Tesla’s long-expected entrance into insurance has sent waves through the insurance industry. Incumbents are now challenged to adopt Insurtech solutions for reduced accidents, changed risk profiles, and automated claims in a fast-evolving digital ecosystem.
When Elon Musk says that 30–40% of Tesla’s expected revenue will come from insurance, the world pays attention. With Tesla being the most valuable carmaker in the industry, this places the insurance business as one of its most valuable business units today.
Musk’s announcement during Tesla’s recent Q3 earnings call has revved up the insurance industry. “Obviously, insurance is substantial. So, insurance could very well be, I don’t know, 30%, 40% of the value of the car business, frankly,” said Musk. And with Tesla’s reputation as an ace disrupter, this remarkably big projection has put pressure on legacy insurers to face the transforming shape of insurance itself.
Tesla’s ambitious foray into insurance reflects the rapid digitization of insurance across markets. Today Insurtech is the key to achieving and maintaining a competitive edge. And consumers expect multiple benefits like reduced premiums, improved products, and automatic claims.
Tesla the Disrupter & Insurance
For some time now, Elon Musk has been hinting about insurance becoming a major product of his company. He had laid down plans to offer a ride-hailing app with its own driver insurance cover in the near future.
“The amount of money that people spend on car insurance is like a remarkably big percentage of the cost of a car,” said Musk during the earnings call in February 2020. “A lot of that insurance cost is just because the insurance companies don’t have good information about the drivers.”
Soon after, by September Tesla started offering car insurance. And with Musk’s latest Q3 announcement, Tesla Insurance — the auto insurance offshoot could become one of the largest auto insurers in America.
With insurance, Tesla gains useful insights into repair costs. These insights will allow Tesla to make changes to its processes and design vehicles that are cheaper and easier to repair, which in the long run help save customers money.
“Ultimately where we want to get to with Tesla Insurance is to be able to use the data that’s captured in the car, and the driving profile of the person in the car, to be able to assess correlations and probabilities of crash, and be able to then assess a premium on a monthly basis for that customer,” said the Zachary Kirkhorn, the company’s chief financial officer.
Hence, telematics based, customized services are next in line for Tesla, which will reduce insurance quotes based on how the drivers are driving. Infact, Tesla had already begun bundling usage-based insurance (UBI) with its electric vehicles in Asia.
It will also enable the company to evaluate its technologies, like autopilot, stability control, anti-theft systems, bullet-resistant steel, to reduce risk. Jon McNeill, Tesla’s vice president of sales and services, has said that Tesla’s insurance “takes into account not only the Autopilot safety features, but also the maintenance cost of the car. It’s our vision in the future [that] we could offer a single price for the car, maintenance, and insurance.”
With regulators in UK already asking insurers to provide products, which will address both driver and machine error, and malfunction with a single policy, a lot is set to change, quickly.
Telematics is at the Heart of Being Competitive
The demand by consumers for usage-based insurance (UBI) has been getting louder. They want to know when will their car be able to share driving habits with insurers, so that everybody does not have to pay for the bad drivers on the roads.
Leveraging telematics data, which monitors driver performance and vehicle usage, is the key to delivering the innovative insurance solutions that incentivize customers.
Musk too has long maintained that car insurance rates should fall as driver-assist and self-driving technology become standard. Musk has said that accuracy of information is “at the heart of being competitive” in insurance.
In the insurance industry, telematics is used to collect data about driving habits. Telematics data is captured through a mobile app, or a small IoT device — that is either plugged into the vehicle’s onboard diagnostic port, or is inbuilt in the vehicle. The captured data comes into play when an insurance provider offers usage-based insurance policies, such as pay-per-mile. And anytime there is an accident, instant access to data about the driver behaviour is available.
Tesla, which already offers insurance to drivers based in California, is perfectly positioned to leverage valuable, real-time information from the sophisticated vehicles it produces.
2021 Holds Great Promise for Established Insurtechs
While 50 insurance companies in the 2020 Fortune 500 list generated an average of $3.2 billion in profits in 2019. And of these, fifteen P&C insurers generated $1 billion or more in profits in 2019, with two surpassing $5 billion in earnings. But, with the rising consumer interest in autonomous vehicles, and companies like Tesla entering the insurance market, traditional auto insurance companies are now facing disruption in their face. The modest rate of adoption of Insurtech solutions by insurers is set to change.
In 2021, the insurance industry will have to cater to the increasing appetite for UBI in personal auto. Insurers will have to rethink how to help customers discover and use auto insurance. Accelerated adoption of UBI is expected, as Covid-19 has ushered in a new paradigm where consumers are more conscious about price transparency.
Insurtechs with expertise in telematics, mobility, and IoT hold the key to delivering on new consumer expectations. By enabling insurers to shift from human expert underwriters to automated underwriting driven by data analytics and AI, both insurers and consumers benefit.
Insurers can reinvent themselves by choosing to either focus on customer services, branding, and marketing while outsourcing everything else to Insurtechs with new technological capabilities. Or choose to innovate on their own, by integrating new technologies into their existing business model. In both scenarios, the full embracement of AI capabilities, and big data-driven automation remains an imperative.
The Shifting Paradigm towards Futuretech
The arrival of autonomous vehicles need not remain a threat to auto insurers’ revenues. With an increasing number of digital platforms offering new distribution mechanisms, the case for traditional insurers to develop customized products for the market is the way forward.
Tesla has been partnering with insurance providers in several key markets, which has the potential to develop into complete digital ecosystems that will stretch beyond the automotive, and insurance industries, and include entertainment, news, education, accommodation, tourism, and even space exploration.
From, insurance being a barrier to the many futuristic innovations that Tesla is targeting, insurance has now become a growth driver. It will be easier to sell self-driving vehicles, or send people to Mars through SpaceX. And like most things Tesla, Musk seems to have solved a short-term problem with a long-term strategy.