Tesla is getting into the insurance business. With sufficient demand and a relatively low risk assumed by Tesla, the product actually seems like it will become a major asset for Tesla in the future.
When Tesla announced back in April that they would be creating an insurance product under the Tesla brand, exclusively for their vehicles, it was met with skepticism. Looking at Tesla’s opportunity to provide insurance for their vehicles, it becomes evident that they are in fact in a better position than most insurance companies themselves. Tesla intends to use individual drivers’ data, with their consent, once they receive approval to do so. According to Tesla, they are currently using a large base of anonymized customer’s data to help determine a more accurate flat rate. The data that they can collect currently includes information from GPS, various sensors, cameras, and a multitude of other sources. This already helps reduce cost, as it gives Tesla more information than most insurance companies have, but the advantage becomes multiplied once individual data can be used.
Tesla is a company historically low on free capital and deep in debt. While they do remain in debt, they are working to become increasingly profitable, targeting a profitable second half. And regardless of profitability, Tesla already has a significant amount of cash on hand, $5 billion to be exact. With cash on hand to cover claims that exceed the profits of any given client’s quote, Tesla doesn’t need to worry about short-term failure of the business. Over a longer period of time, the insurance business sheds risk due to the accumulation of capital from multiple clients.
The second major risk lies with approval. While approval of Tesla’s insurance policy could be an area of concern for some, it shouldn’t be. As I’ve discussed at length earlier, since State National, which is approved in all 50 states as an insurance provider, is fronting Tesla’s plan, Tesla's approval process should be a walk through an open door.