Tesla Insurance Will Dominate & Transform The Insurance Industry - YouTube

Hey, I’m Steven and this is Solving The Money Problem.

If you’re new, welcome.

If you’re not, welcome back.

On a 2019 earning call, Elon Musk had this to say:

[Yes we are creating a Tesla insurance product.

Um, and we hope to launch that, uh, in-in about a month]

[Ok]

[It will be much more compelling than anything else out there]

Since then, Tesla insurance has launched in California with plans to expand coverage throughout

the US over time.

Those of you familiar with legendary investor Warren Buffet will know he built his empire

on the back of insurance businesses, starting more than half a century ago.

The Automotive insurance market in just the United States is almost $300 billion dollars

today and Tesla is uniquely positioned to take a disproportionately large slice of this--relative

to its fleet size--as its product offering will be almost impossible to compete with.

In this video I explain why Tesla insurance will dominate and transform the automotive

insurance industry, while simultaneously fuelling Tesla’s rapid growth and expansion.

How Insurance Works

First, a quick primer on insurance.

The most important piece of the insurance puzzle are actuaries.

These are well-paid professionals who analyze financial risk using mathematics, statistics

and financial theories.

Their job is to determine how much of a premium must be charged to customers to statistically

ensure a profitable company.

If premiums are too low, insurance payouts will bankrupt the company.

If they’re too high, no one will buy your insurance.

It’s a fine line, and the better your data, the more clarity you have around risk, and

the more accurately you can price your insurance product.

The thing is, most actuaries have access to the same data.

It’s broad and general.

Tesla, however, has a RIDICULOUS competitive advantage.

The Data

A Tesla truly is a smartphone on wheels.

The on-board telemetry is out of control.

Every time you plug in at home, your Tesla is uploading a mountain of anonymous driving

data to help improve Tesla’s self driving AI, among other things.

Data is so important in pricing insurance risk that many insurance companies will provide

customers a telematics device to install in their vehicles which measures things like

speed, acceleration and braking to determine how “safe” you are as a driver, and thus

to price your insurance accordingly.

Well, Tesla has more data than ANYONE else, by a stupid margin.

While Tesla insurance doesn’t utilise this data yet, you can bet they will over time,

and by doing so, will be able to either drop prices, increase margins or both.

I really want to stress how important this is.

No other insurance company can know what Tesla can about the driving habits of a Tesla driver.

No one can therefore price insurance as accurately and CHEAPLY as Tesla will be able to.

It just won’t be possible to compete.

Tesla knows when you brake, accelerate, how fast you do both, your reaction times, whether

you’re ludicrous mode, whether you’re launching at every set of lights, whether

you’re following too close, whether you’re staying in your lane, how aggressively you

turn your wheel, whether the air con is on, whether music is playing, whether you hands

are on the wheel and with a suite of cameras and other sensors available; what’s going

on around them and perhaps, if you give them permission, Tesla insurance may even know

if your eyes were on the road.

I won’t be surprised if in the future, Tesla allows customers to opt-in to “full insurance

data”, giving Tesla more data in exchange for an even more competitive insurance premium.

So, one more time.

Other insurers will have literally NO HOPE of competitively offering insurance for Tesla

vehicles when Tesla themselves has a gargantuan and exclusive data advantage.

There’s no getting around this.

As Tesla Insurance expands throughout the US, it’s hard to imagine more than a marginal

number of Tesla owners insuring with another provider.

Even with bundled discounts, it will be incredibly hard to price better than Tesla.

Autopilot, Active Safety & Pricing

Tesla currently produces the safest, second safest and third safest vehicle ever tested

by NHTSA with the model S, 3 and X having the three lowest EVER probabilities of injury

in an accident.

That’s an important piece of the puzzle.

But avoiding accidents is even better and this is where truly Tesla shines.

Its autopilot and active safety features are demonstrably safer than human driving and

the software continues to improve over time with no end in sight.

The more data gathered by the fleet, the safer these features become and the less accidents

happen.

This perpetual improvement will mean less payouts and more profits (or lower premiums).

Tesla is so focused on safety that in October 2018, they began voluntarily releasing safety

data every quarter.

The most recent update from 2019 reads:

In the 4th quarter, we registered one accident for every 3.07 million miles driven in which

drivers had Autopilot engaged.

For those driving without Autopilot but with our active safety features, we registered

one accident for every 2.10 million miles driven.

