Should you buy Insurance Australia Group Ltd at today’s share price?

Credit: Axion23

What would happen to the automotive insurance business if there were never any car crashes?

Safer, more efficient driving is the premise behind developers of driverless cars like Google and Tesla Motors, but this development – while great for the drivers among us – could have unintended consequences for a whole host of industries, including panel beaters and automotive insurers.

At the most recent Annual General Meeting of his Berkshire Hathaway conglomerate, Warren Buffett spoke on the topic, stating that driverless cars were a real threat to the insurance business.

Many investors in S&P/ASX 200 listed companies will surely be wondering ‘how much is at risk?’ – especially if you were looking for reliable dividends to take you through to retirement. Here’s a quick look at the exposure that Australia’s biggest insurers have to the automotive space:

Insurance Australia Group Ltd (ASX: IAG) – earns 30% of Gross Written Premium (GWP) from Motor insurance

Suncorp Group Ltd (ASX: SUN) – earns 31.7% of GWP from Motor insurance

QBE Insurance Group Ltd (ASX: QBE) – earns 18% of Gross Earned Premium (GEP; a different way of recording revenue)

The potential for a heavy hit to earnings and dividends is definitely there, especially for Suncorp which also owns a large network of panel beaters.

It’s highly unlikely that the motor insurance industry will disappear because cars remain a very significant investment for most people, and things like fire, theft, and third party liability insurance will remain a necessity.

Furthermore, it is unclear just how quickly driverless cars will become popular, given the necessary regulatory and safety hurdles that must be met, as well as the logistical and financial challenge of entire nations upgrading their vehicles – which most certainly will not happen overnight, despite some recent assertions by well-known public figures that driver-operated vehicles could be ‘dinosaurs’ within 10 years.

Relax, there’s no burning need to sell your insurance stocks.

However, it is a sign of the ever-increasing pace of technological developments that all investors must keep track of, and now might be a good time to start thinking about which stocks you can rely on for the long haul.

One business that isn't going anywhere is The Motley Fool's Top Dividend Stock pick for 2015, which offers a reliable, growing dividend and looks like an OUTSTANDING BUY today. In fact, I recently doubled my holdings!

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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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