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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 It will be interesting to see if they adapt to the change, or cling desperately to an outdated business model like the entertainment industry did.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 It will be interesting to see if they adapt to the change, or cling desperately to an outdated business model like the entertainment industry did.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."
"You have no idea how this works, does you?"
Well, Actually you're both wrong. I have several family members, and family friends at various levels in the insurance business. Two aunts are agents, a family friend owns an independent agency, and one uncle used to work for an insurance company.
Insurance is a HIGHLY regulated industry. By state law, and I can only speak to Oregon and Washington because that's where my family is, the total sum of premiums minus claims must be at or near zero at the end of the fiscal year.
Your next question is "How do they make money?" I know it was my first question when I learned this. Very simply put, they invest the premiums on the open market until they are needed for a payout. Essentially, the insurance companies make money earning interest on the premiums you've paid. They are able to hold those investments for longer periods of time by re-insuring (insurance company A buys insurance from insurance company B to cover payouts) to squeeze just a little more profit out from the investments.
So, here's the rub. Legally speaking, if claims take a dramatic dive, so must premiums. Granted, it won't happen over night, but it must happen. If the insurance company is keeping too much of the premiums, there will be problems with the state regulators. This means there will be less money for the insurance company to invest, thus less interest to earn. While the premium minus claim sum will remain the same, all the profit in the middle will disappear.
Without a drastic change in operation, business model, or something, this could mean real problems for an insurance company. If you think the mergers going on now in the telecom / entertainment industries are something, wait until the crunch hits insurers. It's entirely conceivable that when all the dust settles there could be one or two major auto insurance companies, and that's about it.