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Autonomous Cars Won't Impact Insurers Anytime Soon

Technologies like vehicle monitoring are impacting auto insurers today, but fully driverless cars are too far away to create problems.

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Brett Horn: Most people think of auto insurance as a very mature, a very staid industry, and to some extent that's true. But technology has and will continue to play a major role in determining competitive dynamics in this space. The rise of the Internet allowed Geico and Progressive to take a lead in the scalable direct channel and allowed both those firms to develop narrow moats around their business. It also gives them greater growth prospects going forward given the ongoing shift toward that channel.

We think the next leg of technological innovation will come from telematics. Telematics allows insurers to directly observe driving behavior and exponentially increases the amount of data that they have to underwrite with. Progressive, we believe, through its pioneering efforts in this area, has an opportunity lock up a disproportionate share of safe and very profitable drivers. On the flip side, Geico has largely ignored telematics, and we think it runs a risk of adverse selection as a result if it waits too long.

There's a lot of talk about driverless cars potentially making auto insurers obsolete. We would agree that in a world where all cars are fully automated auto insurance would largely no longer be necessary. But we think discussion of this tends to blur the lines between the levels of automation. Until you really reach full penetration of fully automated cars, an event that we don't expect to happen for a very long time, auto insurance will remain necessary. As a result, while we do firmly believe in investing for the long term, we think driverless cars are just too far out for investors to worry about today.

When we look across all the factors that are kind of shaping up the competitive environment today, Progressive looks like the best-positioned company to us, but Travelers offers the best relative value. The whole industry has dealt with a rise in claims in recent years due to low gas pricing, lower unemployment and also potentially the rise of distracted driving. Travelers had an ill-timed burst of growth during this period and as a result, has seen its underwriting margins deteriorate. We expect this to mean revert over time. Meanwhile, because of this underwriting issue, Travelers really hasn't seen the multiple expansions that his peers have enjoyed.

Brett Horn does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.