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Should European insurance providers be worried about Tesla?


Tesla currently offer motor (auto) insurance in 8 US states with work underway to add Nevada and Washington State later this year. In 4 of those states the policies are underwritten by Tesla General Insurance (Tesla partner with insurance providers in all other states).


In early 2021, Tesla began hiring actuaries for an insurance company in Germany. No dates have been announced but it is probably safe to assume it is only a matter of time before they offer car insurance to their European customers.


So what do Tesla offer and how are they different from established insurers? Where are they stronger and where are they potentially weaker than incumbents ? Should current insurance providers be worried and what can they do? We took a look.....


How Tesla insurance works


Tesla only offer motor insurance to their customers i.e. owners of the four current Tesla models (S, 3, X and Y).


Premiums are calculated based on the vehicle, your address, how much you drive, level of cover required and a monthly 'Safety Score'. This score is calculated by Tesla based on 5 safety factors linked to real time driving behaviour and the total number of miles driven.


When you start with Tesla insurance you get a score of 90. After every trip you are shown your score for the journey (between 0 and 100) and your adjusted monthly score for the following month.


Premiums are calculated at the start of each month based on your running score. A higher score directly translates to a lower premium.


How is it different from traditional car insurance?


The most obvious difference is that Tesla only offer insurance to owners of Tesla vehicles. Most car insurance providers will provide cover for the majority of the car fleet in their country (there are of course exceptions e.g. some insurers may not quote for modified cars, high performance sports cars etc.


Standard motor insurance policies are for a 12 month period with the annual premium calculated each year. Tesla calculate premiums on a monthly basis based on driving behaviour and mileage for the previous month.


A clear goal of Tesla is to encourage better driving behaviour but there are potential issues with a gamification strategy for safe driving. For example, hard braking results in a lower score. There is some evidence that this may encourage poor driving practises e.g. coasting through stop signs instead of braking too hard.


Tesla promote that they do not to use standard rating factors favoured by traditional insurers such as a credit score, age, gender or marital status. In the absence of driving behaviour data, insurers have used this information as a 'proxy to determine how safe a driver you probably are (on average). Tesla don't need to do this as they already know how you drive.


Anyone who has ever had to make a claim against their own policy knows that their premium will most likely increase the following year. Tesla do not take into account your claim experience when calculating your premiums. In fact, they state that any claims made while insured with Tesla will also not affect premiums.


Where Tesla wins over incumbent insurers


As previously mentioned, a number of rating factors used by traditional insurers are simply proxies for driving behaviour. Younger drivers tend to have more accidents and therefore pay higher premiums. We all can accept that there must be some 20 year olds who are safer drivers than people twice their age. However they are difficult to identify based purely on information provided through an application form.


Real time driving scores are of huge value to insurance providers and considerable investment has been made by these companies in a variety of telematic products. Whether getting a device installed in your car or using a mobile app, there have been challenges with current telematic offerings that have resulted in poor adoption rates. Tesla benefit from having the sensors already built into the vehicle before they leave the factory.


Compared to the standard fleet of cars on the road today, the Tesla fleet is much younger and less likely to have wear and tear that can cause an accident. Tesla vehicles also have more advanced crash avoidance technology and are therefore less likely to be involved in a collision.


The 'Safety Score' is shown after every journey and directly impacts the level of premiums each month. Tesla argue this encourages better behaviour and is backed up by claims that it results in a 30% lower risk of a collision.


If an accident does happen, Tesla owners can use an app to report a claim instantly. The faster a claim is notified, the faster it can be settled and this results in lower claim costs for Tesla when compared with other insurance providers.


Ultimately with more modern safer cars, driven by people who are incentivised to drive more safely through a 'Safety Score', Tesla are confident that they will have lower claim costs and can offer cheaper premiums. When compared to the market, Tesla claim that "an average driver could save between 20% to 40% and the safest drivers could save between 30% to 60%."


Where insurers have the advantage over Tesla


Tesla will only offer cover to Tesla vehicles despite it only being the 21st most popular car brand in Europe in 2021. Not all Tesla owners will switch to Tesla for insurance so their total market opportunity is very low when compared with traditional insurers.


Insurance fraud costs the industry about 10% of their total premiums each year. One of the most effective ways to identify potential claim fraud is to look at the claim history of those involved in an accident. By choosing not to ask for previous claims information, Tesla may have a higher risk of being targeted by repetitive claimants.


A motor insurance claim can involve many third parties including repair garages, doctors, solicitors and car rental companies. Traditional insurers have long standing relationships in their local market and have a lot of experience in estimating claim costs. New entrants to the market often underestimate the costs of handling claims and this can result in a poor customer experience.


When buying car insurance, consumers are often offered a further discount if they bundle their home insurance or insurer other cars in the household. Tesla do not intend to offer cover for non-Tesla vehicles so will probably not look to compete in this space. There is nothing to stop them adding a home insurance product but this may be a jump too far away from their area of expertise.


Conclusion


Tesla offer usage based insurance (UBI) rather than the annual policy available from incumbents. So are consumers likely to change to this new way of buying cover? A 2020 consumer report by Accenture found that 73% of consumers were interested in UBI, up from 60% just two years previously. Traditional insurers have been slow to offer this type of product and may lose out to companies like Tesla who can deliver what the customer wants.


Car brands and insurance brands have always been perceived very differently so how likely are consumers to buy insurance from their car manufacturer? Just 6 months after launching their insurance product, Tesla were the second-largest insurer of Tesla cars in Texas (source).


If only Tesla enter the market then traditional insurers probably have little to worry about. But what happens to the insurance market if other manufacturers like Volkswagen, Peugeot and Toyota follow?


Where there are threats there are always opportunities. Some of these car brands will prefer to partner with insurance companies to calculate premiums and take on the risk rather than underwriting it themselves. A minimal requirement will be for the insurer to be able to provide usage based insurance. Traditional insurers who do not evolve from using standard rating factors to instead looking at driving behaviour may struggle in this new world.