April 2020

Insurance could be considered a dull, unexciting or even a boring subject, that is until you begin to look at reinvention of this centuries old profession. This is exactly what is on the minds of some folk at Tesla.

Today personal motor vehicle insurance is for cars, motorcycles, and similar road legal vehicles. Its principle intent is to provide financial protection against physical damage or bodily injury resulting from collisions and against liability that could also arise. Motor vehicle insurance may also offer financial protection against theft, damage or other events such as weather or natural events. The specific terms of vehicle insurance are bound by not only the insurance contract in place but also local or regional requirements under law.

Motor vehicle insurance is typically priced and then sold by different organisations, for example direct to the customer, through an insurance broker or via a sub agent. It is worth considering a manufacturer and distributor in this loose interpretation.

An insurance company (for the sake of simplicity we will keep reinsurance behind the scenes) will create the product wording and price the many variations of this wording based on certain question/answer parameters, this is the insurance product. The insurance product is defined by actuaries, product specialists and legal folk with an attached rating formula to define pricing for each individual customer's needs. Still with me?

The insurance product is then distributed by sub-agents and/or brokers who take the unique parameters of the customers requirements and pass them through the pricing engine to produce a quotation. Not all customers are eligible for quotations as based on their question/answer details they may be referred back to the insurer for more detailed information or pricing - think 80/20 rule and this scenario is called a referral for underwriting. Once the quotation (or referral) is granted and the customer accepts; the policy is bound as a legal contract for the duration of the terms agreed between insurer and customer. The sub-agent or broker is typically a distributor who receives a commission and the insurer underwrites the contract.

The way motor vehicle insurance is priced often boils down to a number of key factors like vehicle value, previous claims paid for the product, projected costs for parts and the vehicle usage patterns. While I have kept this very simplistic, rest assured the complexities behind the scenes in defining and maintaining a motor vehicle insurance product are immense, moreso as a modern vehicle in recent years becomes even more complex. Data analysis is key to maintaining a competitive motor vehicle insurance product as it provides accurate pricing and forecasting - no one wants to be too expensive and sell very little and definitely no one wants to be too cheap and incur negative loss ratios from claim events.

One key datapoint in underwriting insurance is loss ratios and claims. Think of a bucket being where all the income and expenses reside for an insurance program, a fancy PnL. The loss ratio is the amount of money left in the bucket at the end of the product renewal period, typically an annual figure.The loss ratio is a percentage of the funds left vs the funds paid out. Like anything in business a loss ratio is akin to a game of whack ‘a mole in that you carefully balance income and expenses - too much going out or not enough coming in shifts the sweet spot into dangerous territory. Analysts and actuaries spend vast amounts of time fine tuning the pricing to maintain the income side of the bucket and procurement folk work with suppliers and service agents to keep expenses in check.

So what happens when you need to make a claim?

The following claim overview has been kept simple to highlight the key points of the process, there are so many variations between products, insurers and legislative frameworks that normalizing this is all but impossible. The assumption here is what is described is a typical fender bender accident.

When a claim is submitted either directly with the insurer or via a sub agent or broker the claim is triaged by a claims handler. The purpose of the triage is to allocate the claim to a given process for management. In some cases this may be settled on the spot and in some cases this will require many months of investigation, most however end up in the hands of a loss adjuster overseen by a claims manager. Typically the loss adjuster is an independent third party who provides the claims manager the necessary information to determine the amount and efforts required to settle the claim under the terms of the insurance contract. The claims manager additionally seeks input for various components of the contract to ensure the terms and conditions are met, this for example maybe legal advice. The claims manager will appoint a sub-contractor as lead, this is often a panel or repair shop. The loss adjuster works with the lead to determine the settlement strategy, for example repair. Once the claims manager has all the information required to proceed a decision is made on the terms of settlement.

The vast majority of settlements are either a repair or write off. In the case of a repair the predetermined excess is paid directly to the lead and they draw down the remaining costs from the insurer.

As stated above, this is generalised and excludes many of the complexities which can be encountered.

Tesla Inc. the company founded in July 2003 is the world's fastest growing motor vehicle manufacturer and includes products focused on clean energy. Tesla has reimagined the motor vehicle as if it were day one.

Tesla motor vehicles are electric motor vehicles (EV) that have the computing power of no other vehicle on the roads today. Just like Apple reinvented the smartphone and propelled it into our everyday lives, Tesla has reinvented transport by creating a new category of mobile device. The digital vehicle. A Tesla is a powerful technology package of compute, radar and camera software all running in real time 24 hours a day, three hundred and sixty whatevers a year. Every Tesla EV today has a five star NHTSA safety rating for all categories making them the safest cars on the road today. The technology a Tesla employs to make the driving experience so gobsmackingly superior is more advanced than any flagship mobile device available. No other vehicle, transport operator or manufacturer has used technology like Tesla and Tesla is tens of years ahead of the market- this has put Tesla in a unique position for offering insurance, as I strongly believe insurance is a key part of the total customer experience for vehicle ownership or transportation as a service.

