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Is Tesla Insurance Musk’s Masterstroke or Mistake?

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  • Yesterday, Tesla (TSLA) launched an insurance service in California. The company intends to expand the service to other states as well.
  • Tesla stock is down more than 35% this year. Chinese EV (electric vehicle) maker NIO is also in red. However, Ford and General Motors have risen this year despite sagging car sales.

Yesterday, Tesla announced it was launching an auto insurance service in California. The company plans to make the service available in other states as well. In its press release, it said it its insurance would “provide Tesla owners with up to 20% lower rates, and in some cases as much as 30%.”

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Elon Musk mentioned Tesla insurance in April

Tesla CEO Elon Musk first talked about insurance operations during the company’s first-quarter earnings call in April. Yesterday, a few hours after launching its insurance service, the company tweeted “We’re making some updates to Tesla Insurance and will be back online shortly,” adding, “Algorithm update in progress.” Some users were surprised that Tesla was updating the algorithm so early into the insurance launch.

Is Tesla making the right move?

Auto insurance is a competitive, specialized, and narrow-margin business that requires a lot of capital. Tesla, whose core competency is producing EVs, doesn’t have prior experience in auto insurance. Furthermore, the company is burning cash.

However, Tesla might be partnering with another company for its insurance offering. According to Reuters, Tesla is registered as a broker for State National Insurance.

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As insurance operations revolve around risk management, risk pricing, and float investing, Tesla could have the upper hand. If managed properly, the insurance business could be a cash spinner. In its press release, the company said, “Because Tesla knows its vehicles best, Tesla Insurance is able to leverage the advanced technology, safety, and serviceability of our cars to provide insurance at a lower cost.” It also added that its lower insurance premiums would be reflective of its safety features.

Tesla’s insurance costs

Costs to insure a Tesla car are typically higher. According to insure.com, the Tesla Model S was among the most expensive cars to insure in 2018 and 2019. Auto insurance companies price their premiums based on several factors, including the probability of accidents, average payout per claim, and vehicle costs. Some fatal crashes involving Tesla cars have made headlines. Most of these crashes happened with Tesla Autopilot turned on.

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Tesla Autopilot

According to Tesla, it should be able to price its insurance cheaper than others due to its safety and “advanced driver assistance features.” Tesla’s service quality has come under scrutiny recently, and some car buyers have complained about the nonavailability of parts. This month, a German car rental company faulted Tesla’s service quality. Walmart also sued Tesla for fires started by seven of its solar panels.

Should Tesla really be getting into insurance?

Traditional auto insurers rely on actuaries and established pricing norms to price their premiums. However, Tesla is apparently relying on artificial intelligence and its belief in its cars. Early on, not many thought Tesla would survive in the automotive industry, and it hasn’t seen sustainable profits over the last decade. However, the company’s sales have grown multifold over the last five years. Established automakers Ford (F) and General Motors (GM) are betting heavily on EVs due to the “Tesla effect.”

Can Tesla prove critics wrong?

Only time will tell for Tesla’s insurance venture. Will it go the way of Tesla’s less-successful solar roof project, or succeed like its cars? This year, Tesla stock has fallen more than 35%. NIO (NIO) is also down this year. However, based on yesterday’s closing prices, Ford and General Motors had gained 23.4% and 11.2%, respectively, year-to-date.

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