Elon Musk recently confirmed the launch of Tesla Insurance in California

Tesla Insurance in California Confirmed by Elon Musk

Elon Musk persists and signs. With the launch of Tesla Insurance announced in early September, Tesla car owners living in California now enjoy insurance 20 to 30% cheaper than current rates.

The future will tell if this offer applies to the European market, but the announcement has already provoked strong reactions.

It all started for Elon Musk by a very simple observation insurers have a hard time evaluating the risk of Tesla cars. These are indeed high-end electric cars, loaded with advanced technologies that have no real equivalent on the market and therefore no actuarial reference model.

Admittedly on average they are more reliable than others the last quarterly report of the Californian driver shows that the risk of being an accident victim in a Tesla car is statistically 3 to 6.5 times lower than that at which an American driver is normally exposed.

But for insurers, these technological jewels are so sophisticated that the slightest incident can be extremely expensive. In addition, they are rare and relatively new products. The first deliveries of the Model S, for example, date back to 2012. It is therefore difficult to deduce general trends to build robust actuarial models.

As a result, insurers compensate for their lack of knowledge of the product by increasing the risk premium. This is exactly the same phenomenon that happened a few years ago with Autolib cars. 

A builder insurer not so simple

Elon Musk, whose entrepreneurial spirit is well established, has taken the exact opposite of insurers. Last April, he sent them a first signal stating that the Tesla Group felt they could cover the risk for them. In the process, billionaire Warren Buffet, founder of the Berkshire Hathaway holding, a shareholder of GEICO, one of the leading auto insurers in the USA Tesla and others vehicles insurance.

The probability of success of a car manufacturer in the insurance is about equal to that of an insurer in the automotive sector.

The insurance market presents many barriers for new entrants. Competitive, regulated, mobilizing significant capital, it also requires difficult skills in business law and statistics.

Musk preferred to solve the problem by another angle of attack. Instead of only considering the difficulties of the insurance business, he has capitalized on the existing strengths of his group. Certainly, the owners of Tesla do not run the streets.

But this affluent and relatively homogeneous clientele is well known by its provider, thanks to the amount of digital data captured by the multiple technologies installed in each Tesla car. In other words, the Californian manufacturer has much more information about its customers than an ordinary car insurer.

However, this mass of information can give rise to different uses. So far, it has improved the driving experience of its customers. But tomorrow it could just as well be used to accurately calculate the probability of accidents, and thus cover the risk of each. Eventually Tesla could even insure all of its fleet internationally, but also the electric batteries of its customers, their computer equipment, their homes etc.