Tesla and other car makers represent a growing threat to incumbent auto insurers, even though they have little direct impact on the insurance market today, Moody’s Investors Services said in a report this week.
The report titled, “Tesla’s insurance venture puts incumbents under added pressure to innovate,” reviews the competitive advantages of Tesla’s insurance business—mainly, the advantage of having data generated by Tesla cars that can monitor driver behavior. With such data, Tesla has the ability to offer substantial premium savings to safe drivers. In addition, Tesla likely has much lower operating expenses than traditional insurers, who incur costs of 20-30 percent of premiums for marketing and claims handling, Moody’s analysts note in the report.
In-car cameras and sensors can detect accident causes, lowering claims handling costs. Tesla’s established relationships with customers cut market expenses, the report says.
The Moody’s report states that Tesla’s ability to estimate collision frequency with a high degree of accuracy translates into savings for drivers ranging between 20-40 percent vs. traditional insurers—and 30-60 percent for the safest drivers. Although the report doesn’t offer any attribution for the discount percentages, Tesla does make the same statement on its website.
Tesla’s Safety Score
One of the factors in a Tesla safety score is a measure of “forced Autopilot disengagement.”
The Tesla website explains that its Autopilot ADAS system disengages after a driver has received three audio and visual warnings, meaning that sensors detected that the driver took his or her hands off the steering wheel and became inattentive.
Other factors in the score—hard braking, aggressive turning, unsafe following time—are calculated during the time that Autopilot is not engaged
The percentage of hard braking shown in the Tesla app, for example, is the percentage of manual braking that is done with excessive force when driving and Autopilot is not engaged.
Hard braking is defined as “backward acceleration, measured by your Tesla vehicle, in excess of 0.3g” or as a “decrease in the vehicle’s speed larger than 6.7 mph, in one second.”
Other factors are similarly defined on the Tesla website.
The actual “safety score” calculation involves the development of a “predicted collision frequency” (PCF) based on the collision warnings, hard braking and other factors. The PCF is then converted to a “safety score” using a set formula.
The Moody’s report also offers an illustration of how Tesla calculates a monthly “safety score,” which is a key factor in calculating premiums—and savings. The “safety score” calculation, which is also described on Tesla’s website, considers forward collision warnings per 1,000 miles, hard braking, aggressive turning, unsafe following time and forced Autopilot disengagement (a measure of inattentiveness when using Tesla’s Autopilot advanced driver assistance system).
During a third-quarter earnings conference call last year, Tesla’s Chief Financial Officer Zach Kirkhorn told analysts and investors that the “safety score” was actually a feature for Tesla’s Full-Service Driving beta enrollment program, and that 150,000 cars were using a “safety score” at the time of the call (according to a transcript on the Motley Fool website.) Adding that Tesla had analyzed 100 million miles of driving data, Kirkhorn said that the probability of a collision for a customer using a safety score is 30 percent lower than one not using the safety score. “It means that the product is working and customers are responding to it,” he said.
The CFO also said that the predicted collision frequency in the safety score lines up well with actual driving Tesla data. “Most notably, if you’re in the top tier of safety compared to lower tiers, there’s multiple X difference in probability of collision based upon actual data.”
Google Not A Threat; Other Car Makers Are
The Moody’s report notes that Tesla doesn’t pose a direct threat to incumbent auto insurers today because Tesla insurance is only available for Tesla cars.
But demand for battery-power electric vehicles is taking off, a graph in the report shows. In addition, if other smart EV makers join Tesla in entering the insurance business, incumbents could face serious competitive risks.
Even though factors like a high capital burden and thin underwriting margins have kept other “data-rich tech groups,” like Amazon and Google, out of the insurance business, car makers have already dipped their toes in insurance waters—with captives offering car finance and warranties, making auto insurance a next logical step.
And even if they don’t move into auto insurance markets, the car makers have control over the driving data—putting them in the driver’s seat to partner with incumbents who would have to fork over some profits to access data and customers, the Moody’s report says.
The report goes on to list various other reasons why other EV makers might want to jump into the insurance game, putting them at the center of a connected car digital ecosystems, and also reasons why they might stay away from insurance (accumulation risk in the event of a cyber attack, for instance).
Whether the car makers dive into auto insurance or not, emerging trends pointing in the direction of increased take-up of connected cars over time will force incumbents to innovate, the report says. Business model innovation for traditional insurers could involve moves in the direction of risk prevention rather than risk transfer, and even more radical ones—like acquiring a smart car maker to gain continued access to customers and driving data, the report concludes.
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