GEICO Insurance is a highly successful auto insurance subsidiary of Berkshire Hathaway. While GEICO has seen increasing profits in recent years, the rise of self-driving vehicles poses a major threat to its business model. Warren Buffett acknowledges this threat but does not view it as immediately serious. However, fully automated vehicles could account for 25% of cars by 2030. The report recommends GEICO promote no-fault compensation plans, modify underwriting practices, and offer new coverage for essential automated vehicle components to adapt to this changing industry.

1. Matthew Nash
GEICO Insurance Segment
The way auto insurance works is that it uses actuarial analysis to determine the
probability of an accident. For example in a pool of a 100 individuals, 15 percent will have
an accident and five percent of those accidents will be fatal. This probability helps insurers
to determine how much expected claims and losses will be for the pool; intern this helps
determine rates (Anderson & Brown, pp. 3-5). Secondly, there are other determining
factors that play a role like age, driving record, annual driving mileage, type of car, year and
mileage of car of the insured (Anderson & Brown, pp. 3-5). All of these factors are taken
into account to determine an individual’s premium. With the advent of self-driving
technology, this may change the traditional way insurance is looked at. This report will
identify GEICO Insurance, Warren Buffett’s response, current companies that are
implementing fully automated features and new safety features, opportunities to address
new threats, and a 3 part business-level recommendation. This recommendation includes
the need to promote no-fault compensation, the need to change underwriting practices,
and also the modification of current auto policies.
GEICO’s 2014 Financial Performance
GEICO Insurance is a highly successful insurance firm. This firm is one of 59 wholly
owned subsidiaries of Berkshire Hathaway (Mcfarlane, p. 2). Its the most successful
insurance product is personal auto insurance. According to Berkshire Hathaway’s 2014 10-
K report, GEICO’s segment makes up 43 percent of total insurance underwriting income
(Berkshire Hathaway INC., 2014, pp. 32-33). This was a 1.159 billion dollar gain for the
year (Berkshire Hathaway INC., 2014, pp. 32-33). Also, The 10-K states that in the last three

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years this division’s gain has increased. From 2012 to 2013, the gain was 66 percent
(Berkshire Hathaway INC., 2014, pp. 32-33). From 2013 to 2014, GEICO enjoyed another
underwriting gain of three percent (Berkshire Hathaway INC., 2014, pp. 32-33). In 2013,
GEICO was the 2nd largest auto insurer in regards to premiums written just following State
Farm (Berkshire Hathaway INC., 2014, p. 3). Even with all this success, GEICO and
Berkshire Hathaway face an imminent threat.
Warren Buffett’s Response to Self-Driving Technology
This new threat is self-driving technology. Mr. Buffett states that this is a threat to
GEICO and Berkshire as a whole (Cutter, 2014, p. 2). He states that it is a good technology
for society but very bad for auto insurers (Cutter, 2014, p. 2). Secondly, he explains that
even if with the arrival of this technology Berkshire Hathaway will not sell GEICO (Cutter,
2014, p. 2). However, he does not take this new technology very seriously because it may
take awhile for it to impact the market. Mr. Buffett is right to some degree, self-driving
technology is not a major threat currently. However, in as little 15 years it may be the
norm. According to Gartner Group Vice President Thilo Koslowski, 25 percent of cars will
be fully automated by 2030 (Brandon, p. 3). According Jeremy Carlson an analyst with IHS
Automotive, 11.5 million of these cars will be sold in the world market (Brandon, p. 3).
Many companies are already starting to test the waters with this innovative technology. For
example, Google has already tested a prototype in May 2014 (Brandon, p. 4). This
prototype is designed to only go 25 mph and is intended to drive through high-populated
areas like colleges or cities (Brandon, p. 4). However, Google has not made any effort on
selling any of this technology (Brandon, p. 4). Another company is called Cruise
Automation. Kyle Vogt’s, the founder envisions an opportunity to market and sell this

