Will Driverless Cars ‘Eviscerate’ Insurance Industry?

July 27--Safer cars, including driverless ones, are likely to "eviscerate" the car insurance industry, according to one auto insurance analyst. But until that day of reckoning comes, new technology also will make it easier and cheaper for carriers to sign up policyholders.

That's the take of Meyer Shields, managing director and analyst for investment firm Keefe Bruyette & Woods. Shields recently discussed how technology will upend the auto insurance industry on his firm's "All Things Financial" podcast.

First, there is "a lot of smart money" being spent building online insurance shopping websites, like Google Compare, CoverHound and Compare.com. Such sites make it easier for consumers to size up coverage. Still, some major carriers, including State Farm, Geico and Northbrook-based Allstate, aren't active on those channels.

"This sort of platform has been incredibly successful in the U.K., but much less so in the U.S.," he said. "As these platforms become better known, and more recognized brands sign up, there's reason to expect these options to gain traction and, in doing so, to drive down insurance companies'" costs to land policyholders.

Rocketer, a London-based "Facebook optimization platform," also fascinates Shields. It's using data from Facebook "to identify which insurance company's risk appetite best matches up with a particular driver," he said.

"They even customize that insurer's advertising to best appeal to that potential customer," Shields said. "We see significant savings potential when companies spend less time reviewing policy applications that really don't fit what they're looking for."

Another example of technology affecting the car insurance industry is the use of "telematics," including plug-in devices and smartphone apps that track driving behavior and, therefore, can be useful in pricing and underwriting.

"Even though Progressive has been a leader in developing this tool, we're not convinced that it's showing either remarkably better growth or better profitability than Geico, which so far hasn't shown much interest in revising its risk selection algorithms," Shields said. "But that could be a short-term pricing mismatch that will eventually work for Progressive."

Increasingly safe cars, including driverless vehicles, could have the biggest impact on insurers.

"Ultimately, these advances are likely to actually eviscerate the personal auto insurance industry," Shields said. "The one thing we can't say with any confidence is how long it will take."

He's not the first to make that dire prediction. In 2012, financial industry consulting firm Celent published "A Scenario: The End of Auto Insurance: What Happens When There Are (Almost) No Accidents?" In early 2014, that report's author, Donald Light, told the Tribune that what he once considered a "provocative but plausible" scenario was now "probable."

Keefe Bruyette & Woods has an "outperform," or buy, rating on Allstate, and an "underperform," or sell, rating on Progressive.

"Non-auto insurance products represent a much bigger share of Allstate's earnings than of Progressive's," Shields explained. "Ultimately, however long this takes, Allstate's operations are less exposed to the threat of technological advancement than Progressive's."

Similarly, Deutsche Bank analyst Joshua Shanker recently downgraded Progressive stock to "sell."

While fewer accidents help the car insurance industry in the short term, "it seems a slippery slope to where it becomes detrimental to the rate insurers will be able to charge," he said, particularly when the "autonomous car revolution" is 10 or 20 years away.

"Progressive tends to have a significant concentration of its book of business with younger drivers who are likely the earliest adopters of disruptive technological change," Shanker wrote in a July 19 report. "Progressive may find its way to dominating this new kind of auto insurance world, but it also may find its products completely unnecessary in 2030."

That's likely one reason Progressive bought a homeowners' insurance business recently, he said.

"Over the long term," Shanker wrote, "we believe technological change in driving behaviors represents a massive threat to the personal auto insurance market."

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