Vehicle makers have long complained they don't generate the revenues and profits they deserve. They design, build, market and sell the world's cars and trucks, creating a massive market -- but a huge percentage of the value flows downstream to others.
Car makers may capture revenue from financing and perhaps warranties, but others service and repair the vehicles, provide the gasoline, develop the navigation apps and, yes, sell the insurance. The auto makers would dearly love to capture more of that downstream revenue and seem to have especially aggressive plans on insurance.
But a recent article on Tesla's problems developing an insurance business, on top of Goldman Sachs' face plant in consumer banking, suggests that the auto behemoths may not be as threatening as insurers once thought.
The big original equipment manufacturers (OEMs) have premised their push into insurance on data. At a time when consumers are increasingly open to having premiums priced based on how much, when and how they drive, insurers need to be able to collect that data -- and the OEMs already have access to it.
Because of all the sensors and communications capabilities they build into their vehicles, OEMs don't have to install a telematics device, monitor a driver's behavior for a month or two and wait to generate an appropriate premium for a new customer. The OEM already knows what that car has been up to in prior months and can generate a personalized premium from the get-go.
But a recent article in Reuters about Tesla's move into insurance shows the difficulties that come when a manufacturing company that touches consumers only indirectly, through dealers or repair shops, tries to set up a direct-to-consumer service business. A consumer business comes with, well, consumers, and those consumers demand service.
"Complaints about Tesla Insurance are drawing scrutiny from state regulators and the plaintiffs’ bar. The Ohio Department of Insurance at least twice this year determined that Tesla had violated the state’s insurance regulations in handling claims, including for a lack of timely communications with a policyholder.... Phil Fioresi Sr., a stonecutter in South San Francisco, California, told Reuters it took about 15 calls to reach someone at Tesla Insurance after his daughter’s car was struck by one of its policyholders in September....
"The insurer wouldn’t divulge the current number of claims adjusters. But the dozen or so adjusters who started handling California claims in late 2021 were quickly so swamped that resolving cases took weeks or months, the people familiar with the operations said. At the time, Tesla insured more than 50,000 vehicles in the state, according to California Department of Insurance records....
"Working out of a Tesla office in Draper, Utah, the initial adjusters sometimes had to take on hundreds of claims each, far more than at other insurers, according to the sources with knowledge of Tesla Insurance’s operations. Unlike competitors that often have separate call centers to take claim reports, Tesla’s adjusters had to answer the phones themselves while also handling claims."
Tesla is also facing a class action that alleges it overcharges insurance customers because its data-gathering is faulty and unfairly generates reports of dangerous driving, as this article in Forbes explains.
Tesla's CEO, Elon Musk, has been known to fly by the seat of his pants at the many companies he runs, and we will surely see a more disciplined approach from GM, which has announced big plans for insurance, and Ford, which is rumored to have a major initiative in the works.
But Goldman Sachs still offers a cautionary tale. It has the same sort of strong brand that GM and Ford do and is known for relentless management. It even did a deal with Apple, maybe the strongest brand of them all these days, to offer a credit card. Yet Goldman Sachs has announced it is leaving consumer banking and has taken billions of dollars in losses -- losses totaled $1.2 billion as of August 2022, according to Fintech Nexus, and have continued, to the point that Apple is seeking to end its partnership with Goldman Sachs.
The problem wasn't lack of customers. Goldman amassed more than $100 billion in consumer assets, and more than 6 million signed up for the credit card. The problem was that, while investment banking and consumer banking are both financial businesses and have similarities when viewed from 10,000 feet, they are very different when viewed at street level, where those consumers live.
Fintech Nexus reports, "One of the main areas of focus of [an investigation by the Consumer Financial Protection Bureau] had been Goldman’s handling of credit card disputes, the level of which the company had been reportedly unprepared" for.
Goldman Sachs also misunderstood a key issue about consumer banking -- it thought physical branches would fade in importance faster than they have, creating an opening for a generally virtual presence by Goldman. In addition, the firm found that "robo-advisers" weren't nearly as effective in a mass market as it had hoped.
GM and Ford aren't Goldman, and insurance isn't consumer finance, but Chunka Mui and I found in our years of research into corporate failures for "Billion Dollar Lessons" that planned moves into adjacent markets are one of the seven strategies most likely to lead to disaster. The reason: exactly the sorts of issues that Goldman faced and that GM and Ford may well find. Markets that seem adjacent at a high level can have unforeseen and crippling complications.
Already, there is reason to doubt whether the OEMs will have as big a data advantage as they seem to think they do.
There is a battle shaping up about who owns that data. Insurers act as though they do, whether individually or shared through Allstate's Arity unit. Car makers act as though they do. But I think consumers own the data, and regulators are increasingly siding with me.
The regulators, especially in Europe, are reining in the indiscriminate collection of consumer data by Google, Meta and others and giving control to consumers. And it's hard to imagine that limits set for Big Tech won't filter their way into other parts of the global economy, including car insurance.
If GM has to ask me for the use of my data rather than just collecting it through OnStar, the equation changes.
Tesla, GM, Ford and perhaps others will, of course, face firmly embedded competition, too. As Barron's reports, "While the opportunity is big, making it a reality won’t be easy. State Farm, Allstate (ALL), Progressive (PGR), and Geico, which is owned by Warren Buffett’s Berkshire Hathaway (BRK.A), control roughly 50% of the U.S. market and won’t cede share without a fight."
Barron's adds that "the data coming from the cars may not be as valuable as the auto companies think. For the most part, auto insurance... shouldn’t be all that complicated. Calculating the number of cars that will get into an accident and what it costs to fix them is relatively easy.... The data coming from cars, while helpful, may not be all that necessary.
“'Seventy percent to 80% of drivers are what are called clean, meaning they just haven’t really had any accidents in five years,' [a research analyst] says. 'You don’t need user [data].'”