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.

The dramatic reduction of car accidents will have a significant effect on the life expectancy of individuals. Actuarial changes may have to be made to accommodate this longer life cycle expectancy due to a drop in death rates for one of the most common causes of death in the U.S. Robot assistance may help physically demanding and injury-prone household work to be reduced as well. Life, accidental death and dismemberment insurance firms should generally see less risk in their businesses, which should increase profits and probably the top-line due to increased number of years of premiums.

With robot exoskeletons we should see a proportion of the population currently not part of the work-force, enter it. For example, physically moving stock in a retail environment such as an electronic store such as Best Buy, may become available to older or less-sturdy individuals. Tests are already being run by the Daewoo Shipbuilding and Marine Engineering company in South Korea to use such robots. Robotic surgery will expand access to medical care to individuals in remote parts of the country that cannot sustain full-fledged surgery related care. In situations where there is a mix of humans and robots working together as integrated units, the complexities will expand and risk will be increased. Business liability and workers compensation insurance will necessarily expand to accommodate this increased risk.

Preventable errors in healthcare cause more than 400,000 deaths in the U.S. and now ranks as the third-largest cause of death according to recent studies. The use of robots should allow far more sophisticated care to be provided. You can see how capable robots are already when you see this DaVinci Surgical Systems' robot stitch the skin of a grape back together. With robots, spread of antibiotic resistant bacteria may be reduced substantially, since it should be far easier to keep them clean and their behavior will be more predictable. With more robotic help, it is feasible that errors will be cut down overall, even if there are errors due to the robots themselves. Life expectancy will be increased but also hospital liability and malpractice insurance should decrease. Health insurance should have higher profits and probably larger top-lines due to a larger amount of service being provided.

One benefit of replacing a human with a robot is in the ability to eliminate the vague term "human error." In general, over time, wherever a human is replaced completely by a robot, you can expect less variability, fewer errors, fewer expenses and more throughput. Less risk means better profits for insurance, but on the other hand overall volume of coverage and the top-line maybe affected as some insurance areas become significantly risk free.

In the Saturday Night Live send-up, the robots are said to "eat old people's medicine as fuel" and that 58% of deaths in adults over 50 are caused by robots, with the balance going to heart disease. Waterston, the fake spokesperson, implores, "Old Glory Insurance, for when the metal ones decide to come for you -- and they will." 

Indeed, he was right. The robots are coming but they're here to help. You'll still need insurance. 

 

  This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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