Robot Insurance Is Only a Few Years Away, For When the Metal Ones Come For You

NEW YORK (TheStreet) -- From the iRobot (IRBT) Roomba vacuum to soon-to-come self-driving cars, robots are already making a huge impact on society and business, but who will pay for it when something goes wrong? 

In a classic Saturday Night Live skit, Sam Waterston of the TV series Law & Order tries to sell robot insurance for the fake company "Old Glory Insurance."

"An insurance policy with a robot plan?" one of the actors in the short video asks, incredulous that such an important and useful financial instrument would be available to her, adding, "certainly I'm too old."

An amusing skit about tricking gullible older people into buying insurance for something they obviously don't need might not seem so amusing in a few years when a self-driving car claims its first fatality. It is entirely possible that a class of insurance to protect you against robot accidents may need to be made available, similar to flood and fire insurance today.

The gradual entry of robots into human society, from work to home, is going to affect the insurance industry significantly. Robot cars making their own decisions will likely affect the auto insurance industry. But different insurance sectors may find different effects on their business due to how robots interact with them. There will be winners and losers in the insurance industry and investors have to start understanding the potential effects of this shift.

The automobile and transportation industry will have enormous changes due to the progress being made and the sheer number of people that will be affected: practically every citizen. In 2010, there were more than 5.4 Million accidents on the road in the U.S. and 30,296 fatalities. With a largely robotic transportation system, the number of accidents will likely be dramatically reduced. Google (GOOGL) recently reported that in tests over six years and nearly two million miles on the road, its self-driving test cars got into 11 minor accidents. These cars will only get better and safer, especially as more of the vehicles on the road are also controlled by robots.

Major, publicly traded auto insurers whose businesses are likely to be affected include Allstate (ALL), Berkshire Hathaway's (BRK.A) (BRK.B) GEICO and Progressive (PGR). 

This should reduce insurance coverage needed pretty significantly. An argument can be made that if the robot car makes the decision, then the robot manufacturer is liable rather than the individual. Court cases have held robot manufacturers to be liable. In the case of Robert Williams and the Ford company's robot, the original robot maker was held liable.

You can even see a scenario where car dealers throw in the nominal coverage remaining the way they throw in life-time oil changes. The standard model of auto-insurance sold may need to shift over to a business-to-business type insurance aimed at robot and car manufacturers. This will cut out a large number of agencies which largely make their living on auto insurance.

Claims verification of accidents may also change dramatically due to robotic drones. Damage and circumstances can be recorded almost immediately after the incident, whether it is a car accident, a fire, flood or an earthquake. Large numbers of claims adjusters may give way to fewer actual people needed, who may need to be dispatched only to the most difficult cases. Data may be clearer and fraud should be substantially reduced. Again, this will be massively disruptive to the insurance industry.

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