Published on May 3rd, 2019 | by Vijay Govindan0
Tesla Insurance: Information Arbitrage To Save You Money
May 3rd, 2019 by Vijay Govindan
Tesla Insurance will increase customer satisfaction
I recently went through the pain of looking for auto insurance for my new Tesla Model 3 Long Range. Some auto insurance companies are more sophisticated than others. Others … need some work. Some of the insurance sites I visited could not identify my Tesla VIN. One company said they would call me back. Another company that had an app for my phone would give me a quote in three weeks. One insurer thought our Tesla was a gas car. Facepalm.
Disclosure: I worked at several insurance companies for several years.
Consider two situations: One is a great customer experience for Tesla. The other is somewhere between bad and good, depending on the individual.
Imagine the following: You are ready to order your beautiful Tesla on your phone. You are super excited. You can’t wait to drive it and show it off. Before you place the order, you realize you need insurance before delivery. Magically, Tesla asks you if you want Tesla Insurance on your new vehicle. You add the insurance and you are all set! Painless! You are extremely satisfied with the ease of buying the car plus insurance. You look forward to delivery.
Contrast that with this situation below, which is not so pleasant. (Please note there is some exaggeration.)
Imagine the following: You are ready to order your beautiful Tesla on your phone. You are super excited. You can’t wait to drive it and show it off. You place the order. Then, horror of horrors — you need to find auto insurance before delivery. Yuck!
Panic ensues. How much will it be? Is it going to be super expensive? Do I need to visit a dozen sites to get the best insurance cost? Should you call that weird uncle of yours who knows the best deals in dark alleys with shady characters for everyone and everything? Suddenly, the purchase of your new Tesla got dimmed quite a bit.
Insurance companies can’t individually rate your driving characteristics. Instead, they bucket your experience and characteristics into similar “groups.” These groups are rated, usually by applying one multiplicative rating factor with another. Common groups include your age, when you first got your license, if you are married or single, if you own a home, your credit rating, your accident history, and anything else they ask for when you apply for auto insurance.
Sophisticated insurers use generalized linear models — think of y = a+ bx (instead of a and b being fixed, they can change based on your characteristics). Then expand that to y = a + b1x1 + b2x2 + b3x3 etc. (Linear algebra is very important here.) Even more sophisticated insurers are probably implementing or experimenting with Machine Learning and Big Data analysis.
Buying your insurance when you purchase the car will draw more people to Tesla. It saves you time, effort, frustration, and inconvenience.
Tesla knows how you drive better than you do
On Tesla’s Q1 2019 earnings call, Elon announced Tesla is creating its own insurance product. The company expects to launch it in about a month.
How could Tesla launch an insurance product without having any insurance experience? Very easily. They will have detailed information on how you drive your Tesla, better than an insurance company would. They also know their customers. Most people buying a Tesla probably have excellent credit. Excellent credit is a key factor determining your insurance costs.
“Your insurance score is based in large part on your overall credit rating.”
Last, Tesla knows the inherent safety of its vehicles. Safer vehicles mean reduced chances of having an accident, less chance of getting injured, and less chance of injuring someone else. New Teslas have a suite of cameras, radar, and sensors to keep you and others safe. They are moving towards Full Self Driving (FSD).
Obviously, Tesla would not classify your electric vehicle as a gas car. The company would be able to perform deeper classifications. In a word, it’s information arbitrage. I would define information arbitrage as one party having more knowledge about a situation than the other party in a contract. They use this “added” information to position themselves ahead of everyone else and generate profits from the opportunity. But this is not my term.
“Tesla has an ‘information arbitrage opportunity,’ Musk said. The company is able to capture driving data, giving the company direct knowledge of the risk profile of the driver and car. If customers want to buy Tesla insurance, they might have to agree to ‘not drive the car in a crazy way,’ said Musk, who added they can, they’ll just have a higher insurance rate.”
Tesla has the benefit of having Machine Learning expertise, continuously performing analysis on lots of Big Data, and to top it off, the company has an excellent neural networking team. The first two are keys skills for insurance companies, and the third includes skills the insurance companies wish they had. Tesla can take your vehicle information, anonymize it, group it together, perform statistical analysis, and figure out which combination of behaviors are safer or riskier. Use Autopilot more than 80% of your driving time? That could give you a discount. Drive the speed limit religiously? Could be another discount. Drive more highway miles than local? Discount! Take your Tesla and jump off cliffs? Penalty!
The beauty of this is Tesla only has to price the insurance at break even or a slight profit. It does not have to act as standalone insurers seeking profit as their primary source of income. This would cause a lot of havoc for auto insurance companies as Tesla’s fleet grows.
Now, with this in mind, Tesla Insurance saves you time, effort, frustration, inconvenience, and cost. It improves the customer experience.
What are some advantages Tesla has against insurance companies?
For a simpler format, I will list what I see as advantages for Tesla as an insurance company here.
- Tesla creates the vehicles it will insure. These vehicles are some of the safest, if not the safest, on the road.
If a Tesla gets into an accident, occupants inside the Tesla are less likely to be injured. This reduces liability costs.
- Features such as Traffic Aware Cruise Control and Navigate on Autopilot reduce the risk of rear ending someone (very common) or getting into an accident on the highway. This reduces insurance frequency and severity.
- It is hard to steal a Tesla, reducing property damage costs.
- Tesla software such as Sentry Mode and live camera recording can provide proof for theft, accidents, and who is at fault.
- The Standard Range, Long Range, and Performance versions of the car are similar in body structure, allowing data to be grouped together if needed.
- Tesla owns some body shops.
- Tesla operates Mobile Ranger service.
