Musk moves into insurance to cut premiums for Tesla owners

Tesla is in the early stages of becoming a fully-fledged motor insurer, in a rare move by a carmaker to break into the insurance market as it attempts to bring down the cost of premiums for owners of its electric vehicles.

The electric carmaker announced last week that it would begin offering auto insurance to its customers, but only acting as a broker in the state of California. Speciality insurance company Markel writes the underlying insurance policies.

However, Tesla has said it is “taking steps” towards becoming an insurer in its own right and “taking on these responsibilities in the future”. Using its own balance sheet to underwrite car insurance would be a highly unusual, if not unique move by a car manufacturer.

Tesla chief executive Elon Musk, who is known for his ambitions that span industries from solar power to space travel, has complained in the past about the high premium paid to insure Tesla cars, which range in price from $38,000 to more than $80,000. He said in April that Tesla was hoping to launch an insurance programme by as early as May, adding that "it will be much more compelling than anything else out there".

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He also suggested that Tesla’s access to data captured by the cars themselves would give the company an edge in pricing over third-party insurers: “We essentially have a substantial . . . information arbitrage opportunity where we have direct knowledge of the risk profile of customers and basically the car.”

Lower price

Tesla said they use “anonymised fleet data” but not driver-specific data to assess risks.

The company’s announcement of the current programme said it was “designed to provide Tesla owners with up to 20 per cent lower rates and in some cases as much as 30 per cent”. The lower price also reflected “Tesla’s active safety and advanced driver assistance features”, it added.

The car insurance market is highly price competitive and some observers were surprised at the size of the promised discount. "That claim would seem to suggest . . . that Tesla cars get into fewer accidents. It's not clear [that is so]," said Brett Horn, an analyst at research group Morningstar. He said it was also possible the rates were being subsidised for marketing purposes.

While the idea of a carmaker holding insurance risks on its balance sheet is very rare, partnerships between car companies and insurance companies – allowing vehicle and policy to be bought together – are gaining in popularity.

Evolving technology

Allianz has set up a unit called Allianz Automotive to look for similar deals. It has arrangements with 40 motor manufacturers including Volkswagen and PSA. This year it signed a deal with BMW in the Netherlands.

Martin Hoff, head of automotive market management and innovation at Allianz Automotive, said the carmakers offered a new route to market. But another reason that such tie-ups make sense is because of evolving auto technology and the increasing importance of data.

“Cars are becoming more intelligent and connected. We see a strong value in working with car manufacturers to capture the new technology and create better products for consumers,” he said.

State National, a subsidiary of Markel, will be insurer of record for the Tesla insurance policies, underwriting the risk and setting prices. While Tesla only has regulatory approval to act as a broker in California, State National is licensed to sell insurance in all 50 US states.

State National is a speciality property-casualty insurer rather than a car insurer. It will reinsure all of the risk it takes on in the Tesla partnership, as it does with most of the risks it assumes, according to Markel. State National is, in effect, taking a servicing and underwriting fee while passing claims risk on to the reinsurers. The company has not disclosed which underwriters have bought the Tesla policy risks. –Copyright The Financial Times Limited 2019