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Why Warren Buffett May Be Wrong on AI and Insurance

Jeff John Roberts
By
Jeff John Roberts
Jeff John Roberts
Editor, Finance and Crypto
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Jeff John Roberts
By
Jeff John Roberts
Jeff John Roberts
Editor, Finance and Crypto
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May 18, 2017, 10:03 AM ET
Tesla Introduces Self-Driving Features With Software Upgrade
A member of the media test drives a Tesla Motors Inc. Model S car equipped with Autopilot in Palo Alto, California, U.S., on Wednesday, Oct. 14, 2015. Photograph by Paul Morris—Bloomberg via Getty Images
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The Oracle of Omaha this month warned that artificial intelligence poses a threat to Berkshire Hathaway’s auto insurance business. Speaking at the company’s annual meeting, Berkshire CEO Warren Buffett said the use of AI in self-driving cars will mean fewer drivers and fewer customers for the company’s Geico insurance products.

Turns out Buffett may have spoken too soon. According to a new report from Accenture, the overall auto insurance will actually grow in the future, creating $81 billion in new revenue between 2020 and 2025.

The report, published on Thursday, explains that self-driving cars will lead to a big drop in individual insurance premiums. But that drop will be more than offset by new categories of car insurance, especially ones related to cybersecurity, which Accenture says will be worth $12 billion in 2025.

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The report also points to new opportunities in product liability insurance related to autonomous vehicles (predicted value of $2.5 billion) and a smaller opportunity ($0.5 billion) in the form of insuring infrastructure like cloud computing that will be needed to run fleets of driverless cars.

Here is a chart that shows how Accenture believes the new products will, for a time, buoy the auto insurance market even as sales conventional premiums begin to stall and decline:

According to John Cusano, the global head of insurance for Accenture, many auto insurance claims in the future will be different than ones we see today. For instance, insurers will have to pay out for incidents such as faulty AI products or a hacker stealing personal data from a vehicle. Cusano adds that the new opportunities are significant but not every insurance company is equally positioned to take advantage of them.

“Obviously, the ones who will be most challenged will be those on the retail side of the business since the new risks are on the commercial side. Retail insurers will have to transform their business along the way,” he tells Fortune.

This suggests the likes of Geico will indeed face pressure but that they still have time to adapt and grab a share of the commercial market. And in the short term, Cusano says the growth of autonomous vehicle technology will actually bolster retail insurers. That’s because cars now come with more expensive AI-related technology, like cameras and sensors, which make the cost of repairing a fender bender much higher than it used to be.

A final wild card in auto insurance markets of the future is the potential entry into the business of manufacturers. Cusano says Tesla’s small forays into the insurance markets could expand. Meanwhile, Google is using its fleet of self-driving vehicles to amass huge troves of risk-related data, which could put the search giant in a position to join other new entrants as a fierce competitor in the insurance market.

About the Author
Jeff John Roberts
By Jeff John RobertsEditor, Finance and Crypto
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Jeff John Roberts is the Finance and Crypto editor at Fortune, overseeing coverage of the blockchain and how technology is changing finance.

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