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technology (Brandon, p. 2). Currently, Mr. Vogt’s has developed this technology, which can
be implemented with any Audi A4 or S4 (Brandon, p. 2). In a few short years, the founder
states that this technology will be implemented into any automobile (Brandon, p. 2). The
current price tag to add this technology to an Audi vehicle is $10,000 (Brandon, p. 2). With
its current use, this technology should not be ignored and GEICO needs to adapt to this
technology. Furthermore, GEICO needs to pay attention to what main automobile
companies are doing presently.
Other New Safety Features
According to a 2013 Time article, 90 percent of accidents are the result of driver’s
error (Tuttle, 2013, p. 2). Car companies like Audi, Ford, Mercedes, Nissan, and General
Motors have already implemented new technology to greatly reduce this statistic. For
example, the V2V or vehicle-to-vehicle communications is currently being developed by
General Motors (Self-Driving Cars and Insurance, 2015). This technology uses a radio
network and will allow cars to transmit information between each other to determine cars
exact location and proximity from each other. This will reduce driver’s error because it will
compensate the driver if they make a miscalculation that could have resulted in an
accident. According to Department of Transportation, 76 percent of accidents were
reduced with this new technology in February 2014 (Self-Driving Cars and Insurance,
2015). Finally, many new cars come equipped with forward collision systems. Examples of
this technology are sensors, cameras and lasers that will warn drivers of impending
hazards (Rynkiewicz, 2015, p. 2). According to a 2015 Chicago Tribune, this feature has
reduced automobile accidents by seven percent (Rynkiewicz, 2015, p. 2). This should
motivate GEICO and other Insurers to start adapting to this safer technology now because

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advanced safety features and self-driving technology are one in the same. These
technologies are designed to reduce the probability of accidents. If nothing is done severe
repercussions to profitability may follow.
Opportunities to Address New Threat
As a whole, society will praise this technology because of the high number of car
accident fatalities will greatly be reduced every year. If ten percent of all cars today were
fully - automated today there would be 211,000 fewer accidents and 1,100 lives spared
each year (Tuttle, 2013, p. 2). If percentage increases to 90 percent this increases to 4.2
million less accidents and 27,000 lives saved each year (Tuttle, 2013, p. 2). With the advent
of this technology, this reduction mostly impacts preventable accidents that are associated
with driver’s error or behavior. Some of these behaviors are aggressive driving; distracted
drivers, fatigue, and driving under the influence will greatly be reduced by fully automated
technology (Cost of Auto Crashes & Statistics). For example, if a driver is feeling fatigue,
they could use the fully automated technology to take over driving (Cost of Auto Crashes &
Statistics). This innovative technology may reduce some risks but may introduce threats
and opportunities for GEICO.
BUSINESS-LEVEL RECOMMENDATION I
The first part of my recommendation is for GEICO and Berkshire Hathaway is to
promote a no-fault compensation plan, change some underwriting practices, and modify
their own auto insurance policies. It’s important for GEICO to maintain their core
competencies and this can still be accomplished with some adjustments to their policies
and practices. The first area to be addressed is mitigating the software reliability risk.
GEICO and other insurers should try to promote a state or federal no-fault compensation

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plan. The would work much like no-fault insurance but instead of the insured being
responsible for their own car repairs or medical bills in the event of an accident they would
be reimbursed by the insurer (Helton 1). Intern, the insurer could then be subsidized by
the no-fault compensation plan. If it is proven to be the fault of the insured instead of a
software issue otherwise regular insurance could take effect. These accidents may arise
when the insured needs to switch from full automation to manual for an emergency or to
take an exit off a highway (Self-Driving Cars and Insurance). To determine the cause, the
insurer could mandate a black box in all fully automated vehicles to qualify for insurance.
The black box is a telematics device that tracks a driver’s activity (Self-Driving Cars and
Insurance). Also, the rationale behind this compensation program is the first action for
insurance company should not be to seek subrogation towards the manufacturer of the self
– driving technology.
A similar compensation plan worked in past when the National Childhood Vaccine
Injury Act which was passed in 1986. The act was passed because of the possibility of life-
saving vaccines might cause an adverse reaction with some individuals (Self-Driving Cars
and Insurance). The act protected manufactures against litigation and costly lawsuits. If
this act was not passed the fear was that it would drive out existing manufacturers or new
manufactures from entering the market. This is the very reason for state or federal
governments to establish this plan to encourage new entrants into the self- driving
technology market. It is in the best interest of GEICO and other insurers to promote this
because it would shift the burden of this risk to the state or federal governments. The
second section of my recommendation is for the modification of some underwriting
practices.

