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Paulo Santos
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I am a Portuguese independent trader, analyst and algorithmic trading expert, having worked for both sell side (brokerage) and buy side (fund management) institutions. I've been trading professionally for about 16 years and also launched www.thinkfn.com in 2004. Thinkfn (Think Finance) carries... More
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  • The Long-Term Implications Of Self-Driving Cars For The Auto-Insurance Industry

    This article is borne out of a discussion in the comments of one of my Tesla articles. It's not really a thesis for the short-term, since it will require the overwhelming majority of cars in the road to be self-driven, which is not about to happen soon. Indeed, even when those cars are commercially available, it will still take perhaps as much as a decade or more for them to begin being relevant for this thesis. Anyway, it's still an interesting thesis, which might perhaps help with the understanding of some minutiae of the insurance industry to boot.

    So what will the long-term implications for the auto insurance industry be? As proxies for the insurance industry, though also including life insurance companies and other unrelated stuff, we can refer the iShares Dow Jones U.S. Insurance ETF (NYSEARCA:IAK) and the SPDR S&P Insurance ETF (NYSEARCA:KIE).

    What will self-driving cars bring?

    One thing self-driving cars will bring for certain is a reduced number of accidents. Indeed, most probably they'll bring accidents which will be up to several orders of magnitude less than the present accident rates of human-driven cars. This means that there'll be 10x-100x-1000x fewer accidents per car in the road once self-driving cars make up the overwhelming majority of cars in the road.

    This will be so both because the public wouldn't accept self-driving cars if it was otherwise (and, say, accident rates were somehow similar to today's world), and because every single accident by a self-driving car is likely to hit the news the same way a flaming Tesla did (you never saw the much more frequent regular ICE - Internal Combustion Engine - fires on the news, though).

    So this much lower accident rate is a certainty. This, in turn, will lead to much lower claims for insurance companies. Here, investors might be fooled into thinking that this is a positive. That people will still pay their premiums, but the insurance companies will then have to support much lower claims costs. Nothing could be farther from the truth.

    The truth is that insurance premiums quickly adjust to the risk borne by the insurer. If the risk turns much lower, premiums fall just as hard, to the point where it's perfectly natural for the entire insurance industry to run at what's called an underwriting loss -- where premiums don't cover claims+costs. The following table, depicting the combined ratio for the entire Property & Casualty industry segment (of which auto insurance is part) shows this in spades - a combined ratio of over 100 means premiums didn't cover all claims and costs for the entire period from 2008 to 2012 (Source: "ANNUAL REPORT ON THE INSURANCE INDUSTRY", FEDERAL INSURANCE OFFICE, U.S. DEPARTMENT OF THE TREASURY ).

    (click to enlarge)

    So, insurance is so lousy that it loses money on the aggregate year after year after year? Not necessarily. Premiums are paid up front, and claims and costs are paid over time. This means the insurance industry generates a premium float which it can then invest and reap profits from.

    Indeed, the investment of the premium float turns out to be the main source of profits for most insurance companies - though insurance companies run by Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) are quite often run at an underwriting profit.

    What this means for insurance companies in the context of lower premiums

    We can thus start to coalesce what a huge drop in premiums brought about by a huge drop in claims in the automobile insurance market would mean for auto insurers: It would be ugly, it would be an industry-changing event, and quite possibly it would lead to a much smaller auto insurance market.

    This is so because as the premiums contracted, so would the premium float. Now, not only would most insurance companies have trouble to keep up with the premium contraction, because they would already be fighting against fixed costs in their combined ratios, but in the end, even if underwriting breakeven was achieved, the premium float would be many times smaller and thus producing many times smaller return amounts in absolute dollars (as the return percentages ought to stay the same but would be applied to a much smaller amount of dollars).

    This would spell doom. With the entire industry relying on the premium float returns, this would mean that an auto insurance market with much lower premiums and much lower claims would only be able to support a much reduced number of companies. It wouldn't be surprising to see many companies leaving the market either voluntarily or in a stretcher, when this event takes place.

