING 20 percent per transaction. *snaps fingers* in a heart beat.
I've decided to stop wasting my time responding to AC trolls/sockpuppets... so if you want a response from me... login.
Auto repair shops
Gas stations
Auto parts stores
Taxis and Limos
Motor sports
Motor vehicle related advertising
None of these survive as they exist today. There's probably a dozen more.
Enough with this shit. The "gold standard" Google cars aren't even close to being able to drive themselves autonomously today. WHY DOES EVERYONE KEEP THINKING THIS IS ACTUALLY GOING TO HAPPEN???
I would venture to bet things like lane guidance and the ability to drive a straight line on a limited access highway will be required by 2035, but if anyone thinks cars are just going to magically drive themselves everywhere in 20 years, they're out of their goddamned minds.
And I'll still be driving my manually driven car. Fuck you if you think I'm going to let Google drive for me, they can't even build a usable fucking smartphone in 2015...it'll be a cold day in hell before they're responsible for safely piloting me around in a 2 ton death machine.
as well as whatever profits the company can get away with
Insurance companies are regulated by the states which cap their profits. It isn't about what they can get away with, they get what they are allowed. That is the devil's bargain they make for being the provider of a product required by law.