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BUSINESS-LEVEL RECOMMENDATION II
Many underwriting practices will remain the same like age, sex, expected annual
mileages of the insured (Self-Driving Cars and Insurance). However the insured’s driving
record will be of less importance to determine an individual past behavior. The reason for
this is speeding ticket, DUIs, or negligent driving will be less frequent with a computer at
the wheel. The black box device from the previous recommendation would help to
determine driver’s behavior for underwriting purposes (Self-Driving Cars and Insurance).
This is especially helpful for the insurer to determine future rates during policy renewal.
There may be some opposition to the use of a black box. However, with rates being greatly
reduced because of low frequency of accidents this may offset this. The final portion of my
business-level recommendation is the modification of auto insurance policies.
Business-Level Recommendation III
My proposed change is to add an additional coverage. The coverage is named
essential automated component coverage. This could be an optional coverage and be listed
as a sub- coverage under collision protection. The rationale behind this coverage is that
even though accidents will be less frequent they will be more severe for the insured (Self-
Driving Cars and Insurance, 2015). An example of a costly piece of equipment that is
essential for automated cars is the Lidar system. The Lidar system is a light detection and
ranging system. This system is comparable to radar but instead of using microwaves it uses
lasers to detect objects at much further distances (Shchetko, 2014, p. 1). According to a
Wall Street Journal Report, depending on the sophistication of the technology the price
could range from $10,000 to as much $85,000 to replace. (Shchetko, 2014, pp. 1-2) As the

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new technology advances, the cost will decrease but it will still be an expensive piece of
equipment to replace. This coverage works in a similar capacity to other auto coverages.
The insured can choose their own deductible and limit. This coverage would repair or
replace the Lidar system and other costly pieces of equipment needed for fully automated
cars to work. This would give the insured an additional option to protect their costly
investment. I believe if GEICO and Berkshire Hathaway follow this three part business-level
recommendation they will effectively adapt to this new emerging threat.

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Works Cited (APA-Format)
1. Anderson, Judy and Robert Brown. "Risk and Insurance." Education and
Examination Committee of the Society of Actuaries, n.d.
2. Berkshire Hathaway INC. "Form 10-K Annual Repot Pursuant to section 13 or 15(d)
of the Securities Exchange Act of 1934." United States Securities and Exchange
Commission Washington, D.C. 20549, 2014.
3. "Bershire 2014: Warren Buffet Calls Self-Driving Cars' Real Threat to Insurers." 03
May 2014. Linkedin. Ed. Chip Cutter. 28 March 2015 <www.linkedin.com>.
4. Brandon, John. "Meet the Founder Trying to Start the Self-Driving Car Revolution."
Inc. 08 April 2015 <www.inc.com>.
5. "Cost of Auto Crashes & Statistics." 09 April 2015 <www.rmiia.org>.
6. Helton, Cecil. "What's the Difference: No-Fault vs. Tort Auto Insurance ." Car
Insurance . 22 April 2015 <www.carinsurance.org>.
7. Mcfarlane, Greg. "A Look At Berkshire Hathaway's Many COmponents."
Investopedia. 08 April 2015 <www.investopedia.com>.
8. Rynkiewicz, Stephen. "Advanced Safety Features Showcase the Future of Cars." 04
February 2015. Chicago Tribune. 21 April 2015 <www.chicagotribune.com>.
9. Self-Driving Cars and Insurance. February 2015. 08 April 2014
<http://www.iii.org>.
10. Shchetko, Nick. "The Wall Street Journal ." 21 July 2014. Laser Eyes Pose Price
Hurdle for Driverless Cars . 13 04 2015 <www.wsj.com >.
11. Tuttle, Brad. "Consumers Love the Idea of Self-Driving Cars FOr One Reason." Times.
Ebscohost. 07 November 2013.