How Elon Musk is planning to put motor insurers out of business

It’s now nearly two years since Tesla boss Elon Musk announced his company would start offering insurance to its customers at a 20 or even 30 per cent discount to regular insurance. Now, some in the insurance industry are saying this is the start of a trend of car makers becoming insurers.

The result, they say, could be devastating for traditional insurers, who simply have nothing like the level of data about their customers that Tesla and other car makers do. It’s the same disadvantage brick-and-mortar retailers have against the likes of Amazon: an often fatal lack of customer information.

Traditionally insurance has been a very blunt instrument. Yes, you can broadly identify high risk groups – young men, if we’re talking about car insurance, or smokers if we’re talking about life insurance – but it’s very difficult to tailor premiums to the precise risk of each individual. Inevitably low-risk customers end up subsidising high-risk customers.

Technology is massively changing this, for all types of insurance. The ability to collect data about your customers continuously, and to use artificial intelligence to analyse that data, is allowing insurance companies to provide much more accurate, up-to-date risk analyses, and to price policies accordingly.

It’s a trend that is fraught with ethical problems, particularly in health and life insurance, as it could allow insurers to monitor the state of your health and ramp up your premium accordingly. For car insurance it may be less controversial (beyond objections to the basic invasion of privacy). If you’re a consistently safe driver, you should be rewarded with a low premium.

For car companies that can be bothered to get into the insurance business, that provides one huge advantage over traditional insurers: they are the ones that have access to all that data.

A company like Tesla can track your driving behaviour in real time, and build a risk profile to a level of detail that would have been unimaginable to insurance companies even a few years ago.

In an interview on US TV news network CNBC, Daniel Schreibe, chief executive of AI-focused insurer Lemonade, said the traditional motor insurance industry should be worried.

“You think about what Tesla is doing with the connected car… that has profound impact on insurance,” he said.

“There’s going to be massive dislocation in this entire sector. And the data implications are profound and they aren’t good for incumbent insurers.”

He said Tesla’s advantage came from the constant stream of live data feeds.

“All of the pricing of insurance until now has had to look at big groups of people in aggregate and price them on average. As soon as you can break apart that average … that monolith … and price people using specific data to them, you have a massive advantage that incumbent insurers don’t like,” he said.

He said safer cars and a potential shrink in car ownership as new models of car use emerge would make things even worse for insurers.

Financial analysts at investment banking giant Morgan Stanley think Schreibe is on to something, and says other car makers are sure to follow suit.

“We expect to see over the near to medium term, with rather few exceptions, that all auto OEMs (not just Tesla) will offer auto insurance services directly to their customers on their connected vehicle platforms,” they said in a note to investors last week.