For those driving without Autopilot and without our active safety features, we registered

one accident for every 1.6 million miles driven.

By comparison, NHTSA’s most recent data shows that in the United States there is an

automobile crash every 479,000 miles.

We can see already, Tesla's are demonstrably less likely to be in an accident than other

vehicles even without software safety features enabled.

And with Autopilot engaged, you’re 6 times LESS LIKELY to be in an accident than in another

vehicle.

Tesla will continue to improve these features, resulting in less accidents per mile driven

and ever-lower premiums over time.

What other auto insurer can say it ONLY insures a fleet of vehicles that are:

Way safer than anything else on the road AND will continue to get safer over time?

Answer: none.

For now.

Autonomy

And that brings us to autonomy, or full self-driving.

As we transition to autonomous driving, there will still be accidents.

Less than if these vehicles were being human driven, but stuff happens.

Tesla themselves have said that when a fully autonomous Tesla crashes, the software is

at fault.

As in, Tesla is liable, not the owner of the vehicle.

Had Tesla not entered the insurance space, this could be a big, BIG problem.

What insurer is going to provide insurance for a self-driving car?

How will they price risk?

It’s so radically different and new that it’s hard to imagine how things would play

out.

My best guess is extraordinarily high premiums until insurers gather enough real world data

to begin pricing better.

The timing of Tesla insurance is impeccable and, I may be hallucinating here but, I get

the feeling Tesla are offering insurance NOW so that when autonomy is solved, they’ll

already have trekked into the uncharted terrain of insurance around self-driving vehicles

and have a competitively priced product that gives owners peace of mind.

Whether you believe Tesla solves full self-driving this year, or this decade, doesn’t matter.

When they do, and the robotaxi fleet awakens, you can bet Tesla Insurance will be there

to give robotaxi owners peace of mind.

Pricing Pressure

So far, most Calirofnian Tesla Insurance customers are paying premiums around 20% lower than

competitors.

In some cases this is as much as 30% lower.

This has two effects.

The first is that many budget-conscious customers will make the switch to Tesla insurance to

save money.

The second is to put pricing pressure on other insurers.

It’s no secret that today, most companies charge through the nose to insure a Tesla.

Why?

It’s new and their actuaries don’t have enough data to clearly price risk, so they

take a conservative approach to pricing.

Tesla publishing their quarterly safety data and itself offering competitive insurance

premiums will put pricing pressure on other insurers.

At least, if they want any hope of insuring Tesla vehicles in the future.

But remember, no matter how much safety data Tesla does publish, no one will have access

to the same depth and breadth of individual driver data than Tesla.

No one will be able to compete on price unless they suffer lower margins.

Fat Float

Back to legendary investor Warren Buffet.

I mentioned he built his empire on the back of insurance companies.

But how?

Let's read about “the float”:

Float, or available reserve, is the amount of money on hand at any given moment that

an insurer has collected in insurance premiums but has not paid out in claims.

So, what is one to do with all that money?

Well, leaving it sitting around is pretty bone-headed when you can put it to work and

that’s exactly what is done.

Insurers start investing insurance premiums the moment they’re collected, earning interest,

dividends and other income until claims are paid out.

In the case of Tesla, this “float” can be used to accelerate their expansion, drive

costs down, grow R&D efforts, improve the self-driving AI and well, just about anything

that doesn’t put the capital at enormous risk.

And over time, as safety features improve, less payouts will occur meaning more of that

float becomes pure profit for Tesla.

If we use a $2,000 annual insurance premium as our starting point, we can do some very

quick back-of-the-napkin calculations.

10,000 insurance customers equals $20 million dollars of float, EVERY YEAR.

100,000 customers equals $200 million dollars, every year.

1,000,000 customers equals $2 billion dollars, enough to build a gigafactory.

Every year.

Keep in mind, today, Tesla’s entire fleet is around 1 million vehicles with more than

500,000 additional deliveries expected this year alone.

By the middle of this decade, Tesla’s fleet will be many millions strong.

The potential here is enormous.

Overheads, Margins & Vertical Integration

Tesla is a ruthlessly lean and efficient optimization machine.

“Adding on” an automotive insurance product to its existing automotive business is a perfect

synergy, creating cost advantages that stand-alone insurers do not have.

It’s just the way of vertical integration.

One example of this is advertising.

Tesla’s vehicles are so good they sell themselves.

To date, Tesla has never paid for an advertisement or endorsement.

They haven’t had to.

