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Insurance companies are absorbing those real dollar claims while trying to figure out how much of this automation and technology is actually working to their benefit. The pace of premium increases has hit a 13-year high, according to data from the U.S. Department of Labors consumer price index. A number of state regulators say theyre concerned about the higher costs for drivers. Californias insurance commissioner created a low-cost insurance program last year for lower-income residents and pushed companies to explain why their costs are so high. A January report from the U.S. Department of the Treasury says more than 18 million Americans live in a ZIP code where car insurance is unaffordable based on the median local income. For the most part around this country, you need a car to be economically mobile, says Doug Heller, an insurance expert at the Consumer Federation of America. That premiums are rising becomes a real impediment to families finances and economic growth. Wall Street, on the other hand, has applauded the shift. The industry needs to generate a reasonable rate of return, says Barclays analyst Jay Gelb. Amit Kumar, an analyst at Macquarie Group, upgraded his recommendation on Travelers partly because of the decision to raise rates. Still, just because insurers might like to collect higher premiums doesnt mean consumers will sit still for them. According to the Zebra, which compares quotes for more than 200 insurance companies, premiums are $1,323 a year for a male with a good driving record, up from $1,194 in 2011. Thats a noticeable bill in the family budget. So theres an incentive to shop around and change insurers. Its getting easier to do. Startups and venture capital investors are racing into the online insurance-shopping business. Mark Cuban is among investors backing the Zebra. CoverHound, which previously helped Google create a comparison website before it was closed last year, has raised more than $50 million for its own similar effort. We are seeing more customers switch now on our site than ever before, says Andrew Rose, the CEO of Compare .com, another company that helps customers find quotes online. At the same time, startup insurers such as Metromile seek to provide cheaper options by allowing motorists to pay for coverage based on how much they drive. Customers put a wireless device in their car that measures mileage and shares it with the insurer. Over the longer term, big insurers face deeper threats to their profitability. Morgan Stanley and Boston Consulting Group said in a recent report that the $200 billion global business could shrink 80 percent by 2040. Ride sharing services such as Uber may lead more people to skip buying a car , or maybe that second family car. Self-driving The Cost of Auto Insurance Average annual premium in the U.S.* Most expensive states in 2016 Least expensive states $1,350 $1,250 $1,150 2011 2016 $2,087 $1,925 $1,762 $764 $817 $919 $937 $971 Michigan Delaware Oklahoma Kentucky Texas Ohio North Carolina Idaho Maine Iowa vehicles could reverse the rise in costly accidents but also force premiums lower. And the makers of navigation apps and connected cars, with direct access to a drivers data, could emerge as competitors to traditional insurers. The watershed moment is sometime in the next decade, says Rose of Compare.com. When do you stop seeing rate increases and you start seeing rate decreases? The companies that guess the next turn correctlyand move fast enough to cut rates and grab market sharewill win the next cycle in the insurance business. Lisa Du and Sonali Basak The bottom line Big car insurers are raising premiums to return to profitabilitybut thats made them vulnerable to new competitors. $2,073 $1,990 The states insurance regulator sets a maximum rate Investing The Master Chides His Students Warren Buffett says he thinks money managers charge too much Thats got to sting, especially for Buffett fans Frank Byrd was a 25-year-old stockbroker at Merrill Lynch in Memphis when he first read Warren Buffetts annual letter to Berkshire Hathaway shareholders. He recalls thinking, Its the first thing that I read that I said, This makes sense. Byrd had noticed that his clients who did the best in the market hardly ever traded; like Buffett, they bought stock in companies they admired and stashed it away for years. I knew it wasnt theory, he says. I knew it worked. He later decided to study investing at Columbia Business SchoolBuffetts alma mater and then worked for 15 years in the hedge fund industry. The billionaire investor has been on Byrds mind recently. Buffett Michigan drivers must buy insurance that covers accidents regardless of fault, with no limit on personal injury coverage 37 PHOTO ILLUSTRATION BY CAROLINE DAVID; BUFFET: PETER KRAMER/NBC/GETTY IMAGES Trading Dirty Deeds Hidden In a Mess of Data A market watchdog has more info than it can afford to sort through We have a perfect forensic record of events At the cash-strapped regulator of the U.S. derivatives market, even an iPhones worth of data is too much to handle. Every day, just a bit after 4 p.m., about 50 gigabytes of data are transmitted from the Chicago office of CME Group to the Commodity Futures Trading Commission in Washington. The files contain the days history of trades on the