Though we are still years away from mass adoption, Warren Buffett has made it pretty clear that he’s worried about what self-driving cars will do to his insurance business.
At the 2014 annual shareholder meeting for Buffett’s Berkshire Hathaway (NYSE: BRK-B), he discussed the business prospects for the company’s Geico insurance division. During this discussion, he mentioned that the advent of self-driving cars is “a real threat to insurers if it’s successful.”
That was almost a year ago, and the advent of self-driving cars only seems closer with each passing day. While Google (NASDAQ: GOOGL) put the self-driving car on the map with its early and incredibly novel prototypes, just about every major car company now has some kind of self-driving car technology in the works.
And it’s not just car companies that are getting in on the action. Cisco Systems (NASDAQ: CSCO) and Nvidia (NASDAQ: NVDA) are part of a growing list of tech companies developing some kind of self-driving car technology.
Why exactly is Warren Buffett so scared of self-driving cars?
Consider that the insurance business is so attractive to Buffett because of “float.” Float is the time between collecting insurance premium money and paying out insurance claims. During this time the money can be invested to generate additional returns. Buffett likes float because it essentially gives him access to free money from insurance policy holders, and he can then generate a return on this money.
If self-driving cars eliminate or greatly reduce accidents, insurance companies would surely have fewer accident claims to pay out. But, as a result, driving would also be less risky and insurance premiums would be significantly lower.
With lower premiums there would be a lot less float, making the auto insurance business significantly less lucrative.
To be fair, Buffett doesn’t think this change is right around the corner.
“Geico will be doing a lot more business five and 10 years from now. But 30 years from now? I won’t be around to know,” Buffett said. He laughed at his comment, but the prospect must scare him to some degree.
Buffett has mentioned in another setting that he would expect only around 2% of new car sales in 2030 to be for self-driving cars. But even he admits that adoption of self-driving cars seems to be only a matter of time.
Buffett is famous for advising new investors to avoid buying anything that they wouldn’t want to be stuck owning if the stock market closed tomorrow for 10 years and they weren’t able to get out of their investments. This essentially means to buy things with a tremendously low risk of failing over the long term.
If Buffett is looking at his Geico business and realizing that its days might be numbered, I have to wonder whether it will fit his investment criteria for much longer.
That said, Buffett explicitly stated that he is not considering selling Geico.
“The truth is, if it’s a safer way of driving, it’s good for society and it’s bad for our insurance business,” he told MSN.
I think self-driving cars are indeed going to be very good for society and that they are, at this point, inevitable. There’s no question that technology is making our cars smarter. And if self-driving cars do, in fact, reduce accidents and the inherent risk associated with driving, auto insurance companies like Allstate (NYSE: ALL), Travelers (NYSE: TRV), AIG (NYSE: AIG) and Progressive (NYSE: PGR) will feel the pain.
That has to be worrying Warren Buffett.
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