Musk's Car Insurance Red Line

Anywhere in the world, when someone crashes a car the first call goes to the car insurance company. This is a source of enduring frustration for car makers and car dealers.

That first call - or First Notice of Loss (FNOL) - is a critical first step in the process of caring for a customer and his or her vehicle and can determine where and whether a car is repaired or replaced - putting at stake hundreds of millions of dollars in potential business. Generally speaking, car insurers are the gate keepers to those hundreds millions of dollars.

There has long been an uneasy detente between car companies and car insurers. Car companies would rather see their cars repaired with their own parts at their own dealerships. Car insurers have a vested interest in creating their own repair networks and seeing that cars are repaired properly but at the lowest cost possible.

Car companies and car insurers are both now facing an existential crisis with the onset of safety-enhanced and self-driving cars. For car makers and consumers there is the growing expectation that car insurance ought to be becoming not only less expensive but, ultimately, irrelevant. In fact, car insurance is neither irrelevant nor inexpensive. Insurance costs are rising along with the cost and frequency of claims.

Ironically, a good portion of the increase in the cost of claims is coming from the enhancements necessary to make cars safer to drive. A sensorless bumper might cost a few hundred bucks to repair or replace. Add a few sensors and the replacement cost rockets into the thousands of dollars.

Car companies have been too polite to make a point of this it seems. But not Elon Musk, co-founder and CEO of Tesla Motors. Tesla has been actively engaging with insurance companies such as Root (U.S.), Direct Line Group (U.K.), AXA General Insurance (Honk Kong) and QBE Insurance (Australia) to set up bespoke insurance programs for his vehicles.

Speculation was high in early 2016 that Tesla was looking to get into the insurance business, but Musk clearly thought better of this. What most likely occurred is that Tesla, like Google, considered the ponderous process of obtaining regulatory approvals from 50 state-level insurance commissions and thought it better to wait.

In the meantime, Tesla filed its forensic analysis of the fatal Florida crash with the National Highway Traffic Safety Administration. In the report, Tesla claimed that vehicles equipped with Autosteer were 40% safer - based on crash rates - than Tesla vehicles not equipped with Autosteer.

The sharing of this data marked multiple turning points for the automotive industry. Not only did it reveal Tesla's near total visibility to vehicle operation data, but it also showed Tesla's willingness and ability to volunteer this data without needing any additional customer consent.

More importantly, by sharing the data Musk changed the conversation around driver responsibility vs. car maker responsibility. While it is true that Tesla has, in this and other occasions, thrown its customers "under the bus" by highlighting their own driving shortcomings while exonerating Tesla vehicles and technology, the data share has also called attention to the heightened responsibility facing car makers.

Volvo remains the only car maker to proclaim its intention to take responsibility for liability once its vehicles are capable of autonomous operation. Musk has taken a different tack, suggesting that if insurance companies fail to recognize and accurately underwrite the safety technologies on its vehicles, he will reconsider his stated plan of not entering the insurance business.

In his words (as quoted by Elecktrek.co): “Not to the exclusion of insurance providers but if we find that insurance providers are not matching the insurance proportionate to the risk of the car, then if we need to, we will in-source it. I think we will find that insurance providers do adjust the insurance cost proportionate to the risk of a Tesla.”

https://tinyurl.com/llc7dg5 - Tesla Expands on Its New Car Insurance Program as Self-Driving Technology Improves - Elecktrek.co

In other words, Tesla is prepared to take the kid gloves off when it comes to dealing with insurance companies. Why? Because while some insurance companies have started offering discounts for cars with enhanced safety systems such as collision avoidance, automatic emergence braking, blindspot detection and lane keeping assistance, the vast majority of insurers are either not offering discounts or, in fact, charging more because of the cost of repairs.

Until now, no state or Federal regulator or car company has called out the insurance industry for its failure to stimulate adoption of safety systems. In fact, in the U.S., the Insurance Institute for Highway Safety has published a steady drumbeat of reports proclaiming that consumers turn off safety systems or that the systems fail to reduce insurance claims (with a few exceptions).

In essence, car insurance companies have become an impediment to the widespread adoption of safety systems. Regulators have done little to reverse this dangerous course. It falls to car makers to arrest this safety skid.

Tesla is making the point that the Tesla customer is valuable enough that Musk is willing to pull up the car insurance drawbridge and underwrite coverage for his customers on his own if he feels they are getting a raw deal. Once again, Tesla is taking the lead in consumer advocacy creating an entirely new lobbying position for auto makers. Perhaps its time for General Motors, Toyota, Honda, Mercedes, BMW and all the rest to step up and put similar pressure on the insurance industry.

At the very least, car insurers and car makers need to find common ground especially now as driver monitoring technology is just beginning to arrive in the market. Once car makers have a full 360-degree view of vehicle operation and driver behavior it may well be that car insurers will become irrelevant. Now is the time for the car insurance industry to prepare for this new customer relationship environment or they may find themselves locked out of the business.

Roger C. Lanctot is Director, Automotive Connected Mobility in the Global Automotive Practice at Strategy Analytics. More details about Strategy Analytics can be found here: https://www.strategyanalytics.com/access-services/automotive#.VuGdXfkrKUk