Tesla to Disrupt Auto Insurance with Self-Driving Cars

Executive Summary

In this episode of The Road to Autonomy podcast, Grayson Brulte sat down with Sergey Litvinenko, co-founder & CEO of Koop to discuss soaring auto insurance rates, driven by high repair costs and inflation and why this economic environment is causing consumers to rethink their vehicle purchases.

This economic pressure may accelerate the adoption of autonomous vehicles and robotaxi services as a more affordable alternative. Tesla is uniquely positioned to disrupt this market by leveraging its vast real-time vehicle and driver data to offer cheaper insurance, potentially bundling it into an all-in-one subscription model that could make vehicle ownership profitable for consumers through a ride-hailing network.

Key The Road to Autonomy Episode Questions Answered

Key The Road to Autonomy Topics & Timestamps

[00:00] The Problem: Why Your Auto Insurance Rates Are Skyrocketing 

Auto insurance rates have surged 22% year-over-year due to inflation, the increasing cost of repairs, more expensive parts, and supply chain issues. This has elevated insurance to one of the top three expenses of vehicle ownership, following the cost of the vehicle itself and maintenance/fuel.

[01:00] How High Insurance Costs Now Influence Car Buying Decisions 

The high price of insurance is now a significant factor in vehicle purchasing decisions. Some consumers are forgoing certain vehicles due to insurance quotes as high as $5,000-$6,000 , while others are returning their leased vehicles because they are unwilling to pay the high premiums. According to Kelley Blue Book, over 63% of surveyed individuals have seen their premiums increase in the last year.

[02:00] The Autonomous Solution: Driving Robotaxi Adoption 

As rising costs push consumers to seek alternatives, self-driving robotaxi services are emerging as a key option. It is believed that the high cost of traditional auto insurance will be a primary economic driver that accelerates the public’s adoption of autonomous vehicles.

[03:00] Tesla’s Strategy: Changing How Insurance Is Done 

Tesla, which currently offers insurance in 12 states, aims to change how insurance is done rather than what it is. The company plans to use its insurance product to increase the adoption of its electric vehicles and self-driving software, with the goal of ultimately lowering insurance costs as automation reduces accidents caused by human error.

[05:00] The Unfair Advantage: How Tesla’s Data Lowers Premiums 

On average, Tesla Insurance is 20-30% cheaper than competing policies. This advantage is derived from its unique access to data on both driver behavior (via an opt-in safety score) and the vehicle itself. This data also helps streamline repairs since Tesla controls its own dealerships and parts supply, unlike legacy insurers.

[06:00] Is Tesla Insurance Actually Profitable? 

At present, Tesla’s insurance division is not profitable. It has a loss ratio of around 140, meaning it pays out $1.40 for every $1 it collects in premiums. This is likely a temporary strategy to subsidize and encourage EV adoption , and it is not expected to operate at a loss permanently.

[08:00] The Ultimate Disruption: A Tesla Vehicle & Insurance Subscription 

A potential future business model could see Tesla offering a subscription lease that bundles the vehicle, charging, and insurance into a single monthly payment. If an automaker with Tesla’s market share were to handle its insurance in-house, it would pose a significant threat to the legacy insurance industry.

[10:00] The Network Effect: Making Money With Your Car 

The true game-changer could be an autonomous ride-hailing network where owners can have their cars work for them while they are not using them, such as while sleeping. This model could make vehicle ownership profitable, with the car generating more revenue than its monthly subscription cost.

[11:00] A New Insurance Model for a Self-Driving Future 

A ride-hailing network where individuals put their personal cars to work creates an unprecedented insurance scenario. A new model would be required to switch between a personal policy and a commercial policy (held by the network operator such as Tesla) for when the vehicle is operating autonomously, as the owner is not responsible for the software’s performance.

Full Episode Transcript

Grayson Brulte: Sergey, the insurance markets for auto insurance are scary. Consumers are stop suffering under high inflation, and now their auto insurance rates are going up 22% year over a year. What’s causing that?

