Why Tesla and GM want to be big in the auto insurance business

A Tesla dealership in Colma, Calif., on Wednesday, Jan. 26, 2022.

David Paul Morris | Bloomberg | Getty Images

For consumers who have discovered that costlier insurance is just one of the expenses that makes electric cars harder to love, this is the year relief could arrive.

Tesla says its company-backed insurance, now on the market in just five states, could reach 45 by the end of the year. GM, which relaunched its former GMAC insurance unit as OnStar Insurance in 2020, hopes to hit $6 billion in annual insurance revenue by the end of the decade.

Auto insurance is unlikely ever to be the biggest business of either company, or even close to it. But insurance is becoming a way for the financial side of automakers’ business to drive innovation and facilitate adoption, as data generated by the cars themselves is captured to offer prizes. lower insurance and, automakers hope, customer loyalty.

Wedbush analyst Dan Ives said Tesla could insure 300,000 cars by 2025. “It’s a 2024-25 initiative, but they’re laying the groundwork,” Ives said.

According to CFRA Research analyst Garrett Nelson, electric vehicles are expensive to insure because their offline speed makes traditional insurers wary. And partly because relatively few mechanics know how to fix them, they can be expensive to fix after a crash.

“Tesla is more comfortable with its own vehicles,” Nelson said. “And they set a trend. GM and others are looking the same.”

Electric vehicle makers say they’re motivated by the possibility of closing the insurance gap with more data. The idea is that so much more is measured on cars – especially as automakers use electric vehicles as testbeds for systems that are moving towards fully autonomous vehicles – that insurers have much better data on the risk posed by each driver and can use it. to contain costs.

At Tesla, insurance is now available in Florida, Texas, Illinois, Ohio and California. The company hopes to have its coverage available to 80% of U.S. customers by the end of the year, Chief Financial Officer Zach Kirkhorn said during the company’s latest earnings conference call last month, although national insurance regulations are a factor.

The company has boasted of its early success in Texas, where it launched last fall. Kirkhorn said the cars send Tesla so much information about how they’re driven — allowing the company to send tips back to drivers — that real-time feedback results in “slightly lower” crash rates. “.

“If they drive safer, their cost of insurance is lower, so they drive safer,” chief executive Elon Musk said. “It encourages Tesla Insurance with computing and the real-time feedback encourages safer driving and rewards her financially. That’s great.”

Eliminating $10 billion in auto insurance ads

GM is also moving fast and building on its history of offering insurance. Today, the automaker has a traditional insurance offering in 46 states and Washington, D.C., but it’s working on a safe driving behavior algorithm jointly developed with American Family Insurance in hopes it can be added. to offers in the insurance market, starting in Arizona, Illinois and Michigan.

The introductions in these three states will be the start of what a GM spokeswoman said in an email is the “company’s vision to deliver a fairer/personalized insurance product to our customers.” .

It is working on state regulatory approval for data systems developed by GM and American Family, and the company expects approvals to be granted in the first half of 2022. It is launching faster in those states in because of its work with American Family, but the current product is similar to what you see on the market from other insurers today. GM is the agent, American Family Insurance underwriting the policies.

A big opportunity is to get insurance customers without adding to the $10 billion spent annually on auto insurance advertising in the United States, said Andrew Rose, president of GM’s OnStar insurance unit. and vice president of insurance innovation. That’s more than automakers spend advertising cars, he said.

Managing their own insurance, using data generated by the car, will also help GM process claims faster than usual in the car insurance business. Instead of 18 to 25 days to settle claims, GM thinks it will sometimes know the extent of the damage almost immediately and settle quickly.

“In claims, cycle time is money,” he said. “Sometimes we can tell in seconds. But it might not be time to tell you while the airbag is still deployed.”

While Rose says systems like the ones GM is developing provide far more data, traditional insurers have been turning to telematics for several years using wireless phone apps, according to CFRA insurance analyst Cathy Seifert, adding than Progressive and Allstate are among the fastest adopters.

At Allstate, more than two million customers are enrolled in telematics programs such as Drivewise and Milewise. In states where the plans are approved, 21% of our automotive customers are currently enrolled and 35% of new Allstate automotive customers are choosing the plans, said David MacInnis, vice president, telematics and usage-based insurance.

The technology uses phone-based technologies like GPS tracks to track braking, speeding over 80 mph and driving too fast for road conditions, MacInnis said, as well as the time of day that customers drive and the amount of driving a customer does.

Usage-based auto insurer Root went public in late 2020. Insurance startup Lemonade also began offering usage-based insurance last year. Both companies have fared poorly as publicly traded stocks after debuting in the hot IPO market in recent years.

GM says car-based systems will be more accurate because the data will come from the car itself and because the car itself can track things like seatbelt use that cell phones can’t. not.

At Tesla, the insurance business will be “incidental” in the short to medium term, Ives said, and more important for encouraging the purchase of electric vehicles than as an independent profit center. Its true importance will depend on how quickly truly self-driving cars are developed, presenting a safer risk profile that will allow the company to provide cover as part of a broader merger of hardware and software that looks like Apple’s famous ecosystem approach, he said.

“The goal is to be 30 to 40 percent cheaper for insurance,” Ives said. “It’s game over.”