worlds largest futures exchange, which CME runs. And thats just a sliver of the information the agency gets. One way to nail crooked traders who are distorting prices is to sift through inspired a generation of financial pros to believe beating the market was possible, but lately hes been lecturing about how money man agers and investment consultants arent, on the whole, worth their fees. Hes become an outspoken booster of lowcost funds that passively track stock market indexes such as the S&P 500. Last October, Byrd was invited back to Columbia to give a talk on Buffett. The question at hand: Why is our hero, Warren, steering people away from active managers? That question is sure to get more attention soon. Buffetts annual letter is coming out on Feb. 25, and hes promised to delve into the topic again. Im really eager to read it, says Paul Lountzis, a money manager who worked early in his career at Ruane, Cunniff & Goldfarb, a firm started by Buffetts friend Bill Ruane. I dont think he means that everyone out there is trying to bilk the client, Lountzis says. But it is frustrating when a client calls you and says, Warren said this. Three decades ago, Buffett delivered an influential speech at Columbia called The Superinvestors of Graham-and-Doddsville, describing the results of a small group of investors he knew, including Ruane. All had significantly outperformed the market by following the strategies laid out in a classic investing textbook by Benjamin Graham and David Dodd. Buffetts key message: Markets can be faddish and emotional, and intelligent investors can use that to their advantage. He hit on the theme for years in his annual letter. In the letter three years ago, Buffett struck a far different note. He said most of the money he was leaving for his wife after his death was going to be invested in an S&P 500 tracker like Vanguards 500 Index Fund. I believe the trusts long-term results from this policy will be superior to those attained by most investors whether pension funds, institutions, or individualswho employ high-fee managers, he wrote. Last April, at Berkshires annual meeting in Omaha, he explained why: So many money managers and consultants charged exorbitant fees. The arrangements, he said, eat up capital like crazy, so youd be better off sitting on your rear end in an index fund. The numbers back Buffett up. The Vanguard 500 Index has beaten about 70 percent of funds that buy the stock of large U.S. com panies over the past 15 years, according to data from Morningstar. Hedge funds, too, have underperformed for years, and theyre seeing clients yank money. Buffett himself is a glaring exception to the rule: The share price of Berkshire Hathaway, which holds his investments, gained an annualized 20.8 percent from 1965 through 2015, according to the company, compared with 9.7 percent for the S&P 500. Here is the most lauded money manager of our times saying, Hey, the vast majority of you guys arent worth your weight in fees, says David Rolfe, chief investment officer at Wedgewood Partners, a Berkshire investor that oversees $7.2 billion. Thats got to sting, especially for Buffett fans. Byrd says Buffetts attack on money management makes sense when you look at the numbers. Portfolio management and investment advice as a percentage of U.S. personal consumption has soared sixfold since the 1980s, when Buffett became a household name. Such fees are a sinfully high tax on investors, Byrd says, and must make Buffett mad, given his role in usher ing in the boom. During his years co-managing a hedge fund, Byrd says he rarely had conversations with clients about fees. Hes now working in a different corner of the investing world. Since 2015 his firm, Fielder Capital Group, has been managing money for individuals, focusing on financial planning rather stockpicking. Clients typically pay 0.49 percent to 0.89 percent of assets under management, far less than the 1.5 percent plus a bonus of 20 percent of profits Byrd charged at the hedge fund. He says his clients are primarily invested in index funds, because theyre inexpensive. The planning business, too, is under pressure on fees, with so-called roboadvisers offering inexpensive automated portfolios. Byrd says some clients still want a bit of hand-holding and personal attention on the money front. Unlike beating the market, those are things a good planner can credibly promise to deliver. We manage the lions share, if not all, the liquid net worth of all our clients, Byrd says. Thats, ironically, a much bigger responsibility than I felt running a hedge fund. Noah Buhayar The bottom line Buffett convinced many investors that the market can be beaten, but hes a big fan of index funds. Awkward.

Questions:

1. What are the major differences between index funds and actively managed funds? What are the pros and cons of using one versus the other for various types of investors?

2. Why does Buffett think most long-term investors would be better off with index funds than with actively managed investment alternatives? Do you agree with his reasoning? Why or why not?

3. What was the basis in the past for Buffett saying that is was possible to beat the market? Does his current advocacy for index funds mean that he no longer believes it's possible to beat the market? If not, what else would explain the change in his message?