The auto insurance offering being developed by Tesla, the Elon Musk-led automotive and energy company, is not going to disrupt the sector rapidly and the company is likely to look to partnerships, analysts said.
Equity analysts from Credit Suisse recently attended a presentation by Tesla and heard the firm’s Head of Insurance speak on its progress with the initiative.
Analysts said they came away concluding that, “Tesla is more likely to partner with multiple insurance companies rather than seek to become a formidable competitor.”
It was revealed back in April that Elon Musk-led automotive and energy company Tesla was working on plans to develop its own insurance product, after CEO Musk said it could launch in a matter of weeks and would be “much more compelling than anything else out there.”
The launch has yet to happen, but the rumour mill has certainly been rife with ideas of how Musk and Tesla could disrupt the traditional auto insurance sector with this move.
It later came to light that partnerships would indeed be key, after a filing with the California Department of Insurance revealed that Tesla’s insurance program for its drivers would be fronted by State National Insurance Company, Inc., a subsidiary of Markel Corporation.
Following that, Musk said that Tesla needed to “complete a small acquisition” before launching its insurance offering, which as we suggested that the time likely meant a shell insurance company.
A shell company would give Tesla and Musk an already registered and licensed, but now unused, insurer that could give the firm a head start when launching its insurance operation.
State National has operated shell insurers on behalf of others under its program fronting business before, as has been seen before with ILS manager Nephila Capital (see our sister publication Artemis for more on that).
But, however Tesla and Musk structure their insurance operations, the analysts at Credit Suisse do not believe that it will pose an existential threat to the broader motor insurance industry anytime soon.
Tesla wants to reduce any additional cost burdens on its drivers and introducing its own insurance scheme is one way it can do that.
But the analysts said that at least some of the cost burden Tesla drivers bear is actually related to the complexity of the product itself, longer repair times and often higher repair costs (due to times and also parts availability) as well, which can push up insurance rates for Tesla drivers.
However, Tesla believes that its cars are less likely to become total losses in accidents, than traditional motor vehicles, hence the insurance costs should actually come down somewhat for Tesla drivers.
The analysts believe that telematics could be a key differentiator for Tesla’s insurance offering as well, given the amount of data the cars collect on their condition and their drivers as well.
As ever, when a technology giant looks to enter the insurance or reinsurance space the fear of disruption is often cited as a threat vector.
But in this case it does seem that Tesla and Elon Musk want to deliver on better insurance for its own customers as a first priority, lowering the near-term threat to the auto insurance industry.
That doesn’t mean the threat goes away completely though.
As Tesla ramps up insurance operations and learns more about how to operate insurance in a more consumer friendly and cost-efficient manner, it could in future put these learnings to use in offering insurance to drivers of other vehicles as well.
But at that point in time the traditional auto insurers are likely to face competition from multiple new sources anyway, at which point Tesla is unlikely to be the only threat in town.