Insurers' Existential Risks

By Motley Fool Staff Markets Fool.com

Insurance companies can only exist where there are risks to insure. The car insurance industry could theoretically go extinct if driverless cars reduce the risk of traveling by car. Markel's (NYSE: MKL) weird policies -- like those to insure a thoroughbred -- may decline with horse racing or the equestrian industry as a whole.

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In this segment of Industry Focus: Financials, host Gaby Lapera and contributor Jordan Wathen discuss why it's so important to keep an eye on the broad themes that affect any insurer.

A full transcript follows the video.

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This video was recorded on May 22, 2017.

Gaby Lapera:We talked aboutcombined ratio over time andlooking at the investment portfolio. Thelast thing you should look at is, youwant to think about what kind ofmacro effects there might be on insurance. For example, health insurance. No one really knows, at least in theUnited States, what's going to happen with health insurance over the course ofthe next four to 10 years, really. So that'ssomething you should think about when you're looking toinvest in a health insurer.

Jordan Wathen:Yeah,that's actually a really good example. There'shealth insurance, which is short term, they're here-and-now needs. Abusiness that has not done very well over time andinsurance is long-term care insurance, because basically, theassumptions were, thecost of healthcare would only go up X% per year for so long. Lo and behold,nothing has risen as fast as, well,student expenses first, but then health costs second. So a lot of these companies underwrote these policieson the assumption that prices might grow at 3% a year, whenin reality, they grew 4% or 5% a year, and theyended up losingtheir shirts onsomething like that.

Lapera:Yeah. The other thing that a lot of these insurance companies are facing now arepeople who got long-term insurance, like, 20 or 30 years ago. People areliving a lot longer than they used to. It doesaffect their bottom line. So there's a lot of outside factors that might affect that. Anexample that we brought up the other day on thatWarren Buffett episode -- if you didn't hear it,you can either search through ourhistory for Berkshire Hathaway, oremail me and I can send you the episode -- is thatdriverless cars are going to affect car insurance, becausethe more people who are not driving, the fewer people who needactual car insurance. Plus,driverless cars should, in theory, reducethe number of accidents thatpeople are going to get into. So that'ssomething to think about if you're going to invest in an auto insurer.

Wathen:Definitely. I think autoinsurance is actually really interesting,because one of the benefits ofdriverless cars, if they happen, is thatthe insurance premiums you pay every month shouldtheoretically go down. That'sone of the economic reasons whydriverless cars would be a big deal if they happen. That may be years away, but it'sdefinitely a risk that you have to know about.

Lapera:Yeah. We mostly talked aboutpretty well-known types of insurance, but there's also some more weird insurance. Theinsurer thatalways comes to mind for me isMarkel. They'll insure giant parties, they'llinsure your thoroughbred racing horse, they'll insurerestaurants. They insure weird things thatother people have a hard timefiguring out how to do the underwriting for.

Wathen:Right.I was actually involvedwith a charity that does a golf tournament, and they buyhole-in-one insurance,because if you hit a hole in one, you get $10,000, or a new car,something like that. Butthey don't have the money to pay that out, so they buy hole-in-one insurancejust in case that happens.

Lapera:Yeah,stuff like that. Or reinsurers, whichI think we've talked about before on the show. I think it was actually me and Jordan, becauseJordan and I always do, like, "Let'stalk about weird financial companies." Reinsurers arebasically insurance companies for insurance companies. So insurance companies take out a policy with reinsurers because they're worried that if a hugenatural disaster happens,they won't be able to pay outcompletely, so they have these reinsurers come and helpdisperse the costs.

Wathen:Right. Alot of insurance companies buy reinsurance, sobasically they end up just beingmarketing companies -- they'reout there just selling policies andpassing on the risk to someone else.

Lapera:Yeah. There aredifferent types of insurance companies that you can look into, andmaybe they won't be as affected by innovation as other companies are, or asaffected by the political landscape as other companies.

Gaby Lapera has no position in any stocks mentioned. Jordan Wathen has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and Markel. The Motley Fool has a disclosure policy.