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Business Drive

Automakers are Coming for Your Insurance Dollars

Photo by melissa mjoen on Unsplash

In August this year, the Financial Times published a breakdown — attributed to Morgan Stanley analyst Adam Jonas — of Tesla’s then share price of $900. The question he was trying to answer was how much each of the EV maker’s business lines contributed to its share value.

In that tear sheet, Jonas assigned $30 to the EV maker’s auto insurance piece. That’s a small portion of its stock value — about 3.3%. But here’s the kicker … this tiny tranche represented a $30 billion valuation for Tesla’s insurance vertical, making that business more valuable than many mainstream insurance companies (European coverage leader Aviva was an example cited in the article).

Tesla stock has since crossed $1,100. You do the math!

I know, I know. Everything about Tesla’s market cap feels unreal. But the analysis still managed to highlight an opportunity that is starting to bubble over — the potential of usage-based, connected, automotive insurance as a viable business for Tesla, and by extension, other car companies.

Insurance in Internet of Things

The concept of connected insurance isn’t anything new.

For the last few years, major insurance providers such as Allstate and State Farm have been offering premium options to customers based on their actual driving record — generally captured through constant smartphone or plug-in dongle monitoring. No harsh braking, no sudden acceleration? Your premiums might be lower than someone with lead foot.

It’s a small — only about 6% of Americans take part in such programs —and somewhat tepidly growing market.

Trust Tesla to turn up the temperature. The company recently introduced its Safety Score (a five-metric, opt-in system of capturing driving behavior of Tesla owners from data generated by the car) program. Tesla intends to use the tool, currently in beta mode, as a litmus test for access to its advanced self-driving modules.

Initially, the Safety Score seemed like a single-purpose application. But Tesla will also use it for its fledgling car insurance program. The company recently rolled out its insurance plans in Texas, following its introduction in California last year. An announcement from Tesla makes it clear how it will merge the Safety Score into its insurance offering.

“We actively monitor braking, turning, tailgating, forward collision warnings and forced autopilot disengagements in order to predict the probability of a collision. This system will continue to be fine-tuned as we receive more data. We believe our insurance premiums will be able to more accurately reflect chances of a collision than any other insurance on the market.” — Tesla Q3 Earnings Report

The last sentence hints at Tesla’s true intent — to become an automotive insurance player.

Tesla maybe the most vocal about its ambitions (as it always is), but the EV maker is not the only auto brand trying to break into the business.

Among the legacy OEMs, Ford has been the most active through its Ford Insure program. The Detroit automaker rolled out the usage-based insurance offer, underwritten by Nationwide, in 2020. Ford’s plan offers deep discounts to customers, provided they allow their Ford vehicles to share data with Nationwide.

General Motors has also entered (in fact, re-entered — more on that later) the insurance business. Last year, it unveiled OnStar Insurance which, like Ford Insure, brings usage-based coverage to GM vehicle owners. The product is underwritten by American Family Mutual Insurance Company, but re-packaged under the GM banner.

Even smaller automakers such as Volvo have made forays into self-branded insurance, and it’s very likely other — particularly the Germans— will follow.

Own the car, own the data

In the automotive world, finance and insurance (F&I) products — think lease protection, extended warranty — are highly profitable. Most automakers and dealers regularly lose money on new cars, which they balance out with the ridiculously high margins from selling F&I, parts and services. This has been the case for several decades.

Technically, some OEMs have played the middle-man for insurance companies for many years, often referring new buyers to specific coverage companies. In fact, GM was in the insurance business since the 1920s, only to shut the unit down when the going got rough in 2008. The very idea of an OEM’s involvement in insurance isn’t terribly new.

So what has changed?

The simple answer is — data. Tons of it. Generated directly by the car.

Industry watchers tend to agree that 85-90 percent of the North American vehicle population will have some form of embedded connectivity and autonomy by 2030. These cars are capable of generating between 1–3 terabytes of data per day.

Among other things, this new type of data is able to capture every nuance of driving behavior, and is completely transforming how insurance values are created and sold to customers.

Traditionally, premiums have been based on static data — driving records, vehicle safety rating, driver age, gender etc. But that information has its flaws. First, past behavior may not always indicate future performance. Second, nuances are rarely captured and customers are made captive to group dynamics. If you are a young, male driver, good luck finding a competitive premium.

Connectivity — whether its through your smartphones or from under the hood — creates a real-time feedback loop bringing a new dynamism to actuarial calculations. Insurance can now be underwritten for the individual, and not just a demographic.

But, for OEMs, individualization is hardly the game. What separates the current insurance play from the past is the fact automakers have more control over the ecosystem. You could argue that smartphones are capable generators of driver behavior data — the many insurance apps and pay-as-you-go-models are proof that they work.

But unlike the smartphone, the car is always there. It IS the most reliable and constant source.

For instance, Tesla has real-time visibility into how their drivers perform unlike insurance companies and price premiums accordingly, a fact that the company’s CFO Zachary Kirkhorn was eager to highlight at their recent investor call. The chart below (from personal finance website, ValuePenguin) shows that Tesla is offering the lowest insurance rates in Texas (caveat — it is not entirely clear if Tesla’s pricing is a function of better data-driven actuarial models or competitive undercutting):

Source: ValuePenguin

The business case?

Carmakers are prepping many data monetization plays, but right now, insurance has the biggest edge. If done right, there are many paths to revenue.

There are the customer premiums and broker fees for selling insurance — that’s obvious.

But there’s probably more money to be made from selling the data back to the insurance industry. Ready-to-use data products like the Safety Score are gold mines and the rush to use that information for underwriting insurance premiums is only beginning.

Risk assessment firm Verisk and information brokers LexisNexis have both set up data exchanges where GM, Ford, Honda and Hyundai are already sharing their information.

The opportunity is big enough to justify OEM ambitions. GM is targeting $6 billion from OnStar Insurance by 2030. Both Tesla — and industry analysts — are bullish about the company’s insurance prospects.

There are challenges though. In the past, OEM-brokered insurance was not very competitive, a key reason why they never took hold. The new data models might help in set more more attractive pricing, but the risk coverage industry is mature and saturated, so it will be tough to stand out.

The profit fundamentals are not that great either. Many insurance companies make very little money and operate on margins as thin as 2%-3%. Once again, the predictive accuracy of connected data will be key. It still remains to be seen if they can outperform traditional actuarial data and add to the bottom line.

What OEMs are betting on is autonomy, and the new dynamics of risk assessment that it will bring. As cars become more self-driving, the onus of safety will shift from the driver to the vehicle. The legacy factors of age and gender will become less important — premiums will be driven more by the vehicle’s performance on the road. And what better way to assess that than with the data generated by the car itself? In an autonomous world, the value of this data will only grow.

Ultimately, for automakers, insurance is just a sideshow. The real play is, and will be, data.

Thanks for reading. If you like fresh perspectives on the future of mobility and transportation, please follow Business Drive.

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