Sergey Litvinenko: You’re right, Grayson. The insurance costs keep going up for personal auto insurance. Also for commercial order, but we believe less. So it’s all driven by increasing losses and increasing cost of repairs. As insurance companies have to fix those cars, the parts are becoming more expensive. The supply chain issues, obviously they’re at play and people are upset primarily because insurance is a top three expense when it comes to vehicle ownership. So you have the vehicle itself, then it’s maintenance and fuel, and then it’s insurance. And when insurance starts to become a bigger portion. Of your expenses. That’s what’s driving people upset. Primarily because insurance is not tangible. It’s something that you utilize only when you have an accident, and most of the insurance policies don’t have an accident. That’s why people have a hard time wrapping their heads around how they’re gonna go about this. Anecdotally, I know people in New York and New Jersey area where we’re located that were just said that, Hey, I’m not gonna have this truck because this truck costs 5,000, $6,000 to insure the personal truck. Like Ram or Ford, and it’s crazy. I, I think we’re at the point when insurance costs actually influences vehicle purchasing decisions.

Grayson Brulte: We’re seeing that from Kelly. Kelly. Blue Book data has really interesting data. They said over 63% of the individuals they surveyed have seen their insurance premium go up over the last year. Kelly Blue Book is further considering and estimating another 7% increase in insurance premiums. And I saw some data today from Cox Automotive. Consumers are just turning back their lease and say, we’re done. We’re not paying the insurance, turning the leases over. When does the consumer scream uncle and say, no more? We’re done. We’re not gonna pay it.

Sergey Litvinenko: I think it already started to happen anecdotally. I’ve seen people like this, and I think the way we’re gonna see this through numbers is when vehicle sales start to decline, not in any particular segments, but overall they start growing slower than originally anticipated, and then people will start looking for alternative solutions, and there are not that many. You can use the mass transit and in some areas like it’s really hard to do that. But the next alternative that’s coming up would be. Self driving service, uh, robotaxi service, and I think the insurance industry will be one of the reasons why autonomy is gonna get a adopted faster than otherwise. In other words, insurance can help get more autonomous vehicles on the road faster, and that’s just pure economic decision. We just need to get there from the autonomy side of things,

Grayson Brulte: we’re gonna get there. That’s a real interesting statistic that you believe that it will. Drive the adoption of autonomous vehicles. I agree with that because it’s, it’s a fixed cost. It’s not a monthly cost, and you’re getting value for it when you pay for a ride. Autonomous vehicle. You experience it every day, but before we get to autonomy, there’s this little company out of Fremont, California now Austin, Texas, that I’ll say the word divided. You either love it, you hate it, or, or you’re indifferent or you just don’t know what’s going on and you think that Elon’s crazy. But either way, he’s disrupting markets. He disrupting electric vehicle marketing. You single handedly Tesla built it. Now I look at all these different various. Permeations inside of Tesla. Does Tesla go and disrupt the insurance market? I asked that with the backdrop. Tesla currently offers insurance in 12 of the 50 states of the United States.

Sergey Litvinenko: Well, I think the answer is yes and no. So when it comes to, yes, there is a lot. Going on with Tesla, we’re talking about lower cost EVs, the new model, and actually the existing models. I think with the credits, if you especially look at the aftermarket, they’re already somewhat in the affordable range within the medium price of an average car in the us, which is I believe like 30 to $40,000. And then of course the FSD launch, which. Everybody watching, and I think both the lower cost EVs and FSD will have quite an impact on insurance, especially on the cost of it. And when it comes to Tesla, Tesla will not necessarily disrupt insurance. Meaning it’s not going to change what insurance means and what insurance. Does, but it’s going to change how insurance is done, and I think it comes to Tesla Insurance can help Tesla drive further adoption of EVs and self-driving, self-driving software, self-driving solution. The tricky part there for, even for Tesla itself is that it has never happened before, so you haven’t really seen an autonomy play. At such a scale and it’s not easy to model out how insurance is gonna play out. One thing we know for sure is that if I have an electric vehicle and its vehicle, self-driving is gonna be different performance metrics that I need to evaluate for compared to human drivers going on gas cars. Now, how this is going to play out, it’s yet to be seen. The ideal situation is that insurance costs is gonna go down. Primarily because automation will eradicate a lot of the human mistakes on the road. So lower accidents and EVs are eventually gonna be cheaper to repair than gas cars. That’s the, that’s what we’re going towards. We’re gonna get there in a straight line. We cannot tell, but that’s what we’re gonna get.