Picture this future.

You buy a Tesla and at the time of purchase, Tesla offers to bundle insurance with your

car.

Many will sign up for the convenience alone.

Others will shop around only to discover the Tesla insurance is the cheapest available

anyway.

How, as a competitor, will you have any hope in reaching--let alone winning the business

of--a Tesla owner?

How much will you have to spend on advertising?

How low will your margins need to be to compete?

Good luck.

The future I envision is one in which almost every Tesla owner has Tesla insurance, effectively

meaning Tesla has self-insured their entire fleet.

The take rate is sure to be incredibly high because Tesla will have the best data and

therefore, the best pricing.

Incremental improvements in active safety and autopilot will compound across the entire

Tesla fleet, saving mountains--I mean MOUNTAINS--of cash that was once reserved for insurance

payouts and will no longer be needed.

So too will the exponentially increasing swathes of driver data.

Tesla will continue to get better at pricing risk by using real world, driving-specific

data, leading to bigger margins and/or lower premiums.

Everyone wins.

Expansion Into Other Insurance

Alright, hear me out.

I suspect long term, Tesla will enter home insurance and that their foray into automotive

insurance is just the first step.

The ideal Tesla customers has a Tesla or two parked in their garage, charging from a Tesla

powerwall which was fed by photons collected by Solar Panels or the Solarglass roof.

Easily six-figures worth of Tesla products in one place.

These are all big-ticket items and it makes sense that, if Tesla already has insurance

infrastructure, offering home insurance is a logical next step.

Bundled insurance premiums can be super competitive.

Compounded with the innate data advantage Tesla has for automotive insurance and it’s

not beyond the realms of possibility that Tesla will be able to compete with the biggest

in the business by not just offering automotive insurance, but home insurance too.

And this is a subject for another, more speculative video, but I won't be surprised if Tesla gets

fully into the smart home business, including climate control systems.

This would incentivise Tesla even more into offering home insurance.

But more on that in a future video.

To sum it up, Tesla insurance is a real “sleeper product”.

As it’s only available in California right now, few owners know of it, few investors

think of it and few analysts recognize its potential.

The insurance industry literally revolves around pricing risk.

Whoever can price risk best, usually wins.

And how do you price risk?

With data.

The best data means the best value premium.

If your data sucks, you have more uncertainty and need to be more conservitve, thus forcing

your premiums higher to cover the “what ifs”.

But Tesla will have far fewer “what ifs”.

They’ll know more about their vehicles in general terms, and they’ll know more about

their drivers than anyone else.

And their vehicles get safer over time.

You can’t compete with that.

Tesla insurance will dominate and transform the industry.

I can’t imagine a future in which MOST Tesla owners are not ALSO Tesla insurance customers.

And as this happens, the automotive insurance industry is set for major disruption.

Picture this.

In a world of electric, autonomous vehicles--each gathering gargantuan amounts of useful, driver

behavior and safety data--traditional automotive insurance models are worthless.

Statistical tables are general and useful, but hyper-specific driver-centric data is

on a whole other level and infinitely more valuable.

Once again, Tesla is leading the way and everyone else will soon be trying to catch up.

The way I see this playing out is that automakers of the future, much like Tesla today, will

look to partner exclusively with an insurance company (or start their own) which gains opt-in

telemetry access to its fleet, enabling more competitive pricing on insurance by using

driver-specific data over generic actuarial data.

At present, no other automaker or insurer can even collect this data so for now, Tesla

Insurance has no competition which means lower premiums for customers and higher margins

for Tesla.

And it only gets better from here.

Remember, the safer Tesla’s autopilot software becomes, the less accidents will occur and

more “float” can be used to accelerate Tesla’s mission.

This matters.

I’m Steven Mark Ryan, this is Solving The Money Problem, and I love you all.

Thanks so much for watching.

Let me know your thoughts in the comments below.

Do you have Tesla insurance?

Will you buy it when it's available in your area?

What do you think of Tesla insurance and the possibilities with its extensive driver data?

And of course, if you have any ideas for future videos, let me know.

I read ALL your comments.

p.s.

If you’re still watching, you’re AWESOME.

This channel has kind of blown up since it launched and I’m working on making the best

possible content for you guys, but it takes time.

Consider supporting the channel at http://patreon.com/solvingthemoneyproblem so I can continue creating content for you

guys.

There’s a link in the description.

Either way, the best form of support is you being here and watching, so thanks again.