Pros and cons of Tesla's insurance move

Telematics are nothing new in the US. Automakers such as Mercedes have been partnering up with third-party insurance companies and incorporating telematics into their offers for a while now. However, Tesla (NASDAQ: TSLA) will be the first automaker to launch its own insurance product. Tesla already shares autopilot information with insurance companies, but acting as an actual insurer without a middleman is taking things to the next level.

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Attendees try out a Tesla Inc. Model X electric vehicle during the press day of the Seoul Motor Show in Goyang, South Korea, on Thursday, March 28, 2019. The biannual auto show will be held at the Korea International Exhibition Center (Kintex) until April 7. Photographer: SeongJoon Cho/Bloomberg

Is Tesla moving in the right direction? Here are some of the pros and cons.

Pros:

  • Tesla has all the data

Tesla has a huge advantage over traditional car insurance companies. While traditional insurers rely on imprecise and estimated risk factors facts like age and accident-free years to determine their tariffs, Tesla will be able to access data that takes them far beyond that. With modern sensors in the car, Tesla can get all the data they need: What type of a driver is the person? How hard do they hit the breaks? Do they drive in high-risk areas, in cities or on highways? All of this information puts Tesla in a much better position when it comes to determining their risk model.

  • New, innovative offerings are possible

As the actual insurer, Tesla will be able to offer unique products like on-demand or usage-based offers. For example, Tesla can offer a product where a driver is insured for a certain number of miles. Tesla’s sensors can easily recognize when this amount is exceeded, at which time they will offer additional insurance coverage in real-time that the customer will find difficult to refuse. Satisfied customers can continue to drive with peace of mind, knowing they are always driving within requirements of their insurance policy. I’m pretty sure that Tesla drivers will love that, and can appreciate the savings and value proposition.
Cons:

  • Risk of underestimating claim handling

A major challenge for companies that offer car insurance is how to effectively and efficiently manage claim handling. Customer service, availability, handling of accidents, and dealing with car repair shops all play a major role in the insurance business. New players entering the insurance industry often underestimate this huge part of the business that has a massive influence on customer satisfaction.

  • Regulations

Offering and selling insurance involves some bureaucratic hurdles. Pricing insurance products can be especially challenging as there are many regulations surrounding discrimination, safety – for instance – that insurers need to adhere to. Experience shows that this is also something new players often underestimate when launching new products. We’ll have to wait and see how Tesla overcomes these challenges.

  • The market is limited

While other insurance companies can scale up their products and offer them to a broad variety of customers, Tesla’s insurance will always be limited to the number of Tesla cars being sold. This gives Tesla’s insurance business a limited market scope. We also have to account for the fact that not every Tesla customer will automatically buy insurance from Tesla.

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