Tesla Inc. – the makers of the popular electric car – announced last week the launch of its very own insurance product. Tesla owners in California can now go to the company’s website to request quotes. While the service is currently online, in the days following the launch Tesla’s site faced several outages and bugs were reported in its quoting tool.
“[The product is] designed to provide Tesla owners with up to 20% lower rates, and in some cases as much as 30%,” the company said in its press release. Though the product is currently only offered in California, there are plans to expand coverage to other states in the near future.
The move to offer car insurance is unique for a car manufacturer. Ford, Toyota and Honda, for example, never offered insurance to their drivers. However, this new pivot might be necessary for the high-end electric cars Tesla is manufacturing. The cars range from $38,000 to more than $80,000, in some cases. The parts inside the vehicle are high-tech and extremely expensive to replace – since most of then they need to come directly from the manufacturer itself. All these ingredients add up to expensive premiums, which might be a deterrent to many would-be owners.
Tesla could potentially have one more advantage to traditional insurers in the space. Data. In a statement a few months ago, Tesla’s CEO Elon Musk said “We essentially have a substantial . . . information arbitrage opportunity where we have direct knowledge of the risk profile of customers and basically the car.” When insurers price out premiums for drivers, the name of the game is risk assessment. They look at factors ranging from a driver’s record to their gender. However, traditionally factors used in building risk models rely on broad generalizations about the public and past trends. With access to individual driver data, Tesla can potentially build more accurate risk profiles which might allow them to price these premiums out more efficiently – thus lowering rates compared to traditional insurers like GEICO or State Farm.
However, for the time being Tesla corrected this to say it uses “anonymised fleet data” and not driver-specific data to assess risks.
Still, the rocky start to the service has Tesla fans worried. Reports from users on Reddit and the company’s forum show users received higher-than-expected quotes. Disappointed forum users reported the premiums they were quoted were a far shot from the 20% Tesla promised in their announcement.
Experts too were surprised by the company’s bold discount claims. The insurance industry is competitive and relatively low-margin. Brett Horn, an analyst at Morningstar, told the Financial Times “That claim would seem to suggest . . . that Tesla cars get into fewer accidents. It’s not clear [that is so].” Horn added that the rates could also be subsidized by Tesla for marketing purposes.