Over and over again Tesla appears to draw our attention. We know the company for its cars, rechargeable batteries, giga factories, and its Chairman: Elon Musk. But who knows Tesla for their car insurance? In September last year (2019), Tesla introduced the idea of Tesla Insurance. At first, it appears to be a weird thought. However, the more you think about it the more it appears to make sense. The existing insurance industry is bound to be disrupted by a tech company, as has been the case in multiple other domains. As large insurance incumbents focus on either introducing new technologies to their existing business models (i.e. blockchain, IoT applications, and machine learning processing), or simply believe that they cannot compete with a tech company because they struggle to be as innovative or agile.
This insecurity of large incumbents or inability to adapt to change paves the road for tech companies like Tesla to ‘interrupt’. As a matter of fact, Tesla cars are driving data collectors, and considering the fact that data is the only ‘raw material’ that is growing in volume, I believe it is critical for companies to not only collect the data, but to also actually use it in order to create and develop new business opportunities. Tesla is doing just so by slowly offering insurance premiums for their drivers. Why? Because traditional insurers are charging extremely high premiums to current Tesla drivers, slowly pulling them away from Tesla and steering towards driving other cars that generate lower premiums. Tesla is still seen as a ‘high risk’ car. With every accident that occurs in a Tesla, the company can access all the data about the behavior of the driver. Essentially, insurance offered by Tesla itself will stimulate drivers to drive more carefully and be more sensibly on the road. Moreover, the insurance product is more convenient in the sense that no external insurance parties are involved. Additionally, Tesla insurance will encourage drivers to drive at certain times of the day with the aim to lower their risks and thus lower their insurance premiums. Parallel to this, it can perhaps play an important role in splitting up rush hour traffics and reroute drivers to avoid busy areas.
I personally believe Tesla Insurance is a win in many different ways. Firstly, it eliminates external parties (i.e. insurance companies) from being involved, perhaps resulting in a more pleasant customer experience. Secondly, a Tesla driver is more likely to pay a lower insurance premium if it is coming straight from Tesla. Thirdly, Tesla drivers are likely to drive safer and more carefully, knowing that their driving behavior influences their insurance premium price. Fourthly, insurance incumbents no longer block the road to innovative solutions and real-time data can drive the world of insurance. Many advantages if you ask me. Looking on the flip side, how open will individual Tesla drivers be and want to be with regard to their personal information? Unless Tesla is wiling to investigate and invest in edge computing (which would essentially allow data processing to be done on and within each individual car), then personal data won’t have to be sent to a central server and individuals might be more open to the idea of Tesla accessing every single bit of personal information. I think it could have a very interesting twist in the near future. What are your thoughts?
Dear Tom,
thank you very much for your insightful overview.
As clearly stated in “Competing in the Age of Online Giants” – Hub companies do not compete in a traditional way with better or cheaper products. Instead, they take their network-based assets that have reached scale already in one setting have already reached scale in one setting and then use them to enter another industry and “rearchitect” its competitive structure transforming it from product-driven to a network-driven. I believe you refer to this phenomenon in your article, and I also believe this is exactly what happened with Alibaba entering the payment system with Ant Financial, and with Amazon acquiring PillPack with the aim to enter in the Pharmacy business. Both Alibaba and Amazon seems to be in the retail industry. However, they have two main advantages: they already have an enormous customer base and they can easily connect all their data, knowing exactly their customers habits and preferences.
When looking into Tesla, I believe the story is slightly different. I do believe the company has a big potential. However, I still think it cannot be considered a Hub company. Tesla’s customer base is still relatively small, its share price is extremely volatile, and it hasn’t become profitable but the last quarter. In addition, last quarter profitability has been under a lot of scrutiny by regulators as it is not coming from the cars’ sales but from licensing (they have been accused of manipulative accounting practice). Having said this, I do believe entering the insurance business for its customers is a very good idea. On the one hand, Tesla can finally increase its revenues. On the other hand, as you mentioned, traditional insurance companies are charging unjustifiably high premia. Nevertheless, I think Tesla does not have the size to disrupt the insurance business. In this regard, I believe other internet giants, such as Apple or Amazon represent a much bigger threat.