Early warning (Part 5)

April 30, 2013

 

Early warning is not simply a matter of spotting a trend. It also involves taking that trend out several steps to uncover major oncoming tsunamis or strategic opportunities. For good example of that, I suggest you read elements of a special report, in the recent issue of The Economist, dealing with the future of the car.

One of the most interesting pieces in it was a “report” describing what the personal automotive industry will look like in 20 years. That is a pretty good example of how this works. Can you do that for your industry now? Probably not.

Within that special report is an early warning item. Ask yourself the question: how will the emergence of driverless cars impact the insurance industry and the stock market?

The article answers the first part of the question, but not the second. It points out that most of the cost today for automobile insurance is to cover liability for accidents and posits the fact that, with driverless cars, accidents become substantially less frequent. That in turn means that costs will decline, so that revenues to the auto insurance companies will also decline. However, if this process allows more people to use cars, then more people would need auto insurance, although they would also pay less because automobiles were not have to have so many safety features. That in turn would reduce revenues. And, overall, auto insurance would become even more of a commodity product than it is now.

Today, according to the Insurance Information Institute, the auto insurance industry takes in over $164 billion a year, an amount which recently has been growing at a 2-3% rate. So the driverless car means a significant decline in its income over time.

Take it one step further. The auto insurance industry keeps its investments in forms that are relatively quick to cash out, often stocks and some kinds of bonds. If auto insurance companies do not have as much revenue and potential claims, then they do not need such reserves, so this may impact on the amount of cash flowing into the stock markets as well as the overall composition of investors and stock markets in the future.

That is what we mean about early warning. Think about it.

With the next blog, I will move onto other topics.



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