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Can Tesla (TSLA) benefit from its insurance business? | Gadgets 36T


Can Tesla (TSLA) benefit from its insurance business? | Gadgets 36T
Can Tesla (TSLA) benefit from its insurance business? | Gadgets 36T

For most investors, Tesla, Inc. (TSLA) electric vehicle sales are the focus of the company's balance sheet. But if CEO Elon Musk is to be believed, other parts of Tesla's business could account for a significant portion of its profits. During an October 2020 earnings call, Musk hinted that the company's insurance business, which it launched the previous year, could account for 30% to 40% of the total future value of its auto business.

With Tesla's current valuation of over $1 trillion, that means the insurance business could be worth between $300 billion and $400 billion in the years to come. To put these numbers in context, the high end of this estimate is twice the combined valuations of Tesla's competitors, Ford Motor Company (F) and General Motors Company.

Tesla's Auto Insurance Company

Valued at $288.4 billion and growing at a compound annual rate of 2.7% over the past five years, auto insurance is an attractive industry. Tesla began operations in California in 2019 as a broker for policies written by the State National Insurance Company. The company has since expanded to introduce a similar product in Texas and Illinois. Tesla has also applied to offer insurance coverage to customers in Washington and established an insurance brokerage firm in China in August 2020.

Besides generating revenue for its business, providing auto insurance to customers helps the electric car maker solve two problems at once.

First, it reduces the overall cost of Tesla vehicle insurance. A 2018 USA Today poll named the Tesla Model Is the most expensive car for auto insurance. The insurance costs for Tesla's production vehicle Model 3 are also above the industry average.

Second, and related to the first, Tesla's insurance business could also increase sales of its automobiles by lowering the total cost of ownership. The company has promised discounts on monthly premiums based on a driver's "safety rating". Scores are calculated based on "real-time driving behavior"; Monitoring that monitors actions such as aggressive cornering, hard braking, and dangerous distances. For example, drivers with an “average” security rating save between 20% and 40% on their insurance, while those with the highest security rating can save between 30% and 60%.

Driver Performance Monitor also serves another purpose for the automaker. According to CEO Musk, this allows for a "much better feedback loop" linking manufacturing processes to car design, meaning the company can make changes to the car's design based on data it collects about driver behavior. Pitchbook Mobility analyst Robert Le says Tesla has "full access to data" on vehicle features like battery levels, autopilot and car lights.

Of course, the concept of usage-based insurance or UBI is not new. Insurance companies such as The Allstate Corporation (ALL) already offer similar products. Other automakers like GM and BMW have their own usage-based insurance versions that offer discounts off standard rates and are much larger than Tesla's offering.

These systems typically install a device in vehicles that evaluates driving behavior over a period of time. Discounts are offered based on reviews completed during the review period, credit, and vehicle type. Tesla, on the other hand, says its insurance product doesn't take age, gender, or driving history into account.

Can Tesla make a profit from its insurance business? Tesla's

insurance business shouldn't pose a significant threat to the incumbents, at least initially. According to Tom Super, vice president of intelligence at JD Power, Tesla's entry will have "little impact on the average auto insurance consumer, including the premiums they pay.""

More importantly, the success of Tesla's insurance business depends on sales of its cars. This statement is not surprising. The auto insurance industry operates on low margins, and scale is key to making a profit with the business. The electric-car maker lags its more established rivals by a significant sales margin. In 2021, Tesla sold 936,172 vehicles and GM 2.2 million cars in the same period.

Preliminary reviews of Tesla's insurance product should also raise concerns. Although investors have given the product a boost by increasing the share price, customers are finding it harder to sell. Immediately after launch, Tesla's insurance registration page crashed, prompting complaints from people trying to sign up. Commenters on Reddit said their Tesla-estimated rates were higher than what other insurers were already paying to incumbent insurance companies. It's also a given that the company's driver monitoring systems used for fully autonomous driving (FSD) and Autopilot are still a work in progress. A Consumer Reports test last year found that GM's cruise control systems monitored drivers better than those offered by Tesla.

But Tesla's vertically integrated supply chain could give it a long-term advantage in the insurance industry. The high cost of insuring its cars is a function of their cost of production. These costs are falling rapidly, which is reflected in the company's growing operating profits. Tesla's insurance product also speeds up the claims process by providing a direct link to the manufacturer and making it easier for vehicle owners to schedule maintenance and repairs. This can lead to a blocking effect. As car sales increase in the coming years, Tesla owners will likely prefer the insurance the company offers.

But that is in the future. Consumption-based insurance is relatively uncharted territory. According to the National Association of Insurance Commissioners, there is a great deal of uncertainty in the selection and interpretation of UBI driving data and in setting premium rates based on that data. However, analysts are bullish on Tesla insurance. According to Morningstar's Seth Goldstein, the insurance industry will generate the bulk of revenue and all future profits from services and other segments.

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