    Conclusion

    The advent and spread of the self-driving car will reach a point where it will lead to the demise of most of the auto-insurance companies. This will be so because the float generated by much lower premiums due to much lower claims cannot remunerate the existence of the industry as it is today, based on much higher premiums, claims, and premium float.

    This is many years into the future, but it's something which bears understanding, as it also furthers the understanding of how insurance companies usually produce their economic returns.

    Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

    Dec 01 7:05 PM | Link | 6 Comments
  • The Terrorists Have Already Won

    Back in the jungles of Manhattan, a struggle has evolved. This was the struggle of a rag-tag team of well-dressed Marxist guerrillas hell bent on bringing their ideology to power. This happened in the very heart of the capitalist system.

    The Marxist ideology carried by these well-dressed terrorists was plain to see. Each carried their own red book, where it read:

    "Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth."

    So this was the mission they devoted themselves to. To debauch the currency. To ensure that the printed money would lose value over time (at least at a 2%/per year clip). But to do so in a way which would favor their own constituency over everyone else.

    To just print and give money to the masses would not work, as it wouldn't favor anyone - though it would still debauch the currency. The whole idea of these Marxist terrorists was to debauch the currency, yes, but to favor some over others while doing so.

    For, as Lenin is said (by Keynes) to have said, debauching the currency does not just confiscate arbitrarily, but it also calls into question the equity of the existing distribution of wealth.

    For, therein lies a problem for the Marxist guerrillas in their struggle. Capitalism, it its pure state, is rather fair. You raise a potato, you earn a potato. You pay someone ½ a potato to raise a potato, you earn yourself ½ a potato and your worker earns the other half, voluntarily. The distribution of wealth from such a system is intrinsically fair, even if sometimes lopsided. This, the Marxist guerrillas would not have.

    The Marxist guerrillas wanted to change this system to suit their own objectives. Those objectives, of course, couldn't be stated plainly. These Marxist guerrillas couldn't go around saying "it's for the good of the 1%!". So instead, and as always in any collectivist system, the objective was stated as "it's for the common good".

    But it wasn't. If printing money was for the "common good", then these Marxist guerrillas would simply print and distribute smaller amounts of money. It would look weird, for sure, but it would be a lot fairer than printing money for the purpose of inflating the assets held by the 1%.

    It didn't stop there, either. In the economy, when an enterprise goes broke its shareholders, creditholders and employees suffer. It's hard, but fair, that such should happen upon failure. But it's only fair if it happens to anyone facing failure. If others fail and are not exposed to the same consequences, it ceases being fair.

    Yet, that's just what happened due to the Marxist insurgency. When banks failed, at times shareholders were spared, creditholders were for the most part entirely spared, and employees, including management, were spared as well. While there was, again, a "common good" motive bandied about -- such as saving depositors and confidence in the system - this is again false. Depositors and confidence could have been saved while imposing the same set of consequences for shareholders, creditholders and employees as those faced by any other failing enterprise.

    Such consequences should have been imposed as a matter of fairness, even if the outcomes for those exposed to them turned out to be much better than they'd have otherwise been. The consequences should have been imposed, because if they weren't, then those actually suffering that set of harsh consequences knew for a fact that they didn't suffer those consequences because of failing. They suffered the consequences because they weren't arbitrarily protected by the system, the way the banking stakeholders were.

    The terrorists have already won

    So this is why I say that the Marxist terrorists have already won. They've taken a system which was intrinsically fair, and turned it into an arbitrary mess where winning or losing is dictated by the well-dressed rag-tag team of Marxist guerrillas.

    Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

    Tags: economy
    Jul 09 3:14 PM | Link | 4 Comments
  • Public Alert, "Paulo Santos", "Binary Options"

    There is a fake "Paulo Santos" on Google+ (and God knows where else) that's peddling a "Binary options" service though a video.

    This is a fake "Paulo Santos", it is not me.

    Here's an example of the fake Paulo Santos:

    plus.google.com/102809924508478495976/po...

    Jul 02 8:16 AM | Link | 16 Comments
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