Tesla Insurance Business Comprehensive Analysis, traditional insurance will be replaced?

With a market share of about 17 percent in 12 states (for Tesla vehicles alone) and annualized premium income of about $300 million, Tesla Insurance has yet to realize a significant threat to traditional insurers

– The low price factor that is the most attractive to consumers of Tesla insurance is not supported by reasonable cost rate at present, and the loss rate is 99%, which indicates that the benchmark rate of Tesla insurance may be insufficient and the pricing is too aggressive

— Tesla recently raised rates sharply in several states after comparing them to traditional insurers; at the same time, due to the use of a new safety scoring factor “night driving time proportion”, a considerable number of car owners have been negatively evaluated recently

– The regional expansion of Tesla Insurance has been slower than expected, and the company has somewhat adjusted the business positioning of Tesla Insurance due to higher costs.

Musk, speaking at the January 23 earnings call, described the two functions of running Tesla insurance as:

1, forcing traditional insurers to hold down rates on Tesla vehicles

2. Make Tesla involved in vehicle accident handling and maintenance, and help Tesla continuously improve vehicle safety and maintainability from the aspects of design and manufacturing, so as to reduce the overall cost of vehicle owners

– The claim settlement service efficiency of Tesla Insurance is lower than that of traditional large insurance companies, which is the main negative evaluation factor of Tesla insurance products.

In conclusion, OEM directly deals with auto insurance and has a better ability to deal with “data defined products” (such as UBI products) than traditional insurance companies. However, such products have complicated pricing factors, which are difficult for consumers to understand, and consumers’ adaptation to dynamic price changes.

To sum up, if Ohms operate auto insurance business independently, it is difficult to obtain better cost rates and financial results than large traditional insurance companies. However, if the Ohms fully integrate the auto insurance business with the manufacturing and sales of vehicles, subsidize each other, balance the cost structure of consumers’ car purchase, insurance and maintenance, and optimize the user value of the whole life cycle of the owners, then they may gain certain competitive advantages.

On January 25, 2023, Tesla released its 2022 Q4 and full-year results. In 2022, Tesla delivered 1,316,000 new vehicles worldwide (compared to 936,000 in 2021).

Tesla is the absolute leader of the new energy vehicle market in the United States, with an estimated market share of 63 percent in 2022, down from 79 percent in 2020.

On the earnings call that day, an analyst asked Tesla’s CFO, “Will Tesla insurance becomes a large enough source of revenue for Tesla to provide more detailed information about the business’s financials so that investors can compare it to other insurance companies?” Tesla’s 2022 Q2 and Q3 earnings call did not have any questions about Tesla insurance, so this is the first time in nearly a year that the market and investors have publicly heard Tesla management’s analysis about Tesla insurance.

Zachary, Tesla’s CFO, replied, “I think it may take some time for this business to be big enough to make certain financial disclosures. But I’m happy to provide some updates on the business. At the end of last year, our annual premium income was about $300 million, and it was growing 20% a quarter, so the insurance business was growing faster than the automotive business. On average, 17 percent of Tesla customers in the states where we operate Tesla Insurance use Tesla insurance products. That number continues to rise as we spend more time in the market. We see that most coverage occurs when car owners buy a new car because they are buying insurance for the first time, rather than switching insurers when they already have insurance. Therefore, the insurance business is inherently sticky. ”

Zachary added, “Once again, we created Tesla Insurance to improve and continue to improve the total vehicle cost of our vehicles, given the high rates we have seen from other insurers. This remains our priority. We will obviously run Tesla insurance as a healthy (profitable) business, but we want to make sure we keep costs low and make sure insurance is affordable for our customers. ”

Tesla CEO Musk added, “There are two very important side benefits to Tesla insurance, one of which Zack mentioned, which is that as long as Tesla insures our vehicles at a competitive price, it forces other insurers to offer better rates on Tesla vehicles. So it has a bigger impact than you might think, because it improves the total cost of insurance premiums, even if owners don’t buy Tesla insurance, because other insurance companies have to compete with Tesla and can’t charge outrageous premiums for Tesla vehicles. So Tesla insurance is great. So it has a magnifying effect, which is very important.

And then Tesla insurance also provides us with a nice feedback loop for all Telis globally to minimize the cost of Tesla repairs, because we obviously want to minimize the cost of Tesla repairs in collision and Tesla insurance.

Before, we actually didn’t have a good understanding of this because other insurance companies would cover the cost of repairs. In fact, in some cases, maintenance costs are unreasonably high. So we actually tweaked the design of the car, made changes to the software of the car to minimize the cost of repairs — first of all, the best repair is no repair, which is to avoid accidents altogether, because every Tesla is equipped with the most advanced active safety equipment in the world, whether you buy a fully autonomous driving package or not, You can still get full autopilot or smart features for active safety, active collision avoidance. Most accidents are actually minor, like a broken fender or a scratch on the side of a car. But we’re actually figuring out how to repair cars quickly and efficiently. As I said, these improvements actually apply to older cars as well.

Musk added, “Another key point I’d like to highlight is that it’s worth noting that small changes in bumper design and improvements — obviously improving the logistics of spare parts or providing spare parts for crash repairs — have had a huge impact on repair costs. If you are waiting for a part to be repaired and the part will take a month, you now have a month to rent another car, at great expense. Plus, you’re missing out on the car you love and the car you really want to drive. So it actually has a very significant impact on car costs and customer satisfaction.”

In the Q1 earnings call of 2022, Tesla spent a lot of time summarizing the operation of Tesla Insurance, and proposed that the next step is to offer the product in 80% of the US market by the end of 2022, and focus on expanding the global market outside the US by 2023. At present, Tesla Insurance is only available in 12 states in the United States, which account for about 45% of the market share in the United States. It is obvious that Tesla has not reached its target of regional expansion. In addition, Musk’s latest statement is clearly more cautious and pragmatic than his previous ambitious vision for Tesla insurance, arguing that the biggest role of Tesla insurance is to help consumers lower the cost of cars. The statement of Tesla CFO seems to imply that the pricing model of Tesla insurance is difficult to make profits independently, but insurance can be used as a subsidy for car owners. After all, the manufacturing and sales of Tesla vehicles still have a high profit margin.

With the gradual expansion and operation of Tesla Insurance, we can observe some business and financial results of the operation of this model. According to Tesla’s November 2022 rate filing in Ohio, from August 2019 to November 2022, Tesla Insurance (including products first launched in California) has earned approximately $318 million in premiums across its U.S. operations (including approximately $200 million since October 2016).

According to the annual production of Tesla from 2012 to 2022, we calculate that the global stock of Tesla is about 3.65 million cars. Combined with the sales proportion in the United States, we calculate that the stock of Tesla in the United States is about 1.65 million cars. Assuming an annual premium of $1,800 per Model 3 and Model Y, and $3,000 per Model S and Model X, the total annual premium for all Tesla vehicles in the United States would be about $3.3 billion. That means Tesla Insurance’s current $300 million in annual revenue represents about 9% of the Tesla vehicle market.

However, we note that the signed premiums of Tesla Insurance in California from 2019 to 2021 are respectively 13 million, 55 million and 108 million dollars. In 2022, we assume that it is 150 million dollars. It would be reasonable to infer that roughly 50% of Tesla Insurance’s current revenue comes from California alone (the state with the most pure electric vehicle sales in the US, 39% in 2021).

However, due to the privacy concerns of the state’s insurance regulations, the state’s Tesla insurance is still modeled on traditional products and is not allowed to use Tesla’s safety score to determine and dynamically adjust rates.


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