But despite his fascination with and longtime use of Twitter, the billionaire withdrew his offer to buy the social media app for $44 billion last Friday, ending the slow walk back that he had started weeks ago. Of course, not many expected him to follow through, even when the deal was announced and the market selloff – including Tesla’s stock move – was already telegraphing a low likelihood of consummation.
With the Twitter situation put to bed, Mr. Musk can refocus on his two fundamental interests, aptly described in a December tweet as “Mars & Cars.” With the ramp-up of Tesla’s insurance product, there is plenty that Musk can focus on even without social media. Last month, we outlined a hypothetical scenario whereby Tesla could become a leading auto insurer if all the ducks lined up for the company.
The chart below shows the market cap for the P&C insurance industry, insurance brokers, the largest auto manufacturers, Amazon, Google, Meta (Facebook), and Twitter. One of the fundamental premises of writing personal lines business is the availability of good data and the ability to segment that data effectively to price that product appropriately.
We have seen several InsurTech firms struggle to season their book and understand the inherent quality of the book. Many new auto insurers rely on rate filings from their competitors as they wait to build a more significant book; Tesla Insurance has also utilized competitor analysis in its initial rate filings.
So, it made sense that large social media and e-commerce companies would dip their toes into the insurance marketplace. This testing of the waters was previously seen with Google launching an auto insurance comparison tool in the early 2010s. Even Amazon was linked to a homeowners' product around 2018, which we wrote about at the time.
The same thought process gets discussed every few months, with “data is king” as the basic premise. These companies possess vast troves of personal data that enable them to segment better. Apart from the privacy concerns, what is less discussed is that personal insurance has a labyrinthine regulatory structure. The price of an entry ticket might be low, but the cost to exit can be very high.
The largest e-commerce and social network companies get this. They know that once they get bogged down in the regulatory machine, they have to continue to lift the lid on how they operate their business, which these companies have actively tried not to do. Further navigating the insurance landscape can become all-consuming. That is one of the reasons even larger financial services companies have broken banking, life, property-casualty, etc., into manageable pieces over time.
The prospect of Tesla becoming a leading InsurTech has led many observers to salivate about disrupting the incumbents. Yes, Tesla has become somewhat synonymous with the auto-embedded disruptor, but as we have seen in the past, just being the first does not guarantee the most significant market share.
Not so often mentioned is how the claims experience will shape the retention over time. Yes, Tesla is beginning to write business in eight states, but the base is relatively low, and consequently, there hasn’t been much loss activity. Beyond that, the state of the electric vehicle (EV) market and claims experience, navigating rate filing and approval requirements require a genuine commitment. It’s all fun and games calling out others on Twitter, but it won’t get state regulators to change an established mechanism that is in place to safeguard the customer.
The note below discusses the state of the market, claims experience, and a look at state regulators in greater detail.
Firstly, Tesla is a drop in the bucket in the auto marketplace.
Several other smartphones existed in the market before the iPhone came out. From BlackBerry to Nokia and Samsung to Palm, multiple iterations existed.
The point here is not to take sides between Samsung and Apple but to keep track of the fact that as the market matures, the first-mover advantage can often evaporate. Therefore, two things are essential when discussing the EV market. The first is the market size, and the second is Tesla’s ranking in that marketplace.
The table below shows that fully electric vehicles, also called battery electric vehicles (BEVs), continue to gain market share and now are close to 5% of all autos. Including hybrids and plug-in hybrids (PHEVs), this number gets closer to double digits. The point here is that we are starting from a small base, and it remains to be determined if we can completely move away from traditional gasoline/diesel-based sources.
In the EV space, Tesla is the first name that comes to mind. The table below shows the relative market share of entrants. Others are also ramping up manufacturing, and it is still up in the air how this market will look 10-20 years from now. We might even see the balance begin to shift as early as next year.
For the most part, Tesla has dominated the EV market simply because it is the market, not because it was beating the competition. But what will happen when established names enter the market in force? This fall, several major brands are dropping their first entrants in this marketplace, many of which will likely be direct competition for the Tesla models. Cadillac, Lexus, and Subaru are all making their EV debuts. Separately, other auto manufacturers are coming out with electric options for existing models (e.g. Chevrolet Blazer, Equinox, and Silverado), which already have an established customer base.
Taking a step back, one should not be surprised if Tesla's relative market share slips as other manufacturers ramp and begin to gain traction. This market share recalibration will correspondingly determine the relevant total addressable market vs. an optimistic interpretation of Tesla being the only relevant market size player.
Secondly, buying insurance from Tesla is one thing, but what about the claims experience?
The narrative on Tesla’s insurance product focuses on the safety score aspect, pricing competitiveness and ease of purchasing it. Tesla operates in eight states with the product written on other carriers’ paper. Over time maybe a portion or all of it will be on its own paper.
However, that involves investing in commensurate infrastructure, whether outsourced or in-house. In addition, much of the claims settlement process influences whether a first-time buyer sticks around.
Below is a basic flow chart showing a typical personal auto purchase decision. Even though pricing and the purchase decision might be straightforward, an adverse claims experience will often sour public perception of their coverage and lead to non-renewal (excluding fraud).
With the product being new to the market, there hasn’t been enough discussion on how the claims experience will shape up. Once the book seasons it might open a new set of challenges that goes back to our initial premise. Either you are all-in or all-out. You cannot be a successful auto insurer with a half-hearted attempt, which leads to the next point.
Thirdly, insurance regulatory challenges abound as the product gets more entrenched.
While Tesla is familiar with the strict regulatory environment regarding car manufacturing, insurance regulation is a different beast. Each state regulates rate filings differently, and navigating the byzantine legal regime often takes whole teams within traditional insurance companies that ensure all t’s are crossed, and all i’s are dotted.
The table below on the left shows the different regulatory structures, with a “T” denoting states in which Tesla insurance is present. State rate filing regulatory regimes fall into one (or more) of the following five general templates: file & use, which is 36%, prior approval, which is 24%, use & file, which is 18% flex, at 8%, or deregulated, 2%. While these buckets represent the general direction of state-level rate filing regulation, each state can (and does) have its own intricacies, making running an insurance company more complicated than it would otherwise have to be.
In its bid to jump-start the firm’s insurance product, Tesla has bought shells of several smaller insurers, which have subsequently been rebranded Tesla Insurance. By leveraging that prior experience in the field, at least Tesla isn’t completely starting from scratch. But as the firm continues to ramp up the rollout of the insurance product into new states, it will experience growing pains, especially concerning catering to each state’s individual rate filing regulatory demands.
Although personal auto insurance can seem like an area of rebound interest for Tesla, there is a difference between public exhortation and running a successful insurance company on its own balance sheet. The EV space is warming up with existing and new players cranking up the competition. Tesla has an early mover's advantage; the EV marketplace might end up looking quite different compared to today.
Beyond the evolution of the market, customer satisfaction and claims go hand in hand. These will also require real investments in building the infrastructure supporting a positive claims experience. In addition, Tesla insurance is still a new product, and the claims experience has yet to be tested.
Finally, the regulatory structure in different states is designed to keep quick entry/exit competitors out of the fray. If Tesla continues to get into public disagreements with state regulators, it will only slow down its attempts to become a relevant national insurance player. Consequently, we continue to believe in a greater likelihood of Tesla taking a stair-step approach in offering a competitive insurance product vs. a transformational attempt at disrupting this industry.
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