Tesla and other car makers represent a growing threat to incumbent auto insurers, even though they have little direct impact on the insurance market today, Moody’s Investors Services said.
In a report titled, “Tesla’s insurance venture puts incumbents under added pressure to innovate,” Moody’s reviews the competitive advantages of Tesla’s insurance business — mainly, the advantage of having data generated by Tesla cars that can monitor driver behavior.
With the data, Tesla has the ability to offer substantial premium savings to safe drivers. In addition, Tesla likely has much lower operating expenses than traditional insurers, who incur costs of 20%-30% of premiums for marketing and claims handling, Moody’s analysts noted in the report.
In-car cameras and sensors can detect accident causes, lowering claims handling costs. Furthermore, Tesla’s established relationships with customers cut market expenses, the report said.
Tesla’s ability to estimate collision frequency with a high degree of accuracy translates into savings for drivers ranging between 20% to 40% vs. traditional insurers — and 30% to 60% for the safest drivers, Moody’s added. Although the report doesn’t offer any attribution for the discount percentages, Tesla does make the same statement on its website.
The Moody’s report also offers an illustration of how Tesla calculates a monthly “safety score,” which is a key factor in calculating premiums — and savings. The “safety score” calculation, also described on Tesla’s website, considers forward collision warnings per 1,000 miles, hard braking, aggressive turning, unsafe following time and forced Autopilot disengagement (a measure of inattentiveness when using Tesla’s Autopilot advanced driver assistance system).
During a third-quarter earnings conference call last year, Tesla’s Chief Financial Officer Zach Kirkhorn told analysts and investors that the “safety score” was actually a feature for Tesla’s Full-Service Driving beta enrollment program, and that 150,000 cars were using a “safety score” at the time of the call. Adding that Tesla had analyzed 100 million miles of driving data, Kirkhorn said the probability of a collision for a customer using a safety score is 30% lower than one not using the safety score. “It means that the product is working and customers are responding to it,” he said.
The CFO also said the predicted collision frequency in the safety score lines up well with actual driving Tesla data. “Most notably, if you’re in the top tier of safety compared to lower tiers, there’s multiple X difference in probability of collision based upon actual data.”
Google Not A Threat; Car Makers Are
The Moody’s report notes that Tesla doesn’t pose a direct threat to incumbent auto insurers today because Tesla insurance is only available for Tesla cars. But demand for battery-power electric vehicles is taking off, a graph in the report shows. If other smart EV makers join Tesla in entering the insurance business, incumbents could face serious competitive risks.
Even though factors like a high capital burden and thin underwriting margins have kept other “data-rich tech groups,” like Amazon and Google, out of the insurance business, car makers have already dipped their toes in insurance waters — with captives offering car finance and warranties, making auto insurance a next logical step.
If they do not move into auto insurance markets, the car makers have control over the driving data — putting them in the driver’s seat to partner with incumbents who would have to fork over some profits to access data and customers, the Moody’s report said.
The report goes on to list various reasons why other EV makers might want to jump into the insurance game, putting them at the center of connected car digital ecosystems, while outlining factors why these car manufacturers might stay away from insurance (accumulation risk in the event of a cyber attack, for instance).
Whether car makers dive into auto insurance, emerging trends point in the direction of increased take-up of connected cars, which will force incumbents to innovate, the report said. Business model innovation for traditional insurers could involve moves in the direction of risk prevention rather than risk transfer, and even more radical ones — like acquiring a smart car maker to gain continued access to customers and driving data, the report concluded.
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