Library: Sollers – Is Tesla Insurance the beginning of an insurance revolution?

March 2023 featured report:

Is Tesla Insurance an existential crisis for traditional insurers?

This article looks at the current existential crisis insurers face as a result of new distribution models being introduced.

Jaroslaw Bucon, chief customer officer of Sollers Consulting, looks at embedded insurance and the specific example of Tesla that we thought we would highlight this month.

Insurers know that customers don’t need to interact with them unless they own something that needs to be protected or for which they may face a liability. They fear that big tech, using their huge platforms will cut them out of the market and eat their lunch by taking them out of the distribution network almost overnight.

This perhaps is where embedded insurance can appear more threatening, because it removes the need for a separate sales process. For instance, if you’re going to buy a car, the best point to be sold insurance is at the point of sale. The same might be said of protection for certain electronic devices, such as a laptop, though many consumers in certain markets have grown wary of the value of such cover.

Tesla breaks the mould

The same might be said of buying electric cars, because the insurance premium seemed excessively high.

Tesla has taken the embedded insurance model further than most. This is because Elon Musk reverse engineered the insurance sales process and disregarded the benefit – or necessity – of being insured in favour of the impact that needing to have a policy on the car would affect the individual’s willingness to buy a Tesla.

Many potential customers, used to cover for a car with an internal combustion engine, were being put off EVs, because traditional insurers charged high premiums.

And they had good reason. There was little data on reliability, there had been problems with lithium cells, parts were hard to come by, as were auto shops to repair damaged vehicles. And there were other factors that could make the repair expensive, such as the pyro switch, how it operated and whether it always had to be replaced.

These aren’t issues for traditional auto makers, because insurance is an external problem. For Tesla, it was very much its problem, if it put people off buying its EVs.

So Tesla realised if it could find a way to lower the price of insurance, the car would become more attractive and it would sell more of them. This is why it created its own captive insurer.

It’s not the first and won’t be that last, but this isn’t a land grab for for insurance market, but about making the insurance more affordable and therefore the car more attractive.

The influence of behavioural science

Tesla has devised a risk metric it calls its safety score for its US users. This is a grade from zero, meaning the driving behaviour is extremely dangerous, to 100 for a model driver.

Interestingly, despite having access to the data, speeding is not one of the factors integrated into this metric. Unless, of course, you approach other objects quickly. Collisions alert triggers, as do aggressive directional changes, bumper driving/tailgating and driving at night between the hours of 10pm and 4am.

In addition, the driver must constantly supervise the behaviour of the car if using the semi-autonomous driving setting.

The specific weights of each of these risk factors are available on Tesla’s websites, to help policyholders understand how these behaviours convert to a predicted collision frequency (PCF) which is converted into a safety score for the customer.

Giving customers feedback quickly influences their behaviour. The feedback appears in the Tesla phone app and is gamified. The driver understands which of those behaviours increases the risk and therefore which ones are more desirable to improve their score – and potentially reduce their insurance premium.

The author highlights stories of people boasting of driving for 500 miles with a safety score of 99 the whole distance. It wold seem for some, improving one’s safety score is the EV equivalent of hypermiling, during which drivers try to extract the maximum possible mileage from a gallon or tank of fuel.

Everyone’s a winner

The benefit is clear – the higher the score, the lower the insurance premium. While that may seem self-evident, it’s clearly more instructional than simply having a telematics box plugged in.

Because Teslas are one big telematics box. They have sensors on the car, the software is always running and that means that it has all the data that many insurers with telematics boxes will not.

Teslas also employ car security systems that can react faster than the driver should they need help to avoid collisions. And of course, fewer collisions will mean lower insurance.

Claims are traditionally expensive and Tesla has accelerated – if you’ll pardon the pun – the process by taking a live reading from every car using images from its in-built cameras data and sensors. Tesla always knows exactly what’s happened when there’s been a collision, so there can be no claims forms outlining how a tree suddenly jumped out in front of the car.

Committed for the long haul?

Tesla has been selling traditional insurance since 2019. However, owners in 11 states in the US can purchase a policy based on the safety score. Its official goal was to reach eight million customers across the US by the end of 2022.

Tesla’s commitment to the insurance must be assured for the medium term, at least. It is incredibly vertically integrated, says the author, there are no additional costs to add telematics, and Tesla ambitions of huge scale – up to 20 million EVs a year by 2030.

Of course, by then, the relationship between individuals and their transport may have shifted away from personal ownership to transport as a service in some markets, or some mix along the spectrum in others.

No threat to incumbents

Who is going to be the loser with Tesla entering the auto insurance market? The obvious ones are those who can’t sell their products to Tesla owners.

The more Tesla sells its car with insurance, the smaller that part of the market will be for traditional insurers.

Other automotive companies may follow their lead, and there are examples of this happening in some markets. However, says the author, it’s unlikely we will see a market where all manufacturers become like Tesla and forcing their existing distributors out by and creating their own insurance company.

Big tech is not likely to wade in, either, he says, as there aren’t many other products that are as suitable for telematics as vehicles, with the exception perhaps of some portable electronic devices, or home/apartment insurance.

He believes manufacturers won’t want to cross over into insurance and insurance won’t start manufacturing cars.

However, he adds: “In the future, the Tesla insurance model may turn the motor insurance market upside down.

“It will infect other market segments with innovation, but it is doubtful that it will change the entire insurance world.”

For more, see the full report.

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