Tesla Insurance Could Surprise Market with Potential for Hundreds of Billions of Annual Revenue

During the Q3 2020 Earnings Call, Tesla CEO Elon Musk hinted that he believes Tesla Insurance will take over a significant chunk of the company's auto business. “Obviously, insurance is substantial. So, insurance could very well be, I don’t know, 30-40% of the value of the car business, frankly.” Steven from Solving The Money Problem/YouTube offers to understand this topic in more detail and understand how this claim is reasonable.

The auto insurance market in the US alone is nearly $300 billion. Tesla is in a unique position to take a disproportionately large slice of this pie since it will be almost impossible to compete with its product.

The principle of insurance is simple: insurance agents, using Public Data, calculate the amount of insurance premiums that will bring profit to the company, not allowing it to bankrupt with large insurance payments.

But, Tesla has a big advantage: the company has access to the unique data of its vehicles that no other insurance company can get. Data is the most important aspect of the pricing of insurance risks. As such, some insurance companies even offer their customers a special device to install on their car to help the company assess customer driving style. However, they will not even come close to getting the data that Tesla has about the driving habits of its customers. That is, no other company can predict this critical aspect as accurately and cheaply as Tesla. In fact, legacy insurance has no chance of making a competitive insurance offer to Tesla owners.

Tesla currently makes the safest cars in the world, as indicated by NHTSA testing. Its Active Driver Assistance Systems and Autopilot help avoid countless accidents. And the larger the Tesla fleet, the more advanced the active driver assistance functions become; and the safer Tesla cars become, the fewer accidents there will be. This continual improvement will mean smaller insurance payouts and larger profits over time. And importantly, as insurance payouts decline, Tesla will be enabled to keep the insurance premiums ultra-competitive.

When it comes to Full Self-Driving, Tesla is the absolute and only winner here. The company said that any accidents occurring when the car was fully self-driven would be solely Tesla's fault and not the driver's. No other insurance company in the world will go to the length of taking out self-driving car insurance. But, if this does happen, then insurance premiums are likely to be prohibitively high as long as the insurance companies do not collect enough real data.

Now, let's get down to some simple math calculations. Steven gives us an estimate. It should be kept in mind that this is just an example and not his prediction of future pricing.

For example, annual insurance for a Tesla car will cost $1,000 for a private owner. If the vehicle is part of the Robotaxi fleet, it will be used much more often, so let's assume that the insurance premium for such vehicles is $5,000. Let's also assume that there will be one million Robotaxis on the roads in one year. Then we arrive at $5 billion in revenue for Tesla in just one year.

Tesla's plan to create a truly massive fleet of its vehicles is staggering to consider. The company announced that, within three years, they will unveil a $25,000 car. This offering will no doubt rock the entire industry--even beyond the huge disruption Tesla has already caused. With this scenario, there is a high probability that, by 2030, Tesla will have 22.5 million vehicles on the roads.

Let's say that in 2030 Tesla will have a fleet of 100 million vehicles. In order to simplify the calculations, Steven suggests using $2,500 as the amount for the insurance premium per year (so as not to separate out Robotaxis from regular personal use vehicles--the former of which would likely fetch a higher premium). In this scenario, in 2030, Tesla would receive revenue of $250 billion--and from insurance alone.

In Steven's model, the average selling price of a Tesla vehicle is $35,000 per unit. If we multiply by the estimated number of Tesla vehicles sold in 2030 (approximately 20 million), we get $700 billion in revenue from the automotive business. If we look closely at these numbers, we realize that Tesla's insurance income, in this case, would comprise almost 36% of the value of its automotive business, which is consistent with Musk's forecast.

© 2020, Eva Fox. All rights reserved.

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Article edited by @SmokeyShorts, you can follow him on Twitter

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