Studies shown here claim that the Tesla 3—the most affordable Tesla model—is experiencing “skyrocketing insurance costs.” I can’t say I’m surprised, as I’ve been suspect of the true insurance costs of a Tesla, or for that matter, any Electronic Vehicle (EV). I am skeptical because after spending forty years in insurance, I consider myself a product of the insurance world. I have a pretty good understanding of how insurance rates are developed, how insurance responds to societal change, and the data-driven aspect of insurance, along with the financial regulation, consumerism, compliance and the rest of intricacies that makes insurance work quite reliable and transparent
When the EV’s first came to market, they truly were a game-changer poised to revolutionize transportation. Sandwiched between the hype and hoopla was the slice of reality that said not so fast. The skeptics in the room pointed out the many unknowns about EV’s and how insuring one of these cars would be problematic, since no one knew anything about pricing insurance or paying the claims that were certain to show up sooner rather than later.
In my regular work at VUE I develop a lot of thought leadership articles etc. and I always look at the current landscape for insurance opportunities and threats that could make a difference—good or bad—in insurance products and services. First and foremost, I found the EV issue especially intriguing because EV’s were going to save the planet from global warming, or cooling, or weather (take your pick). This created a problem when asking about the practicality of EV’s. Ask a few questions about EV’s and you ran the risk of being on the wrong side of global warming.
Take simple questions like: How long does a charge last? and How far can I go before I need to plug it in? I think those are fair questions, but the answers were basically “who knows” and “it depends.” We find that in the case of the Chevy Volt, the answer to the question was “about 20 miles.” And the obvious follow-up question: Then what? The smug answer went something like this: “we planned for that, and EV’s will have a gasoline engine that can provide power to the car so it can still go down the highway and charge the battery. And besides, most people travel less than 20 miles a day which means that you can’t be stranded.” Silly me, but I thought that the EV was supposed to be the alternative to those polluting and environmentally toxic gas engines.
But, I digress—back to insuring these saviors of the environment. Insurance, from the days of gathering at the old Lloyds Coffee House and choosing to insure or not to insure a particular ship, is about understanding the risk and determining a price to ensure that risk. As insurance evolved, it learned that the right kind of information could help make the correct underwriting decision. From those early days, insurance has become one of the most data-driven businesses on the planet. New things coming down the pipe? Insurance will figure out a way to insure them. So it goes with EV’s.
If you look at all of data that comes from insuring private passenger automobiles, there is an accuracy about the probability of a specific type of accident or event that can be boiled down to a dozen decimal places. Here is the example that I usually cite:
“Most people that drive down a highway have seen those re-tread tire carcasses from a semi-truck laying in the roadway. During daylight driving they are fairly easy to see and to avoid. But, at night they are not so easy and are frequently run over by a passenger car. Sometimes when you hit one it can bounce up and damage the oil pan which then leads to losing oil and quite often seizing the engine. The repair for that type of incident is the total replacement of the engine. For a typical Chevy, Ford, or Toyota the engine replacement is a $3,000 to $5000 claim. And that claim, along with hundreds of other types of claims have a probability that can be translated into an actual dollar amount and that probability is what ends up as a part of the total premium that the insurance company is charging. Truth be told, insurance rates are not back-of-the-napkin estimates of what it will cost to insure an automobile, but very exact and precise measures of the sum total of a hundreds of costs that can come in the form of a claim.”
As for Tesla, the insurance companies that were asked to insure the Tesla cars did not have any knowledge of the true cost to insure the cars for this simple reason: they had no idea of the cost to repair the cars. With insurance companies not having any idea of the potential cost to repair a Tesla against a variety of accident scenarios, they began to guess the cost of repair.
In the myriad of premium calculations that make up a particular premium charge, there is a .0000000023 charge in the comprehensive coverage for hitting a re-treaded tire carcass. But that charge, in the case of insuring the Tesla, is based on the probabilities and costs associated with a non-EV automobile. Where the regular gasoline operated car had a known cost to repair—replacing the engine for $3000 to $5000—the Tesla doesn’t require replacing the engine. Instead, the Tesla has $40,000 worth of batteries that are ruined and need replacing. So, the poor actuary who figured the odds were about the same also figured that the repair costs would also be the same.
That brings us to the article that is linked to this blog. Early on, the pricing calculations for all EV’s—not just Tesla—were guesstimates. As more data is derived from actual on-road experience, the actuary can sharpen her pencil and get the premiums better aligned with the risk that is being insured.