Grayson Brulte: Does Tesla’s data and real-time data, historical data, give them an advantage when it comes to pricing? The insurance premiums? Right now with the human driven Teslas, on average, a Tesla insurance is 20 to 30% cheaper than your average auto insurance. That’s a big difference, especially in the economic climate, I think.

Sergey Litvinenko: Yes, definitely advantage, definitely. And it’s not just the advantage when it comes to the driving behavior. Of Tesla owners and I know you can opt in into sharing your data with Tesla and it can give you back recommendations, how you can improve your driving the safety score. So that’s only one part of the equation. Another part of the equation is the vehicle itself. Data about the vehicle itself. Repairs are a meaningful component of the insurance costs. If you have a legacy insurer that has to work with third party repair shops and I don’t know how to repair. Electric vehicles or Tesla vehicles, and it’s very hard to get parts, or the supply chain is not there. Tesla will have an advantage because they can repair vehicles in their dealerships that they, by the way, control and they already have the parts. So just a matter of getting them at every single dealership and then changing there on a. Which they have the expertise to do. I don’t know exactly, but I’m pretty sure that was a meaningful component to the 20 to 30% average reduction compared to the market. And on top of that, you have the driving behavior. And now with the FSD launch, it’s also gonna be the automation features. So when you have lower cost, lower cost to repair EVs. When you can control the human driver and you can enable human driver with full cell driving features and you have data about all of that, this is definitely gonna bring the cost down. However, if you look at the Tesla’s insurance performance, they released a report recently, I believe they’re at half a billion dollars across those 12 states that you mentioned. And the loss ratio is 140 or so. That means that for every dollar they collect from a customer, they pay out 40 cents. So technically. Tesla is losing money on insurance right now, and coincidentally, it’s also 20 to 30% cheaper, so it might be subsidizing in the short term to increase EV adoption. It might be just because they need to do a bunch of updates to their underwriting model. I don’t think they’re gonna run this unit unprofitably in perpetuity. They’re gonna make it work. But right there you can see what insurance is doing is that there is a Tesla insurance. It’s running at a loss. It’s better. Or more competitive than the market. It’s more convenient. So people choosing between Tesla and other OEMs will be more likely to buy Tesla, not just because it’s a great product, but also it’s, there is less friction associated with insurance. I think that’s the thinking there. But go. Going back to your question, data, yes, data will help Tesla tremendously.

Grayson Brulte: Lemme throw a curve ball and to the mix here. There, there’s no data to back this up. This is a theory I have right now. Tesla has 4.2% market share. Of the overall light vehicle automotive market in the United States. Put that in perspective. Volkswagen has 4.1%. BMW has 2.5%, and then you’ve got the big boys in the 12 to 16% range, which includes Ford, gm, and Toyota, 4.2% of the market. You have the ability technically to grow another additional 12% to get to. The big leagues. What if Tesla’s, because you know what? We’re no longer gonna sell cars. We’re gonna do a subscription lease where the insurance is gonna be bundled in along with your charging. Does that change the game? Mm-hmm. Now you’re taking 14% of the white vehicle automotive market, you’re taking that insurance away. That’s a big chunk of the market. Does that start to disrupt it a little bit if they did that?