Insurance as a value proposition for motor vehicle manufacturers is not new. It provides yet another moat around your brand. Traditionally motor vehicle manufacturers have partnered with insurers and brokers to run programs on their behalf, this is partly driven by regulation and partly driven by a desire to demarcate insurance from the core product, that being the vehicle. Motor vehicle manufacturers tend to enjoy the margins from parts so having an insurer contributing to this gives a longer revenue tail without the associated costs of running the programme. Tesla is an experiential transport provider, a smart phone on wheels, their core product is the end to end experience - this is new.

What if we looked at the manufacturer/insurer relationship with a customer lens and began to think from day one using the world's safest vehicle, a vehicle that can react and think faster than any human on the planet, and more data from one vehicle than has possibly been produced by the entire underwriting industry - ever. The role of the insurer suddenly becomes less important and the experience surfaces as superior. Why? Because the experience is integrated. Do customers really care who the insurer is, what answers they give for questions, why they pay an annual fee for a policy with the motor vehicle brand on it but have to deal with yet another company that speaks a whole new language - which incidentally is miles away from the motor vehicle brand story? More than likely not, most customers only want to know they are covered - with a safety net.

Integration brings something new, a consistent experience and a clear service offering. Using data to derive premiums changes everything. Whether the goal is to make a profit, break even or be a loss leader, the data matters. When your model includes bundling you need the ability to choose profit, loss or break even depending on current market conditions and future strategy. Once data drives the strategy, acceptance criteria and referrals will become a thing of the past as well as underwriting and the manual door stops we see in a typical insurance application today.

Add to this the possibility of real time data and per mile risk analysis and we see how attractive insurance becomes to Tesla. With accident rates the lowest for any motor vehicle manufacturer, full insight into the driver, the vehicle and the road 24/7 and ownership of the entire supply chain Tesla is perfectly positioned to bundle insurance at considerably lower cost that traditional as well as aid in distinguishing the Tesla brand as a transport service or experience, more so than any other motor vehicle manufacturer on earth. Bundling will become yet another moat around the Tesla business - you purchase a Tesla and with this comes the experience including insurance, charging, entertainment, transport - you get the picture... and Tesla get the revenue.

So with integration, bundling and data what happens when you need to make a claim?

The reality is when Tesla enters the insurance market, you wont need to make a claim.

Well not in the traditional sense. Remember a Tesla is smart, a Tesla has data and sensors and cameras which all work together so the vehicle is acutely aware of its surroundings. A Tesla will know when it needs to make a claim and it will do this directly to HQ with every data point necessary to complete a claim. This combined with the global Tesla service network will arrange your lone vehicle, provide the roadside point for collection and repair your vehicle. The at fault party is identified with 100 percent accuracy via the onboard camera network and over 90 percent of cases will be settled digitally within minutes. A Tesla is a transport service, an experience - this does not change because you had an accident.

But what happens when motor vehicle ownership begins to decline, and we move to transport as a service or rely more on ride sharing, last mile transport or other emerging choices? The mere thought of a house deposit worth of dollars sitting idle in a car park for 23.5 hours a day is daunting for most, and realistically money that can be better used. The answer may lie not in how we believe this to work today but how usage patterns will change in the future. Vehicle usage as a per kilometer driven on our roads wont change so don't think this is some sort of motor vehicle demise. Moreso think that ownership changes. More people will adopt, convert and begin to grow with less ownership and rely more on “as a service” usage. In this scenario we still need insurance in some way, shape or form albeit less vehicles on the road and more efficient use of what there is.

Insurance in this scenario is different. Calculating the risk is the environment, the occupants and the route. These factors do not change from the traditional model but the values under a “as a service” model do. Logic says that the values increase exponentially against the mere fact that the risk is perceived as unknown due to the model but with real time highly accurate data it actually becomes less about the risk calculation. If the data is telling the algorithm what the weather is doing, the route being traveled and the driving style of the vehicle (for instance autonomous vs full driver control) and combine this with the drivers prior digital driving history and the current conditions around the vehicle you begin to see the effect this has on traditional underwriting. If you are eligible for the service you are eligible for the insurance as they are one in the same.

Imagine pulling out your latest bat phone and hailing a Tesla, then jumping in and driving across town using autopilot while you are busing designing the next big widget. During your journey you decide to take a diversion and pick up some noodles you just ordered on the console of the Tesla, you turn off autopilot and self navigate the busy city center to the noodle house yourself. As you are prompted by Tesla that due to the weather and the current traffic conditions if you chose to take the main street your journey will increase by 0.30 cents as the risk has increased. You accept this risk and continue. Upon completion of your trip you are debited the total amount for the journey, the noodles and the insurance. By the way, the Tesla you just rented is owned by a young family down the road from your house who had it parked in the driveway and enabled the “share” function to all users within 5 kms and a rating of more than five.

Tesla has everything needed to deliver insurance to their customers. Reinvented.

Sounds crazy I know, however this is very close to a reality we will see sooner than we think.