Hey, I’m Steven and this is Solving The
Money Problem.
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If you’re not, welcome back.
On a 2019 earning call, Elon Musk had this
to say:
[Yes we are creating a Tesla insurance product.
Um, and we hope to launch that, uh, in-in
about a month]
[Ok]
[It will be much more compelling than anything
else out there]
Since then, Tesla insurance has launched in
California with plans to expand coverage throughout
the US over time.
Those of you familiar with legendary investor
Warren Buffet will know he built his empire
on the back of insurance businesses, starting
more than half a century ago.
The Automotive insurance market in just the
United States is almost $300 billion dollars
today and Tesla is uniquely positioned to
take a disproportionately large slice of this--relative
to its fleet size--as its product offering
will be almost impossible to compete with.
In this video I explain why Tesla insurance
will dominate and transform the automotive
insurance industry, while simultaneously fuelling
Tesla’s rapid growth and expansion.
How Insurance Works
First, a quick primer on insurance.
The most important piece of the insurance
puzzle are actuaries.
These are well-paid professionals who analyze
financial risk using mathematics, statistics
and financial theories.
Their job is to determine how much of a premium
must be charged to customers to statistically
ensure a profitable company.
If premiums are too low, insurance payouts
will bankrupt the company.
If they’re too high, no one will buy your
insurance.
It’s a fine line, and the better your data,
the more clarity you have around risk, and
the more accurately you can price your insurance
product.
The thing is, most actuaries have access to
the same data.
It’s broad and general.
Tesla, however, has a RIDICULOUS competitive
advantage.
The Data
A Tesla truly is a smartphone on wheels.
The on-board telemetry is out of control.
Every time you plug in at home, your Tesla
is uploading a mountain of anonymous driving
data to help improve Tesla’s self driving
AI, among other things.
Data is so important in pricing insurance
risk that many insurance companies will provide
customers a telematics device to install in
their vehicles which measures things like
speed, acceleration and braking to determine
how “safe” you are as a driver, and thus
to price your insurance accordingly.
Well, Tesla has more data than ANYONE else,
by a stupid margin.
While Tesla insurance doesn’t utilise this
data yet, you can bet they will over time,
and by doing so, will be able to either drop
prices, increase margins or both.
I really want to stress how important this
is.
No other insurance company can know what Tesla
can about the driving habits of a Tesla driver.
No one can therefore price insurance as accurately
and CHEAPLY as Tesla will be able to.
It just won’t be possible to compete.
Tesla knows when you brake, accelerate, how
fast you do both, your reaction times, whether
you’re ludicrous mode, whether you’re
launching at every set of lights, whether
you’re following too close, whether you’re
staying in your lane, how aggressively you
turn your wheel, whether the air con is on,
whether music is playing, whether you hands
are on the wheel and with a suite of cameras
and other sensors available; what’s going
on around them and perhaps, if you give them
permission, Tesla insurance may even know
if your eyes were on the road.
I won’t be surprised if in the future, Tesla
allows customers to opt-in to “full insurance
data”, giving Tesla more data in exchange
for an even more competitive insurance premium.
So, one more time.
Other insurers will have literally NO HOPE
of competitively offering insurance for Tesla
vehicles when Tesla themselves has a gargantuan
and exclusive data advantage.
There’s no getting around this.
As Tesla Insurance expands throughout the
US, it’s hard to imagine more than a marginal
number of Tesla owners insuring with another
provider.
Even with bundled discounts, it will be incredibly
hard to price better than Tesla.
Autopilot, Active Safety & Pricing
Tesla currently produces the safest, second
safest and third safest vehicle ever tested
by NHTSA with the model S, 3 and X having
the three lowest EVER probabilities of injury
in an accident.
That’s an important piece of the puzzle.
But avoiding accidents is even better and
this is where truly Tesla shines.
Its autopilot and active safety features are
demonstrably safer than human driving and
the software continues to improve over time
with no end in sight.
The more data gathered by the fleet, the safer
these features become and the less accidents
happen.
This perpetual improvement will mean less
payouts and more profits (or lower premiums).
Tesla is so focused on safety that in October
2018, they began voluntarily releasing safety
data every quarter.
The most recent update from 2019 reads:
In the 4th quarter, we registered one accident
for every 3.07 million miles driven in which
drivers had Autopilot engaged.
For those driving without Autopilot but with
our active safety features, we registered
one accident for every 2.10 million miles
driven.
