Tesla signs Liberty Mutual to support auto insurance undercutting

Tesla is persisting with its plan to undercut the automotive insurance providers, signing another deal to expand its InsureMyTesla offering, this time with Liberty Mutual in the US. Now available in 20 countries, the company aims to ensure better rates for its customers, as a means of making its cars more price competitive, as well as paving the way for it to experiment with its self-driving technologies.

The new deal comes as CEO Elon Musk continues to demand that insurers lower their premiums for Tesla cars, due to their better safety records and Autopilot technology – a contentious claim in both Silicon Valley and Detroit, but apparently backed by the NHTSA’s findings that crash rates for Teslas fell 40% since Autopilot was launched.

Signing Liberty Mutual appears to be a response to AAA’s recent decision to raise its rates for Tesla cars, based on what it said was a high frequency of claims. Tesla took that about as well as you imagine, and declared that AAA’s decision making was “severely flawed.” AAA said it had based the choice on data from the Highway Loss Data Institute, but while AAA appears to not want the Tesla business, Liberty Mutual appears to be leaping at the opportunity.

For insurers in general, there’s going to be a difficult few years as they adjust their business models to reflect self-driving technologies. KPMG warns that the personal automotive insurance market could shrink by as much as 40% over the next 25-years, due to autonomous driving technologies, and automakers are beginning to explore the possibility of bundling insurance inside the cost of the vehicle itself – a paradigm shift that would cut the insurer out of a relationship with the consumer, and potentially give the automaker much more bargaining power.

So the insurers will be wary of autonomous vehicles, but will realize other opportunities in the IoT – which are enabled by the huge amount of additional data that IoT devices can generate, which can be used as part of their risk analysis. Having a much more firm idea about when a product becomes a risk should provide insurers with the ability to improve their overall margins – by cutting out the riskier policies and replacing them with safer ones, or simply charging more for those riskier deals. Riot has previously explored this in a research paper.

The bundled offering of a car, including the car itself, a financing deal, the insurance, and likely a long maintenance and servicing contract is effectively Vehicle-as-a-Service (VaaS). There are different approaches to this, in the private ownership model but also in public fleets of ride-sharing services, but the overarching point is that self-driving technologies are poised to severely alter the current model of vehicle usage.

VaaS was the topic of another previous Riot research paper [enquire for details], but the core concept is that new technologies will have a transformative impact on the current model of private vehicle ownership. Ride-sharing will see fewer cars provide more trips for the market, and erode the desire to own a personal vehicle – especially once marketers can concisely present the cost breakdown of a ride-sharing service versus owning and keeping a car (price paid, cost of finance, fuel, tax, maintenance, insurance, vs. $10 per trip, for example).

It seems that this erosion will affect the lower end of the car market more dramatically, but could work to the advantage of premium automakers – who can leap on the opportunity to market the luxury of owning a car all to yourself, which doesn’t have to be shared. For people who just view a car as a means of getting from A to B, ride-sharing until public transport becomes an option seems like an easy transition to make.

For those who have invested substantial amounts into their cars, the VaaS model could provide a new way to sustain that luxury experience. Volvo has already experimented with this subscription paradigm, where a customer would essentially trade in their car every two years in exchange for the latest version.

For Volvo here, the system locks in customers and provides recurring revenues that can be better anticipated (good for cash flow), as well as keeping money in-house through the servicing and maintenance tasks – preventing those revenues from leaking out to third-parties. For automakers like Volvo, which don’t compete on volume plays at the lower ends of the markets, VaaS could enable them to combat falling sales by significantly increasing their internal per-vehicle margins.

Similarly, the ride-sharing operators are going to be lucrative customers for automakers to sell to, providing fleets of the latest vehicles and a guarantee of uptime as part of an SLA. Those operators will want up-market cars, to help sell the experience to their own customers, and while fewer over-all cars might be sold, both the automaker and the ride-sharing operator are planning on getting a lot more revenue out of a single car in that new model, compared to the single-user private sale.

That transformation is going to be a slow one, first seen in developed markets. Emerging markets and economies represent more greenfield opportunities for the automakers, which will allow them to compete along familiar lines, but in established markets, they will have to change the model in order to adapt.

Developed economies feature higher levels of urban-living, and the number of people living in urban environments grows every year – and shows no sign of slowing. Those cities are the perfect environment for ride-sharing to grow, and for other pressures to encourage urban dwellers to ditch their cars – such as the cost and hassle of parking, local regulations and levies on internal combustion engines (ICEs), and the price competition from established mass transit systems. In more rural or countryside markets, such pressures are less prevalent, but average incomes are lower – so it is not clear whether villages and hamlets will be a bastion for embattled automakers.