Sergey Litvinenko: Absolutely. And think about it this way. We’re talking specifically about personal auto insurance, which is a huge segment right now. It’s dominated by the legacy players, so progressive. Geico, Liberty Mutual is all the world, and if you have an OEM, which will have a top three market share in the United States, and that OEM says that we are going to do insurance ourselves, and this is gonna be the insurance for what’s gonna be a standard in the near future, meaning that it’s gonna be an electric vehicle with full self driving or partial self self-driving is gonna make you worry. Because, well, how can a legacy carrier compete an OEM that produces EVs and avs, especially if there is no data on that and that OEM has all the data, I think the opportunity to disrupt is there. And when it comes to bundling everything in one, that’s a really interesting idea. Well, first of all, it has to make economic sense to Tesla, but if we assume that makes economic sense to them, let’s think about the bundle charging. Probably gonna be inexpensive if you can have. Ev and let’s think a few years ahead. Let’s say you have a 20 5K ev that they finally release, and let’s say on the aftermarket, you can even get it for 70, 75% of the, of the value. Let’s make it up to $20,000, maybe $17,000. And if you want to buy a subscription or lease it or finance it, let’s make it, you probably put a few. Dollars of worth of down payment. Let’s say your vehicle cost comes down to 250, maybe $300. Throw FSD on top, say another $99. Your most recent ev, probably most awesome ev with full self driving is under $400. If you don’t figure out insurance, insurance can be as much as $400 on top. And now it’s like, well, I’m paying more for insurance than I’m paying for my car. For charging and for self-driving. Now this is gonna be crazy. Tesla has the way, how to make sure that it doesn’t happen, and I think that’s why they started Tesla Insurance in the first place. But if you have traditional insurance companies. Coming to potential Tesla owners and saying that, look, we’re gonna charge you for insurance as much. You pay for the whole thing. Of course, this is not going to work, and Tesla will have to disrupt the space, otherwise it’s gonna hurt the sales.

Grayson Brulte: They’re gonna disrupt the space. The Ride hailing app is extremely important, so if you factor in that, let’s say Sergei or, or Grayson, we, I lease one, you lease a vehicle and then you have the ability to put on a Ride hail network to generate revenue when you’re sleeping. That’s very interesting, and especially when you make that autonomous, that gets even more interesting. So now not only are you saving money, you’re making money, the vehicle becomes profitable for you. Tesla just changed the entire global auto industry. They disrupted it and then insurance on top of it, they disrupted Uber. How does anybody compete if this, if all the stars do indeed line up, and consumers that are spending say $400 a month with a vehicle are making on average $600. They’re up $200, it’s over.

Sergey Litvinenko: It’s gonna be very tough. I think the original idea that we have, let’s talk about robotaxis first. The original idea that we had in the industry was that robotaxis are going to happen in commercial fleets, and I still think it’s gonna be the case. And you’re going to have robotaxi services and different cities and they’re gonna do passengers and they’re gonna do goods and maybe a bunch of other things in the future. But we haven’t really thought about, okay, if I have a vehicle that I can. Put my vehicle on a network and it can produce revenue for me. This has never been done before. It’s very important to note that this is so new that we are only as good as our assumptions are. And I think when it comes to insurance, this model, when you can put your personal vehicle on a network, there’s going to, there has to be some form of a. Because, well, yeah, I can own the vehicle, but technically when it’s out there on the road performing the service, I am not responsible for how it’s going to perform. It’s gonna be the software driving this or what other people do with it. So there has to be some way how you can switch between your own insurance and the insurance that probably Tesla will have to carry if Tesla becomes the fleet. Owner operator, that’s when Tesla will need to think about moving into the commercial space and having a commercial product for the fleet that is going to operate on its network. And this product, of course, probably will have to be in house, so working within their captive and will most likely have to be reinsured. But that interplay between personal and commercial insurance. Nobody has seen this before, so I can tell you that the insurance industry will make it work. There’s gonna be a product, there’s gonna be a solution. How exactly is it gonna look like? It’s up in the air, and I’m pretty sure there is a company, there is a team within Tesla that’s working hard on that.

Grayson Brulte: Once you figure out the insurance element, the network effect kicks in and the network effect creates tremendous value for shareholders and for users of the service. The future is bright. The future’s autonomous. The future is the network.