At last weekend’s Berkshire Hathaway Inc. annual meeting, one shareholder asked Warren Buffett how his auto insurer Geico might fare in the event that autonomous-driving technology succeeds in slashing the number of accidents, as Tesla Inc.’s Elon Musk suggested it would on an earnings call last month. “If accidents get reduced 50%, it’s going to be good for society and it’s going to be bad for insurance companies’ volume,” Buffett said. Musk shot back on X to recommend that Buffett should buy a stake in Tesla.
That was funny and thought-provoking. In an age of tremendous uncertainty for the insurance industry, I certainly agree that investors should hedge their bets with small exposures to potentially disruptive technologies. But with climate change, inflation and runaway litigation all wreaking havoc, I’m dubious that “too few accidents” is the tail risk that should most concern them going forward.
In general, it’s obviously true that cars have been getting safer and that serious accidents have been declining as a proportion of total fleet size. Seatbelts, antilock brakes and drunk-driving crackdowns have all had an impact, and advanced driver assistance technology — or even full autonomy — would clearly have the potential to bring about the next step-change improvement in the rates of severe accidents.
Yet there’s no way that the fleet would be completely replaced overnight by more advanced vehicles. Fallible humans would continue to bump into robotaxis; early versions of the technology have hardly been error-free; and meaningful improvements at the national level would probably be realized over decades, rather than months or years.
Moreover, auto insurers’ growth will continue to depend on other factors above and beyond vehicle tech, including the numbers of vehicles on the road; the number of miles they log (which is expected to keep growing); and the demand for coverage against weather-related damage from, for instance, severe hail, strong winds and flooding, which all may become more frequent in the age of climate change. At the same time, policyholders and insurers are also wrestling with a trend of more aggressive litigation which could keep the demand high for umbrella coverage from people concerned about getting sued and losing homes or other assets over a bad accident. And as Berkshire’s insurance chief Ajit Jain pointed out over the weekend, the cost of fixing ever-more technologically advanced automobiles has “skyrocketed.”
Second, I’m not sure I can ever envision Buffett entering an investment like Tesla at 63 times blended forward earnings. Buffett famously got his start as a cigar-butt value investor in the mold of Ben Graham. And although he later came around to paying up for the right high-quality companies (including Apple Inc. and, in 2008, Hong Kong-listed Tesla competitor BYD), I’m betting he’s still not wild about the prospect of paying those multiples for a company with falling vehicle sales and a vague vision of a robotaxi future. In recent months, Buffett’s company has been cutting exposure to Apple and BYD (now trading at under 17 times forward earnings), apparently preferring the risk-reward of government securities. So it’s crazy to think he’d turn around and buy the more richly valued Tesla.
Ultimately, all of this is speculation about a reasonably distant future, anyway. If you believed the hype, truly autonomous vehicles have been about five years away for a decade or so, the intervening years littered with high-profile accidents, regulatory hurdles and billions in capital expenditures without a true, marketable autonomous product to show for it. Musk has been the hype man in chief, exaggerating the capabilities of his advanced driver-assistance system — misleadingly branded as “Autopilot” and “Full Self-Driving” — that still requires the oversight of attentive human drivers.
Geico seems to be doing just fine for the time being. Although it struggled when auto parts and repairs prices surged in recent years, the company’s numbers have since been improving on the back of rising premiums, declining claims and solid investment returns from higher-yielding fixed-income securities. The company is also making measured progress on advanced data and analytics to improve profitability and better manage and price risk. But it still has some work to do to keep pace with investor darling and industry peer Progressive Inc.
For his part, Musk has continued to adamantly insist that Tesla will “solve autonomy,” and, in fairness, betting against him has broadly been a losing strategy. Like many, I hope that he or someone else succeeds, and helps save thousands of human lives a year from automobile accidents, among the leading causes of death in the US. But there are plenty of reasons to stay skeptical and a plethora of other business risks that Buffett’s Geico and its auto-insurance peers have to concern themselves with in the meantime.
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