How Tesla plans to cut customers’ insurance costs: Tap into Autopilot

Tesla Inc. CEO Elon Musk is turning to the insurance business in an attempt to achieve what the automaker has so far struggled with on the vehicle pricing front: lower costs for customers.

Tesla says it will start offering insurance this month that taps internal data from the AutoPilot driver-assist system to reduce rates. Musk, on Tesla's first-quarter earnings call, said the product would "be much more compelling than anything else out there."

The thinking, experts say, is that Tesla can offer lower rates because AutoPilot will decrease the frequency of collision claims. The automaker would have a better determination of how safe drivers are based on how often they use AutoPilot and could adjust rates more easily than other insurers.

"They have a lot of confidence in their ?AutoPilot system," Jessica Caldwell, executive director of industry analysis at Edmunds, told Automotive News. "It seems as if they want to position that as their unique selling point. Offering insurance that takes it into account is fairly unique."

The automaker has partnered with Liberty Mutual since 2017 on a program called InsureMyTesla, although it's unclear whether the new insurance product would be connected. While details remain scarce, State National Insurance Co., a subsidiary of Markel Corp., has said it will manage the product.

According to a filing with the California Department of Insurance, State National said the Tesla-branded insurance would include, among other features, a customer-permitted direct data feed that would "eliminate frictional costs and inefficiencies inherent in traditional insurance processes." The filing also said that "vehicles equipped with an autonomous feature option will be eligible for credits based on the level of autonomy of the vehicle."

The automaker intends to eventually offer self-driving vehicles, although AutoPilot does not have that capability today.

Musk, on the April 24 earnings call, said if a driver uses the vehicle "in a crazy way," Tesla could raise that customer's insurance rates.

While auto insurance rates vary greatly and depend on factors including age, location and driving history, Teslas have generally been more expensive to insure than competing vehicles because of their technology and parts costs.

According to 2018 data from the Insurance Institute for Highway Safety, the Model S sedan topped a list of the 25 most expensive vehicles to insure.

Meanwhile, a 2019 study by Insure.com ranked the Tesla Model S as the 15th-most costly vehicle to insure in the nation, with an average annual premium of $3,300.

"Ownership cost is a big driver," Caldwell said. "They've had issues on delivering on price, and cheaper insurance could get buyers closer in line to what they were expecting to pay."

Tesla's foray into the insurance business has already drawn skepticism from one potential competitor: Berkshire Hathaway CEO Warren Buffett, whose company owns Geico.

"The success of the auto companies getting into the insurance business are probably about as likely as the success of the insurance companies getting into the auto business," he said at Berkshire's annual meeting this month

Buffett said insurance was not an easy business.

"I would bet against any company in the auto business being any kind of an unusual success," he said. "The idea of using telematics in terms of studying people's driving habits, that's spreading quite widely. It is important to have data on how people drive, how hard they brake, how much they swerve, all kinds of things, so I don't doubt the value of the data. But I don't think the auto companies will have any advantage to that. I don't think they'll make money in the insurance business."

'Impossible to fix'

While Tesla is banking on the reliability of future technology to reduce claim volumes, that doesn't do anything to reduce costs in the present.

"There's a reason why Tesla has one of the highest insurance rates; it's because it's impossible to fix," auto analyst Maryann Keller, principal of Maryann Keller & Associates, told Automotive News. "You'll look at them and you'll say, 'There's nothing wrong with the car. It's got a small dent.' Well, that little dent may cost $15,000 to fix — or more. The real question is can anyone bring these cars back to original equipment condition? That's the promise of insurance."

Caldwell noted that Tesla, which recently closed a $2.7 billion offering of stock and convertible notes to raise much-needed cash, might need even more of a financial cushion if it starts having to pay insurance claims.

"To offer a product like this, they'd need to have plans in place to have reserve capital," Caldwell said. "It just feels like Tesla has their hands in a lot of different buckets — and it seems like their core business is struggling."

Hannah Lutz contributed to this report.