Body:
Author: Winslow
Content:
Total 1,698 Words
Estimated Reading Time: 6 Minutes
For the past year, Tesla’s insurance business has been outside of my field of vision. Due to my lack of understanding in this industry, and the fact that Tesla’s insurance business is currently only available in a few states in North America, there is hardly any data available for reference besides the premium screenshots posted by users. So I’ve had no idea where to begin my research.
However, I’ve recently had some new thoughts about Tesla entering the insurance business again and am eager to write about it and discuss it with everyone.
First of all, the insurance business could potentially be one of Tesla’s most profitable in the future.
Why is it one of the “most profitable” businesses? Let’s first understand what businesses Tesla is currently profiting from:
- Selling cars
- Charging network
- Full Self-Driving (FSD), Enhanced Autopilot (EAP), and other software
- Insurance
But currently, the most profitable business is selling cars.
During Tesla’s first stage of sales, their flywheel consisted mainly of “selling cars” and “charging networks”: selling cars promotes the construction of charging networks, a well-made charging network lets Tesla sell more cars. The core of this stage is solving the customer’s range anxiety. In my understanding, Tesla is still in the first stage.
As more and more charging infrastructure from different energy brands is gradually improved with easy access to more facility owned by different power plants, well-performing supercharging piles perhaps will be able to connect to charging piles from other brands. At this time, Tesla’s original sales flywheel may be weakened, and they will have to enter the next stage. In this new stage, the flywheel might become “selling cars”+“insurances/safety”.
So why can insurance/safety become part of the flywheel at this stage?
Let’s first take a look at how traditional insurance companies do business.
The pricing (car insurance premiums) of the insurance company is mainly determined by the insurance company’s actuaries based on the expected value of “the probability of the vehicle being in an accident” and “the maintenance cost”. According to the annual reports of several large insurance companies listed on the stock market, the gap between the company’s revenue and costs is only about less than +5% annually. It is estimated that the industry competition is fierce, and in some years it may even drop to a negative value. In other words, the company loses more money than it earns.
Losing money but making noise. At first glance, it seems that insurance companies are not making much money, are they an honest business?
The operating model of the insurance industry is “first collect money, then pay.” It’s a bit like a bank. The bank also collects deposits from its customers and then makes loans. In my understanding, both rely heavily on leverage, depending on the customer’s money to operate. Both are afraid of unfortunate probability. Insurance companies are afraid of an increase in the probability of customers being in an accident, while banks are afraid of account holders run-on.Back to the previous topic, although fierce competition among insurance companies has resulted in a close proximity between pricing and cost lines (sometimes even resulting in verified losses), the fact that the payment is received before payouts means that insurance companies only need to invest a small amount of capital at the beginning. As long as the income scale is large enough, the difference between income and cost (i.e. profit) relative to the initial capital investment is huge. Therefore, the insurance industry is a leveraged industry, and scale is one of the key factors that determine profitability.
Scale is crucial to the insurance industry, but it must also be built on the premise of profitable individual bike premiums. Without a solid foundation, how can one dare to build a high-rise building?
If individual bike premiums are losing money, the bigger the scale, the more the losses will be magnified, and they may even lead to the collapse of the insurance company. The profit of individual bike premiums can be simply expressed as: individual bike premium profit = individual bike revenue – (individual bike accident probability x individual bike claims cost)
The larger the positive difference between the two, the more profitable the individual bike premium. Since the upper limit of individual bike claims cost is determined by the insurance policy limit, the only two ways to increase profits are to either increase individual bike revenue (which is not feasible due to fierce competition in pricing and cost) or to reduce individual bike accident probability. Therefore, the only way is to focus on the latter.
And Tesla’s ability range just enables it to make significant progress in the latter. In other words, Tesla has the ability to reduce the probability of individual bike accidents. Simply put, it is to use artificial intelligence technology to significantly reduce the probability of accidents by assisting human drivers, or even driving for them, reducing the accident rate to 1/10. This is the result of the improvement of FSD, EAP and other software technologies.
Once the probability of individual bike accidents can be reduced, it means that individual bike profitability can be expanded even if the pricing remains unchanged. However, Tesla’s consistent attitude is: “If I have the ability to reduce prices, I will definitely do so.”
There seems to be a faint outline of the next flywheel here. Selling cars with high safety/low insurance premiums (depending on how much Tesla’s technology can reduce the probability of accidents) can promote car sales.
Here, it is necessary to prove whether high safety/low insurance premiums can constitute a part of the flywheel. This is difficult to prove directly, but think about it, as a customer, when you buy a car, isn’t safety the primary consideration?
In other words, when a certain product on the market can exponentially increase safety, especially when it is a product that carries the travel needs of the whole family, and its use cost is cheaper than that of its competitors, would you choose it?
I believe the answer is yes. As automobile accidents are the category with the largest casualties in the world, emphasizing safety and low insurance premiums cannot be overemphasized. Therefore, safety and low insurance premiums should be a part of the flywheel.
Finally, if traditional insurance companies do not make money, can Tesla’s insurance make money?Although the cost of Tesla’s insurance business will gradually decrease with the development of technology, and the part of Tesla’s characteristic decline will also be returned to customers, Tesla doesn’t need to fight with traditional insurance companies on cost as there is no other insurance company in the market that can compete with them in pricing. Tesla can reserve a portion of profit to expand vehicle insurance premiums.
As technology continues to mature and profits increase, the flywheel keeps spinning, and scale leverage becomes available. Perhaps insurance will become one of Tesla’s most profitable businesses soon.
This article is a translation by ChatGPT of a Chinese report from 42HOW. If you have any questions about it, please email bd@42how.com.