Tesla Plans to Sell Owners Cheaper Car Insurance

Tesla Inc. is creating its own branded insurance program, a move the electric-car maker believes will enable it to offer a lower-cost product to drivers.

Source: WSJ - Leslie Scism | Published on May 7, 2019

auto insurance premiums fanning inflation

Tesla Chief Executive Elon Musk has been working with a unit of Virginia-based Markel Corp. and another company, which hasn’t been named, to offer the branded insurance, according to Markel and regulatory insurance filings in California, where Tesla is based.

Revealing the program’s existence in an earnings call last month, Mr. Musk said the goal was to more accurately take into account the safety benefits of the cars’ Autopilot driver-assistance system. Tesla says it has far better data on the performance of its vehicles and their drivers than other insurers do, and believes it can use this information to offer customers lower-cost insurance, according to the California filings.

In the call, Mr. Musk said buyers would have “to agree to not drive the car in a crazy way.” If they do, their insurance rates would be higher, he said. He said he hoped to launch the insurance offering within a month.

It couldn’t be determined how the program would coexist or compare with an arrangement in place since 2017 with Liberty Mutual Insurance Co., called InsureMyTesla. That program is promoted as “a comprehensive insurance plan developed in cooperation with” Liberty Mutual.

Tesla declined to comment, and Liberty Mutual didn’t have an immediate response.

The amount Americans pay for car insurance varies widely and is determined by factors including age, gender, driving history and even where the car is garaged. Some insurers offer discounts on car premiums in order to insure other possessions, such as additional vehicles and multiple homes, people in the industry say.

A 2019 report from QuinStreet Inc. unit Insure.com—a consumer insurance information website—ranked the Tesla Model S as the 15th most expensive car to insure in the country, with an average annual insurance paid of $3,300. The Nissan GT-R was the most expensive at $3,941. Numerous BMW and Mercedes models ranked ahead of the Tesla vehicle.

Industry consultants and academics said Tesla’s plans point to inevitable change in the car-insurance world, as traditional carriers face possible downward pressure on rates if self-driving features help to prevent car wrecks. Car insurers could experience steep drops in premium volumes, and thus their profits, in the next couple of decades, consultants and analysts say.

Currently, 94% of wrecks are attributable to driver error, but in 15 to 20 years, if technology delivers as expected, “auto claim frequencies will be radically reduced, even if claim costs continue to rise,” said Robert Hartwig, director of the Risk and Uncertainty Management Center at the University of South Carolina’s Darla Moore School of Business. Vehicles loaded with expensive sensors and other safety gear are typically much more costly to repair.

Last year, car insurers collected $246 billion in premiums, according to S&P Global Market Intelligence. Such payments accounted for 36% of all premiums for the property-casualty insurance industry.

Tesla’s planned offering “is emblematic of the types of partnerships that traditional auto carriers will need to forge with vehicle manufacturers and data and software conglomerates if they hope to survive the transition from the current environment,” Mr. Hartwig said. The car maker is acting to take advantage “of the value associated with the hordes of data it collects as Tesla owners log miles in their vehicles,” he said.

That said, count Warren Buffett—owner of auto insurer Geico—as a skeptic of Tesla’s plans.

At the Berkshire Hathaway Inc. annual meeting this past weekend he said other car companies have tried insurance in the past, only to fail at it. He said the likelihood of success of auto companies getting into the insurance business is about as likely as insurance companies getting into the auto industry.

“I worry much more about Progressive,” Mr. Buffett said of rival insurer Progressive Corp. “It’s not an easy business at all.”

Mr. Buffett also noted that the idea of using telematics and other data to set rates isn’t unique to a Tesla insurance product. He said it is already spreading quite widely across insurers.

Industrywide, U.S. car insurers are spending millions of dollars on autonomous-driving research, embedding with car manufacturers and testing technology to stay on top of trends.

But so far, the industry hasn’t made dramatic changes to the way it prices car insurance. Truly autonomous cars are years away from dealer showrooms.

Tesla cars also don’t have the ability to fully drive themselves. The car maker’s Autopilot system requires drivers to remain in control and monitors hand movement on the steering wheel. Mr. Musk maintains the system has improved safety, though Tesla has drawn scrutiny for several crashes involving the system.

Researchers at the insurance-industry-funded Highway Loss Data Institute have determined that the crash-avoidance features on the Tesla Model S are reducing physical-damage and injury-liability claims, while Autopilot is lowering collision claims.

In an earnings call earlier this month, Markel Co-Chief Executive Officer Richard R. Whitt said its State National unit will serve as “the plumbing” to enable the Tesla program, providing licensing with state insurance departments.

“Often the people that have these innovative ideas have a hard time navigating the regulatory environment and being able to execute quite honestly on their innovative ideas,” Mr. Whitt said.

Under the Tesla partnership, the risk of losses on policies would be transferred to another party, so far unnamed. Mr. Hartwig, the professor, said the risk could be transferred to a single insurer, a consortium of insurers, or some combination or insurers and reinsurers.