The past few years have seen companies like Tesla and General Motors looking to enter the automobile insurance market. These manufacturers see an opportunity to offer insurance to customers because of the amount of data collected from their vehicles.

However, Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) Chairman and Chief Executive Officer Warren Buffett said he has no worries about auto manufacturers entering the insurance market. Instead, Warren Buffett is more concerned about Progressive's (PGR 1.16%) edge regarding insurance. Here's why.

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A two-horse race for the leading auto insurer

GEICO has been around since 1936 but was purchased by Berkshire Hathaway in 1996. According to Forbes, GEICO is the fourth-largest auto insurance company, with a 9.5% market share. Only State Farm, Allstate, and Progressive have higher market shares.

However, when it comes to future leaders, Warren Buffett sees two companies that could become the top auto insurer -- GEICO or Progressive.

Buffett went on to say that "I have always thought for a very long time [that] Progressive has been very well run. They have an appetite for growth. Sometimes they copy us. Sometimes we copy them. And I think that will be true five years from now, ten years from now."

Risk management is key to running a successful insurance business

Ajit Jain is Berkshire Hathaway's vice chair of Insurance Operations and is on Berkshire Hathaway's board of directors. Jain has a deep knowledge of the insurance business and ran Berkshire's reinsurance business before stepping up to his current position. Jain noted that Progressive had a significant advantage over GEICO with regard to the loss ratio.

The loss ratio is a crucial metric insurance companies use; it's the ratio of losses to premiums earned. This ratio can give you an idea of how much of your earned premiums are used to resolve claims made by clients. Good companies can control losses and keep loss ratios in check. This is something that Progressive has done exceptionally well.

According to Jain, Progressive has a 12-point advantage over GEICO when it comes to the loss ratio -- a significant margin in the industry when competition is so high. According to Jain, "There are a number of causes for that, but I think the biggest culprit is as far as Geico is telematics."

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Image source: Getty Images.

Progressive has a nearly 10-year head start on this technology

Progressive's telematics, or pricing insurance policies based on driving habits, is a huge advantage. Progressive was the first in the industry to use telematics when it rolled out the technology in 2010 -- giving it a considerable advantage.

Telematics works like this: Driving data is collected from devices installed on cars or through a cellphone app. This app enables Progressive to collect mileage, speed, braking time, and when you drive during the day.

Progressive can develop personalized rates from this data and give drivers discounts for safe driving. When it comes to pricing models, the more data, the better. And since Progressive has over 10 years of driver data, it has better models to manage risks and keep loss ratios low.

Investor takeaway

GEICO is working to catch up to Progressive. In 2019, the insurer joined other auto insurers that began to use telematics. Jain noted, "My hope is that in the next year or two, Geico will be positioned to catch up with Progressive."

Progressive has an incredible advantage over other insurers because of its built-up knowledge of telematics. As an investor in Progressive, it gives me added confidence that this is a stellar stock to hold for the long haul.

Even Charlie Munger, vice chair of Berkshire Hathaway, admitted, "In the nature of things, every once in a while, somebody is a little better at something than we are."