Tesla Insurance forcing competitive rates from peers, says Musk

January 28, 2023

Tesla CEO Elon Musk has said that his company’s insurance offering has already made a significant impression on the market, with other large car insurers having been forced to offer better rates for Tesla vehicles.

TeslaSpeaking during a Tesla Q4 earnings call, Musk also spoke to the “unreasonably high” repair costs that the company is seeking to minimise via its foray into the insurance space.

Tesla reported revenue of $24.32 billion for Q4, including automotive revenue of $21.3 billion, although its automotive gross margins were at their lowest for the past five quarters at 25.9%.

Currently, the company is not providing specific financial details of its nascent insurance business, which launched last year and uses real-time driving behaviour data to determine policy terms for Tesla drivers.

But CFO Zach Kirkhorn confirmed during the company’s earnings call that the insurance business was at a $300 million annual premium run rate as of the end of last year, and is growing at a rate of 20% per quarter.

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“It’s growing faster than the growth in our vehicle business,” he noted.

In the states that Tesla operates, an average of 17% of customers are using the Tesla Insurance product, Kirkhorn said, adding that the number is continuing to increase as it spends more time in these markets.

“We see most of the adoption occurring when folks take delivery of a new car, as they’re setting up insurance for the first time as opposed to going back and switching when they already have insurance set up,” he explained. “So, there’s an inherent stickiness in the insurance business.”

Analysts at Morgan Stanley predicted alongside the launch of Tesla Insurance that it could pose a long-term threat to the US auto insurance industry due to its pricing sophistication and distribution strategy.

So these forecasts could now be supported by the strong growth that Tesla’s offering has seen so far, and by Musk’s comments that the product is already beginning to impact the pricing of competitors.

“By Tesla operating insurance for our cars at a competitive rate, that makes the other car insurance companies offer better rates for Teslas,” Musk explained. “So, it has a bigger effect than you think because it improves total cost — or insurance costs even when they don’t use Tesla Insurance, because now the gigas of the world have to compete with Tesla and cannot charge outrageous insurance for Teslas. So, it’s great.”

The other benefit of the offering from a Tesla user and operational perspective is the “feedback loop” it provides into minimizing the cost of repair for Teslas worldwide, he continued.

“We obviously want to minimize the cost of repairing a Tesla if it’s in a collision and for Tesla Insuranc,” Musk said. “And previously, we didn’t actually have good insight into that because the other insurance companies would cover the cost. And actually, the cost, in some cases, were unreasonably high.”

In response, Tesla has actually adjusted the design of its car and made changes in the software of the car to minimize the cost of repair, the CEO reported.

“It’s giving us this really good feedback for reducing total cost of ownership,” he said. “We’re actually solving how to get somebody’s car repaired very quickly and efficiently and back in their hands.”

Kirkhorn concurred with this point, noting that the broader motivation for Tesla in introducing an insurance offering had always been to improve the total cost of ownership for its cars, given the high premiums it had observed from some third-party insurers.

“That remains our priority here,” he concluded. “We’ll obviously run this as a healthy business, but we want to make sure we keep our costs low and insurance stays affordable to our customers.”

Tesla’s CEO has previously spoken out against the “incredibly inefficient” processes in insurance which he views as keeping premiums high for many drivers, as well as a perceived unnecessary number of “middle entities” involved in this process.

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