For those driving without Autopilot and without
our active safety features, we registered
one accident for every 1.6 million miles driven.
By comparison, NHTSA’s most recent data
shows that in the United States there is an
automobile crash every 479,000 miles.
We can see already, Tesla's are demonstrably
less likely to be in an accident than other
vehicles even without software safety features
enabled.
And with Autopilot engaged, you’re 6 times
LESS LIKELY to be in an accident than in another
vehicle.
Tesla will continue to improve these features,
resulting in less accidents per mile driven
and ever-lower premiums over time.
What other auto insurer can say it ONLY insures
a fleet of vehicles that are:
Way safer than anything else on the road AND
will continue to get safer over time?
Answer: none.
For now.
Autonomy
And that brings us to autonomy, or full self-driving.
As we transition to autonomous driving, there
will still be accidents.
Less than if these vehicles were being human
driven, but stuff happens.
Tesla themselves have said that when a fully
autonomous Tesla crashes, the software is
at fault.
As in, Tesla is liable, not the owner of the
vehicle.
Had Tesla not entered the insurance space,
this could be a big, BIG problem.
What insurer is going to provide insurance
for a self-driving car?
How will they price risk?
It’s so radically different and new that
it’s hard to imagine how things would play
out.
My best guess is extraordinarily high premiums
until insurers gather enough real world data
to begin pricing better.
The timing of Tesla insurance is impeccable
and, I may be hallucinating here but, I get
the feeling Tesla are offering insurance NOW
so that when autonomy is solved, they’ll
already have trekked into the uncharted terrain
of insurance around self-driving vehicles
and have a competitively priced product that
gives owners peace of mind.
Whether you believe Tesla solves full self-driving
this year, or this decade, doesn’t matter.
When they do, and the robotaxi fleet awakens,
you can bet Tesla Insurance will be there
to give robotaxi owners peace of mind.
Pricing Pressure
So far, most Calirofnian Tesla Insurance customers
are paying premiums around 20% lower than
competitors.
In some cases this is as much as 30% lower.
This has two effects.
The first is that many budget-conscious customers
will make the switch to Tesla insurance to
save money.
The second is to put pricing pressure on other
insurers.
It’s no secret that today, most companies
charge through the nose to insure a Tesla.
Why?
It’s new and their actuaries don’t have
enough data to clearly price risk, so they
take a conservative approach to pricing.
Tesla publishing their quarterly safety data
and itself offering competitive insurance
premiums will put pricing pressure on other
insurers.
At least, if they want any hope of insuring
Tesla vehicles in the future.
But remember, no matter how much safety data
Tesla does publish, no one will have access
to the same depth and breadth of individual
driver data than Tesla.
No one will be able to compete on price unless
they suffer lower margins.
Fat Float
Back to legendary investor Warren Buffet.
I mentioned he built his empire on the back
of insurance companies.
But how?
Let's read about “the float”:
Float, or available reserve, is the amount
of money on hand at any given moment that
an insurer has collected in insurance premiums
but has not paid out in claims.
So, what is one to do with all that money?
Well, leaving it sitting around is pretty
bone-headed when you can put it to work and
that’s exactly what is done.
Insurers start investing insurance premiums
the moment they’re collected, earning interest,
dividends and other income until claims are
paid out.
In the case of Tesla, this “float” can
be used to accelerate their expansion, drive
costs down, grow R&D efforts, improve the
self-driving AI and well, just about anything
that doesn’t put the capital at enormous
risk.
And over time, as safety features improve,
less payouts will occur meaning more of that
float becomes pure profit for Tesla.
If we use a $2,000 annual insurance premium
as our starting point, we can do some very
quick back-of-the-napkin calculations.
10,000 insurance customers equals $20 million
dollars of float, EVERY YEAR.
100,000 customers equals $200 million dollars,
every year.
1,000,000 customers equals $2 billion dollars,
enough to build a gigafactory.
Every year.
Keep in mind, today, Tesla’s entire fleet
is around 1 million vehicles with more than
500,000 additional deliveries expected this
year alone.
By the middle of this decade, Tesla’s fleet
will be many millions strong.
The potential here is enormous.
Overheads, Margins & Vertical Integration
Tesla is a ruthlessly lean and efficient optimization
machine.
“Adding on” an automotive insurance product
to its existing automotive business is a perfect
synergy, creating cost advantages that stand-alone
insurers do not have.
