Automakers Flex Their Insurance Muscles

Would you buy auto insurance from the same company that made your vehicle?

Recently, two noted automakers placed bets on customers answering “yes” to that question. In the US Tesla and Porsche launched what we can call “native” insurance policies covering their vehicles. Tesla’s is currently available only to customers in California, although the company is promising a fuller roll-out in the future. Also, for the moment, Porsche is offering its policy to drivers with vehicles garaged in Oregon, Illinois and Georgia.

In-house insurance is a real departure for the auto industry, which for many decades has concentrated on merely selling, servicing, and financing the vehicles that roll out of its factories. Both companies implied that these products were superior in varied ways to traditional third-party coverage. “You know what to expect from your Porsche,” the luxury carmaker crows on the web site devoted to its native policy. “Why expect anything less from your auto insurance?” Tesla, never shy to hype a product with lofty claims, says its insurance premiums are up to 20% lower than traditional policies and, in certain instances, can come in up to 30% cheaper.

Hype aside, neither automaker is going about this entirely on their own. In spite of their breaking-the-mold language both are, in fact, offering their insurance products through third-party underwriters. In Porsche’s case, it’s teaming up with Mile Auto, a pay-per-mile specialist. Tesla’s partner is the more old-line State National Insurance Company.

Quality and price are two fairly compelling sales points for selling native insurance but what are the motivations for carmakers to offer such policies? Neither Porsche nor Tesla responded to interview requests for this story.

However, Roosevelt Mosley, principal and consulting actuary at specialist firm Pinnacle Actuarial Resources, has a few ideas. “They may be attempting to reduce the barriers to ownership of their vehicles,” he said. “For Tesla’s specifically, insurance companies were charging significantly more to insure these vehicles or refusing to insure them at all. Tesla’s feeling was that this higher premium was unjust and, therefore, decided that they could provide insurance cheaper.”

Mosley added that another reason could be what he termed the “changing mobility landscape”. With the proliferation and ubiquity of ride-share services, certain consumers might be tempted to eschew buying a car altogether and simply use pay-per-journey alternatives such as Lyft or Uber.

At this early stage Tesla and Porsche have not made public any data for customer take-up or figures for how much revenue/profit they’re garnering from the products. That said, it’s clear that the pair have concocted quite different business models with these policies that reflect the profiles of their respective customer bases. Tesla’s seems to be more or less a traditional contract, with the driver paying a certain premium in exchange for liability coverage (required by law in California). The company says in its literature that “we also provide additional financial protection against theft of the car and damage to the car for events other than traffic collisions”.

This essentially conservative approach to insurance is reflective of the kind of person that buys a Tesla. because all models are EVs, they’re suitable for an individual who does a lot of normal commuting driving. The cheap cost of keeping the cars powered, using domestic rated electricity at least, also encourages long-distance operation.

A Porsche is a very different kind of car. It’s generally not used for regular or distance driving, and with such powerful machinery under the hood it’s a gasoline gobbler. Understandably, then, Porsche goes the cost-per-mile route with its native insurance. Interestingly, its policy avoids the Tesla-like tendency to crunch stacks of car data. Policy holders are only required to submit their total mileage through the relatively low-tech and privacy-friendly means of snapping a photo of the odometer at regular intervals. This is “instead of using invasive tracking devices or always-on smartphone apps,” as Porsche says on its insurance web site, naturally enough to put the owners of their fast cars at ease that the speeds are not being recorded, at least by the carmaker.

So, by offering proprietary native policies, could Tesla and/or Porsche ultimately be spearheading a sort of native insurance revolution? James Lynch, chief actuary and vice-president of research and education at the Insurance Information Institute, can see a  landscape populated by both native and traditional policies. He said the former makes for “a new distribution channel and, in today’s app-driven world, that is something the industry is very interested in. If it really caught on, a lot of insurers would have to adjust their business models”.

“If it takes off it could be a threat to the current distribution systems (independent agents/captive agents/direct),” he added. “If it did catch on, most likely it could end up co-existing with the other channels, which have proved remarkably durable over the years.”

Yet Mosely doesn’t feel that’s likely to happen, at least not in the proximate future. He says that “at some point” native policies could be a competitive threat but not right now. He explained: “Because most households have all their vehicles insured with one company, dislodging just one vehicle from the household will be difficult. That difficulty increases as a customer bundles auto and homeowner’s insurance.”