For most investors in Tesla, Inc. (TSLA), sales of electric vehicles are the top numbers on the company’s balance sheet. But if CEO Elon Musk is to be believed, another part of Tesla’s business could account for a significant chunk of its profits. In an October 2020 earnings call, Musk suggested that the company’s insurance business, launched the previous year, could represent between 30% and 40% of the overall future value of its automotive business.
At Tesla’s current valuation of over $ 1,000 billion, that means insurance business could be worth between $ 300 billion and $ 400 billion in the coming years. To put these numbers into context, the upper end of this estimate is twice the combined valuations of rivals Tesla, Ford Motor Company (F) and General Motors Company (GM).
Key points to remember
- Tesla’s auto insurance, which is currently available in three states, is expected to make a major contribution to the company’s results going forward.
- In its current form, however, the insurance product must overcome several issues to make a visible difference in income.
- Tesla CEO Elon Musk said the insurance business could account for 30-40% of the company’s automotive business.
Tesla’s auto insurance business
With a value of $ 288.4 billion and average annual growth rates of 2.7% over the past five years, auto insurance is an attractive industry. Tesla entered the industry in 2019 in California as a broker for policies underwritten by the State National Insurance Company. The company has expanded its operations since then, launching a similar product in Texas and Illinois. Tesla also asked to offer insurance coverage to its customers in Washington and launched an insurance brokerage company in China in August 2020.
In addition to generating income for its business, providing auto insurance to customers helps the electric car maker solve two problems at the same time.
First, it lowers the overall cost of insurance for Tesla vehicles. A 2018 USA Today survey ranked the Tesla Model S as the most expensive car for auto insurance. Insurance costs for the Model 3, Tesla’s mainstream vehicle, are also higher than the industry average.
Second, and this relates to the first, Tesla’s insurance business could also boost sales of its cars by lowering the overall cost of ownership. The company has promised monthly premium discounts based on the driver’s “safety score”. Scores are calculated using ‘real-time driving behavior’ monitoring that checks for actions such as aggressive turns, hard braking and unsafe following distances. For example, drivers with “average” safety scores save between 20% and 40% on their insurance, while those with the highest safety scores can save between 30% and 60%.
Monitoring driver performance also serves another purpose for the automaker. CEO Musk says this allows for a “much better feedback loop” that links manufacturing processes to car design, meaning the company can make changes to their car design based on the data collected. on driver behavior. Robert Le, analyst at Pitchbook Mobility, says Tesla has “full access data” to vehicle features, such as battery levels, autopilot and car lights.
Of course, the concept of usage-based insurance, or UBI, is not new. Insurance companies like The Allstate Corporation (ALL) already offer similar products. Other automakers like GM and BMW have their own versions of usage-based insurance that offer discounts on standard rates and are much larger than Tesla’s offering.
In such systems, a device which examines driving behavior for a limited period is usually installed in vehicles. Discounts are offered based on assessments performed during the review period as well as credit and vehicle type. Tesla, on the other hand, says its insurance product doesn’t take age, gender or driving history into account.
Can Tesla Generate Profits From Its Insurance Business?
Tesla’s insurance business is not expected to pose a major threat to incumbents in the insurance industry, at least initially. According to Tom Super, vice president of intelligence at JD Power, Tesla’s entry will have “limited impact on the average auto insurance consumer, including the premiums they pay.”
More importantly, he says the success of Tesla’s insurance business depends on the sales of its cars. This statement is not surprising. The auto insurance industry operates on low margins, and scale is necessary to make the business profitable. The electric car maker lags significantly behind its more established counterparts in terms of sales. In 2021, Tesla sold 936,172 vehicles, while GM sold 2.2 million cars during the same period.
Early reviews of Tesla’s insurance product should also be of concern. While investors have approved the product by pushing the company’s stock price higher, customers are harder to sell. Immediately after launch, the Tesla insurance registration site crashed, leading to complaints from those trying to register. Commentators on a Reddit forum said their estimated rates from Tesla were higher than what they were already paying established insurance companies.
Tesla’s insurance underwriters also have an uneven track record with customers: they have received higher-than-average customer complaints compared to other insurers. There’s also the fact that the company’s driver monitoring systems, used in its full self-driving (FSD) and autopilot systems, are under development. A Consumer Reports test last year found GM’s Cruise systems to monitor drivers better than Tesla’s.
But Tesla’s vertically integrated supply chain can provide it with a long-term insurance advantage. The high insurance costs of its cars are a function of their production costs. These costs are falling rapidly, as evidenced by the company’s growing operating profits. Tesla’s insurance product also speeds up the claims process by providing a direct connection to the manufacturer and making it easier for vehicle owners to schedule maintenance and repairs. This could generate a locking effect. As car sales increase in the years to come, Tesla owners will likely prefer the insurance offered by the company.
But it is in the future. Usage-based insurance is relatively uncharted territory. According to the National Association of Insurance Commissioners, there is great uncertainty regarding the selection and interpretation of driving data using UBI and premium pricing rates based on that data.
Analysts have an optimistic view of Tesla insurance anyway. According to Morningstar’s Seth Goldstein, the insurance business will generate the majority of sales and all profits from services and other segments in the future.