What Does Tesla's Tentative Move Into Car Insurance Mean For TheSector?

Tesla has used its corporate Twitter account to announce Tesla Insurance, an exclusive policy for its cars that for the moment will only be available in California and promises to reduce the cost of policy premiums by between 20% and 30%. The move was first announced by Elon Musk in April. Comments to the tweet note that in many cases, the policies being offered are higher than those Tesla owners already pay, something that could be signaling implementation problems or a certain degree of miscalculation. But beyond that, should insurance companies be worried by Tesla’s initiative?

As well as the capital needed to guarantee coverage, anybody thinking of setting up an auto insurance company needs to be able to offer customer service, roadside assistance and a network of workshops, which Tesla already mostly already provides to the owners of its vehicles. While the role of companies in the value chain of conventional car insurance is generally that of an information aggregator and provider of third-party services, Tesla’s participation and involvement in that chain will likely be — or is already — significantly higher.

What variables should we take into account when analyzing the entry of an automotive brand such as Tesla into the car insurance business?

• Firstly, the possible savings from the brand’s knowledge of its own vehicles, as well as from taking advantage of the advanced technology, safety and low service requirements of its cars to provide insurance at a lower cost.
• Another element to consider is the homogeneity of a portfolio of vehicles limited at the moment to three models, which suggests possible economies of scale in some repairs that the company usually supervises. This could play to its favor, although it could also be a problem for owners who own other makes, who would have to find another company to insure them.
• Possible differential elements such as the emergency button located on the roof of the vehicle, the location connection that allows remote diagnosis or even certain actions such as disconnecting the battery pack.
• The company says it will not use its access to the information collected by the cameras and systems of a particular vehicle to calculate the price of the policy, but it could prove an advantage when investigating possible accident claims.
• If the safety elements of the Teslas and their greater mechanical simplicity can help reduce the accident rate compared to other makes, which Tesla insists is the case — although this has sometimes been disputed — the company could find itself with a more profitable portfolio of policies than those of a traditional insurer, as well as allowing it to finally corroborate with statistically conclusive figures its claims of lower accident rates.
• Tesla’s vehicles top safety rankings could also mean that accidents have less serious consequences, which would also help generate a more profitable portfolio.
• As Tesla drivers tend to be older, wealthy and better educated there will likely be fewer fraudulent claims, which again could help keep premiums lower.
• The fleet of existing vehicles used to provide roadside assistance, as well as agreements with workshops that already carry out repairs on the aluminum bodies of Tesla’s vehicles could help with integrating insurance into its structure.
• The loyalty of Tesla’s customers and the ease with which they can be contacted through its direct sales channel rather than indirectly through a network of dealers, as well as the effect of offering its customers an all-in-one solution. None of these factors would justify higher prices than those of the market, but it might lead to a rapid expansion among Tesla owners if it could offer truly competitive prices.
• Entering a service industry like insurance could be a way to diversify the company’s business and boost profits, as long as the number of claims remained reasonably low and were not a drain on its financial resources.

If Tesla manages to put together an attractive value proposition in a competitive market such as car insurance and extend it to other states or countries, this strategic vertical integration movement could have major repercussions. Between 2015 and the second quarter of this year, it has sold slightly more than 610,000 vehicles, reaching close to 100,000 vehicles each quarter more recently.

Could Tesla’s entry into the insurance sector prove a game changer?