February 28, 2017
How Insurance Will Become Invisible
by Paul Carroll
A couple of years ago, lots of people in insurance were looking over their shoulders, because of concerns that a tech giant such as Google, Amazon or Facebook might innovate in some shocking way and take over the industry. That threat has faded, but a recent story about Tesla from a transportation news site should make us all pay attention. It suggests a possibly major change for auto insurance, and it certainly fits much more into my mental model of how innovation will happen than a full-on invasion by Google, Amazon or Facebook ever did.
Tesla is bundling car insurance with its cars, albeit, thus far, just in Australia and Hong Kong. This makes perfect sense to me. Car makers have complained for decades that they make the boxes while everyone else profits from financing, insurance, repairs and so on. Why not offer to bundle insurance at an attractive price?
Tesla has powerful advantages. The article cites a study showing that Tesla’s Autopilot feature reduces accidents by 40%, and Tesla’s irrepressible founder and CEO, Elon Musk, believes he can boost that figure to 90%. A huge reduction in crashes lets Tesla set prices that traditional insurers might not match, because they lack Musk’s confidence in the data. Tesla also has a major edge on cost because its “Do you want fries with that?” approach to selling knocks out the commission that would go to agents, if you’re a State Farm, or the huge marketing budget if you’re, say, Geico. Tesla has an underwriting advantage, too: It’s already tracking the actions of its cars moment by moment, so it can evaluate drivers incredibly precisely, whenever they’re in control.
The Tesla approach reinforces my belief that much of insurance will become invisible. Perhaps you buy a commercial building and, as part of the transaction, take out a mortgage that includes a term life policy that lasts the length of the mortgage, to be sure your heirs would be able to keep the building. Already, when you ship rice in the developing world, you may automatically have insurance included in the cost. Various forces will try to maintain the status quo, as car insurers will surely fight Tesla, but going invisible takes out a big chunk of sales costs and simplifies underwriting, because it can be done quickly and mostly based on broad demographic data about the likelihood of a claim.
Tesla’s experiment may never go anywhere. The company already has a ton on its plate, ramping up production at its crucial Gigafactory for batteries and integrating its acquisition of Solar City (also founded by Musk). That integration could well pose a problem because a maker of cars and an installer of solar panels don’t have a whole lot in common, because they are both gobbling up cash at this point and because any problems could lead to charges of self-dealing, as long as a Musk company bought a Musk company for $2.6 billion at a time when Musk held 22% of the acquired company’s stock. Just in case he didn’t have enough things going on, Musk is still CEO of another company he founded, SpaceX, which has plans in outer space at least as ambitious as what Tesla is trying to do on the planet.
But I’d suggest you keep an eye on Tesla’s foray into auto insurance—and look for other ways that insurance can be bundled like an Extra Value Meal at McDonald’s.
One more quick thing before I get out of the way and turn you over to my six favorite articles from the past week: I’ve been mentioning The Innovator’s Edge, which tracks the more than 850 insurtechs we’ve identified around the world. To make it easier to identify the likely winners from this pool, we’re assembling a panel of distinguished judges who will identify “5 to Watch” every month, starting in mid-March. The judges will draw from the insurtech startups that have filled out our Market Maturity Review—45 and counting have done so—within Innovator’s Edge. If you’re an insurtech startup and want to be considered for our first list, you have about a week to go to Innovator’s Edge and fill out an MMR. It only takes a few minutes and has the huge added benefit of exposing you to incumbents that are looking for sources of innovation—whether that means buying from you, partnering with you, investing in you or buying you. If you have any problems with the MMR, please contact us at email@example.com.