Driverless Cars Aren't a Threat to Progressive

A Wall Street bigwig is currently claiming that driverless cars could put Progressive (NYSE: PGR  ) out of business. In fact, his firm is betting money on the demise of the entire auto-insurance industry. Supposedly, safer, driverless cars will eliminate accidents and the need for insurance. After considering the argument and looking at some data, I don't think betting against Progressive based on driverless cars is a very solid thesis.

Steve Kuhn: "Don't Go With the Flo"
Steve Kuhn of Pine River Capital Management recently appeared on Bloomberg TV to pitch his short case against Progressive, cleverly titled "Don't Go With the Flo." As a preamble, he admitted Progressive is an innovative, well-managed company, but expensive compared with the insurance industry. Then he got to the meat of his thesis: Driverless cars are going to put the entire auto-insurance industry out of business. He expects that by 2025, driverless cars will be safer than human drivers, and until then, automated safety measures will incrementally reduce traffic accidents.

Fewer accidents will result in lower total premiums, greatly shrinking the auto-insurance market. And when cars become fully driverless, the liability for accidents with reside with the automaker, not the individual driver. Automakers will use their larger bargaining power to shrink whatever profits remain for auto insurers. It seems pretty far-fetched, but Kuhn claimed that his firm, a $14 billion hedge fund, is betting money on this thesis.

My policy: "Go With the Flo"
I wasn't convinced. To start, the development of driverless cars is going to proceed slower than Kuhn projects -- widespread adoption by 2025 seems very unlikely. Secondly, he makes some pretty broad assumptions about auto insurance. He assumes that if cars are safer, insurance premiums will be lower. But if you look at the data, that's not the case.

Cars have been getting safer for years, yet insurance premiums continue to grow. Between 1999 and 2012, total traffic deaths decreased 20% and fatalities per mile driven have decreased 27%. Yet over the same period, total liability premiums have increased 48% and total collision/comprehensive premiums have increased 22%. In other words, despite major, continual improvements in automobile safety, total insurance premiums have increased as cars on the road, drivers, miles driven, car prices, and accident liability have combined to push up the total market for car insurance.

I'm happy that cars are getting safer every year, but I don't expect that the need for car insurance will ever be eliminated. There will always be accidents, and I'm sure that automakers will resist the notion of insuring every car they put on the road. Aside from the capital requirements, they don't have the expertise. To fill the need for auto insurance, companies like Progressive will continue to exist, regardless of the awesome innovations in driverless cars.

Foolish takeaway
While I'm utterly unconvinced by Kuhn's argument, I'll give him credit for creativity. It's definitely more interesting that the usual stuff coming out of Wall Street investors. I'm just surprised that Kuhn, a Goldman Sachs alum, would put money on it. Then again, maybe I'm too skeptical. Or maybe I'm too gullible and Kuhn is playing an elaborate practical joke and I fell for it.

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