- Tesla has Machine Learning, Big Data, and neural net experience. It can leverage this experience to price the insurance.
- Tesla gets detailed vehicle telemetry from each vehicle.
- Tesla can supply the parts for repairs at cost and without markup.
- Tesla already calls you within a few minutes if you are in a severe accident.
- Tesla will give you a tow if you run out of charge.
- Tesla can seek a nominal profit.
- Due to all of the above, Tesla can undercut insurance companies on price.
- Because of these inherent advantages Tesla can offer similar coverage for less, or offer more coverage for the same price versus competing insurance companies.
- Bundling the purchase of insurance and purchase/lease of a Tesla together improves the customer experience greatly.
Many things that an insurance company offers, Tesla already does.
Detailed “Tesla Insurance” information
Below is some information recently found regarding Tesla Insurance Services. The link for the entire 4000+ page document can be found if you have the link to the actual insurance filing or visit the CA DOI’s headquarters. Source: Twitter. Thanks, Steve Jobs! (@tesla_truth)
Above, we see Tesla’s rating algorithm for Tesla Insurance Services. The base rate for each coverage is multiplied by the respective discount / surcharge. All the different coverages are added together for the final premium (Line 27).
Summary of coverage definitions
BI = Bodily Injury
PD = Property Damage
MED = Medical Payments
UM = Uninsured Motorist
COMP = Comprehensive
COLL = Collision
UMPD = Uninsured Motorist Property Damage
GAP = Gap Insurance
RR = Rental Reimbursement
RA = Roadside Assistance
CDB = Collision Deductible Buyback
What is most interesting is the Autonomous Vehicle Package on Line 28 (page 66)
AUTONOMOUS VEHICLE PROTECTION PACKAGE
Subject to all the terms, conditions and exclusions of the policy, we will provide the following coverages:
- Autonomous Vehicle Owner Liability
- Cyber Identity Fraud Expenses
- Wall Charger Coverage
- Electronic Key Replacement
We find out later that this coverage will be mandatory for Tesla drivers (page 868).
- Vehicle Automation Package Endorsement
SNIC is proposing to add a Vehicle Automation Package endorsement that is mandatory for all Tesla vehicles, which includes:
- Autonomous Vehicle Owner Liability
- Cyber Identity Fraud Expense
- Wall Charger Coverage
- Electronic Key Replacement
On page 1772, we find the premiums for this coverage. It is not expensive at all.
Autonomous Vehicle Protection Package Premium
Non-Good Driver $25
Good Driver 20
Some concerns about Tesla Insurance
As I would with any new insurance program, I have some concerns.
- This is a new program. With all new programs, the rating factors may not reflect actual experience.
- Tesla has no experience setting rating factors for insurance programs.
- It looks like Tesla is working with State National Insurance Company in California. Do the premiums and profits accrue to Tesla or SNIC? It’s unclear at this point.
- There is no guarantee Tesla will make money from the program.
- Insurance departments are very conservative. As Tesla quickly changes its software and hardware, will the insurance coverages be able to keep up?
- The insurance program for SNIC does not seem to take advantage of the deep data Tesla has about your driving habits.
- How Tesla continues driver and vehicle privacy in the face of all of this data is unknown.
Final thoughts on buying insurance for your new Tesla (US edition)
Tesla Insurance has the potential to drastically improve the insurance experience for Tesla owners. If you are looking for insurance for your new Tesla, I suggest the following.
- Ask your existing insurance company how much it would be to add your new Tesla. Many insurance companies will require your VIN for the most accurate quote.
- If you want a general idea of price, go through some of the major auto insurance websites. Be prepared for a barrage of phone calls. Use an email you don’t care about.
- Be sure to use similar coverage amounts for the most accurate quotes.
- If you have another vehicle or driver, make sure those factors also match. A quote with just a Tesla versus a Tesla plus another vehicle will trigger the multiple vehicle discount. Get all the discounts you can.
- If you have doubt on the whole process, ask an insurance agent for help. They have rating software that instantly compares many auto insurers all at once. They can also explain what the different coverages mean.
- Compare, compare, compare! I would recommend checking with at least 10 different insurers.
- Before you begin the process of buying insurance, clean up your credit score as best you can. Insurance companies have found your credit score is an excellent proxy for the risk of filing a claim. Higher credit score equals less risk of filing a claim.
- If you have prior claims, see how long it will take to clear your credit history. Multiple claims, points, or accidents (even if you are not at fault) will slot you into a higher rating category for up to 5 years.
- I recommend getting GAP insurance. If you have a total loss, GAP insurance will cover the difference between what the vehicle is worth and how much you owe. It’s not much, but will give you lots of peace of mind.
- If you lease or finance, your financial company may require Comprehensive and Collision coverages on your new Tesla.
Buying insurance can be a real chore. Cheer up, your new Tesla is on the way to make it worthwhile!
If this article helps you decide to order a Tesla, take advantage of my Tesla referral link to get up to 5,000 miles of free Supercharging on a Model S, Model X, or Model 3. (If you order before May 28th, we both get 500% more Supercharging miles than the normal 1,000 miles and five more chances to win a Founders Series Model Y or Roadster.) Here’s my code: ts.la/vijay59877
If someone else helped you more with your purchase, please use their referral code.
Disclaimer: I currently own Tesla shares. A recent discussion with $TSLAQQ folks confirmed they are more worried about Tesla’s finances and profit than advancing the world towards sustainable energy. This article is my opinion and is not meant to be investment, financial, or car buying advice. Please see a properly licensed financial advisor to discuss investments. Follow me on Twitter @vijaygovindan17.
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