It’s just the way of vertical integration.
One example of this is advertising.
Tesla’s vehicles are so good they sell themselves.
To date, Tesla has never paid for an advertisement
or endorsement.
They haven’t had to.
Picture this future.
You buy a Tesla and at the time of purchase,
Tesla offers to bundle insurance with your
car.
Many will sign up for the convenience alone.
Others will shop around only to discover the
Tesla insurance is the cheapest available
anyway.
How, as a competitor, will you have any hope
in reaching--let alone winning the business
of--a Tesla owner?
How much will you have to spend on advertising?
How low will your margins need to be to compete?
Good luck.
The future I envision is one in which almost
every Tesla owner has Tesla insurance, effectively
meaning Tesla has self-insured their entire
fleet.
The take rate is sure to be incredibly high
because Tesla will have the best data and
therefore, the best pricing.
Incremental improvements in active safety
and autopilot will compound across the entire
Tesla fleet, saving mountains--I mean MOUNTAINS--of
cash that was once reserved for insurance
payouts and will no longer be needed.
So too will the exponentially increasing swathes
of driver data.
Tesla will continue to get better at pricing
risk by using real world, driving-specific
data, leading to bigger margins and/or lower
premiums.
Everyone wins.
Expansion Into Other Insurance
Alright, hear me out.
I suspect long term, Tesla will enter home
insurance and that their foray into automotive
insurance is just the first step.
The ideal Tesla customers has a Tesla or two
parked in their garage, charging from a Tesla
powerwall which was fed by photons collected
by Solar Panels or the Solarglass roof.
Easily six-figures worth of Tesla products
in one place.
These are all big-ticket items and it makes
sense that, if Tesla already has insurance
infrastructure, offering home insurance is
a logical next step.
Bundled insurance premiums can be super competitive.
Compounded with the innate data advantage
Tesla has for automotive insurance and it’s
not beyond the realms of possibility that
Tesla will be able to compete with the biggest
in the business by not just offering automotive
insurance, but home insurance too.
And this is a subject for another, more speculative
video, but I won't be surprised if Tesla gets
fully into the smart home business, including
climate control systems.
This would incentivise Tesla even more into
offering home insurance.
But more on that in a future video.
To sum it up, Tesla insurance is a real “sleeper
product”.
As it’s only available in California right
now, few owners know of it, few investors
think of it and few analysts recognize its
potential.
The insurance industry literally revolves
around pricing risk.
Whoever can price risk best, usually wins.
And how do you price risk?
With data.
The best data means the best value premium.
If your data sucks, you have more uncertainty
and need to be more conservitve, thus forcing
your premiums higher to cover the “what
ifs”.
But Tesla will have far fewer “what ifs”.
They’ll know more about their vehicles in
general terms, and they’ll know more about
their drivers than anyone else.
And their vehicles get safer over time.
You can’t compete with that.
Tesla insurance will dominate and transform
the industry.
I can’t imagine a future in which MOST Tesla
owners are not ALSO Tesla insurance customers.
And as this happens, the automotive insurance
industry is set for major disruption.
Picture this.
In a world of electric, autonomous vehicles--each
gathering gargantuan amounts of useful, driver
behavior and safety data--traditional automotive
insurance models are worthless.
Statistical tables are general and useful,
but hyper-specific driver-centric data is
on a whole other level and infinitely more
valuable.
Once again, Tesla is leading the way and everyone
else will soon be trying to catch up.
The way I see this playing out is that automakers
of the future, much like Tesla today, will
look to partner exclusively with an insurance
company (or start their own) which gains opt-in
telemetry access to its fleet, enabling more
competitive pricing on insurance by using
driver-specific data over generic actuarial
data.
At present, no other automaker or insurer
can even collect this data so for now, Tesla
Insurance has no competition which means lower
premiums for customers and higher margins
for Tesla.
And it only gets better from here.
Remember, the safer Tesla’s autopilot software
becomes, the less accidents will occur and
more “float” can be used to accelerate
Tesla’s mission.
This matters.
I’m Steven Mark Ryan, this is Solving The
Money Problem, and I love you all.
Thanks so much for watching.
Let me know your thoughts in the comments
below.
Do you have Tesla insurance?
Will you buy it when it's available in your
area?
What do you think of Tesla insurance and the
possibilities with its extensive driver data?
And of course, if you have any ideas for future
videos, let me know.
I read ALL your comments.
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