This October, Tesla announced they would start offering usage-based insurance (UBI) to all Model S, Model 3, Model X, and Model Y owners in Texas. Tesla insurance, unlike traditional ones, would use real-time driving behavior for premium calculation, already known as a pay-as-you-drive or usage-based insurance. Considering that the car insurance market has been heating up for years, will Tesla’s approach become a threat to the traditional car insurers?
How does Tesla's usage-based insurance differ from traditional insurance?
For a start, Tesla’s insurance premium is evaluated solely based on the vehicle’s model, driver’s address, monthly mileage, and the special ingredient - the vehicle’s monthly Safety Score. The Safety Score is an assessment of 5 driving metrics Tesla finds to have higher collision probability, and the overall premium formula was derived based on statistical modeling of fleet data. The driving metrics are acquired from the built-in telematics and sensors infrastructure.
Namely, the traditional car insurance premium is based on myriads of non-driving factors, such as credit score, age, marriage status, homeownership, etc. The socio-economic factors lead to highly biased insurance premiums, which is the number one reason why traditional insurance is considered discriminative.
Tesla insurance calculator will show status in real-time & tell you what actions are needed to be rated "good driver"— Elon Musk (@elonmusk) September 20, 2021
Five Safety Score factors are measured directly by Tesla using various vehicle sensors and include:
- Forward Collision Warnings per 1,000 Miles
- Percentage of manual braking with excessive force (Hard Braking)
- Percentage of aggressive turning (Aggressive Turning)
- Unsafe Following
- Forced Autopilot Disengagement
Tesla expects drivers with the “average” safety score to save anywhere between 20% to 40% on premiums, while the drivers with the highest safety score could save between 30% and 60%.
Moreover, according to 150,000 probe vehicles, Tesla has calculated that customers using the Safety Score are 30% less likely to be involved in a collision.
Is Tesla reinventing car insurance?
No. However, one of the most prominent struggles insurers have with usage-based insurance is closely tied to the cars’ data acquisition and analysis, which is the fundamental reason why usage-based insurance hasn’t reached mainstream status.
Namely, from the technological aspect, car data is extremely hard to handle at a scale. The time and geographical skewness of car data make it practically impossible to derive any data from it using conventional database solutions. As a technological enabler, Mireo, with its unique SpaceTime Analytics Platform, bypasses the gap between the telematics data and the insurers by offering a comprehensive analytical set of Big Data analytics tools.
Mireo’s SpaceTime Analytics Platform fuses the car data with the underlying digital map data, thus enhancing the car data to provide higher-order analytics, such as the hours spent driving on highways, within the cities, or above the posted speed limits. The unprecedented analytics speed enables actuaries to perform myriads of experiments to determine which country-specific parameters affect the crash probability and to what extent.
The future of car insurance
The car insurance market demands and its competitiveness inevitably push car insurance towards telematics. As the car manufacturers such as Toyota, GM, and Tesla are already testing the waters with proprietary telematics-based insurance, the competition is increasing relentlessly.
Usage-based insurance drivers - US, 2019-2023, InsiderIntelligence
To get a glimpse of the current industry's status, let's single out a few quotes that describe it the best:
During Tesla’s Q3 2020 earnings call, Elon Musk stated how he expects the insurance business to represent someday 30% - 40% of Tesla’s car business.
“Obviously, insurance is substantial. So insurance could very well be, I don't know, 30%, 40% of the value of the car business, frankly.”
At the Berkshire Hathaway annual shareholder meeting held in May 2021, Warren Buffett and Ajit Jain stated:
“GEICO clearly missed the business and was late in terms of appreciating the value of telematics. They have woken up to the fact that telematics plays a big role in matching rates to risk.”
GEICO is the second-largest car insurer in the USA, part of Buffett’s Berkshire Hathaway conglomerate.
Tom Wilson, the CEO of Allstate, the fourth biggest car insurer, was even more explicit:
Tom Super, vice president of insurance intelligence at market research company J.D. Power, said Tesla’s insurance offering “could represent a viable long-term threat” to auto insurance powerhouses like Allstate, GEICO, Progressive, and State Farm.
The Milliman consulting company has probably described the competitiveness in the car insurance industry the best.
“Not only are car insurers competing against each other, but now they are also faced with an external-to-the-insurance-industry threat from car manufacturers. As car manufacturers and car insurers gain more vehicle data, the most innovative are in the best position to lower car insurance premiums and gain customers.”
However, the shift from traditional car insurance policies to telematics-based ones requires broad insurer's organizational changes that C-level executives must promote, sponsor, and execute. But that change is inevitable and cannot be avoided nor prolonged indefinitely.
Let’s see how it’s made!
With the help of Mireo’s SpaceTime Analytics, we’ve examined over 1 bn of trips from more than 500,000 Italian cars and their official crash report records to find how driving patterns affect risk probability. SpaceTime Analytics enabled us to run a series of correlation tests exceptionally quickly. Unlike Tesla, we’ve focused on different driving factors specifically tied to Italian drivers and would suggest considering the following safety score factors:
- Night-time driving
Italians driving between 23:00 and 04:00 have double the probability of having a crash.
- Driving hours
Italians spending more than 50 hours monthly on the roads are twice as likely to crash than regular commuters who spend 20 or fewer hours monthly on the road.
Contrary to common perception, frequent speeding does not increase the auto insurance claim risk probability that much.
Try It Out!
If you've found this UBI analysis impressive and would like to see the similar numerous, on-the-fly calculated analytics running live on more than 200.000 vehicles, check out our free SpaceTime online demo.