“We are working super hard on insurance.” – Tesla Motors CEO Elon Musk

The global automotive industry is a two-headed monster. On the one hand you have engineers designing vehicles around rigorous principles that take into account all of the imaginable worst case scenarios that might lead to failure (think ASIL D, ISO 26262). On the other hand industry leaders look the other way as thousands of humans – 1.2M to be exact – are slaughtered each year on highways around the world.

Lately, the CEOs of car companies such as General Motors and Volvo Cars have started paying lip service to something called “Vision Zero” – the goal of reducing highway fatalities to zero and/or reducing emissions and congestion to zero. To be honest, the only realistic goal of these three is zero emissions. Zero congestion has unattractive implications for vehicle sales. Investors would not approve.

The problem is that the industry has come to accept thousands of daily highway fatalities with hardly a sniff. Car makers selling cars in the U.S. view 36,000+ annual highway fatalities (100+/day) like President Trump views 200,000 COVID-19 fatalities – the cost of doing business. Worse yet, the constant crashing of cars into each other, inanimate objects, and pedestrians is considered sufficiently routine as to be unimportant.

On a Webinar last week on the topic of vehicle-to-everything communications a senior executive from Molex delivered a jolt to the hundreds of attendees listening in when he shared details of the fatal crash of his son in a black ice incident that might have been avoided with the proper deployment of V2X technology. This story transformed the statistics back into the tragedy they actually represent.

Cars should not hit things. For any reason. It shouldn’t happen. Cars hitting thing is a defect the industry has come to accept as a feature.

Because we accept cars hitting things the industry has spent decades designing vehicle systems intended to help people survive crashes. In fact, surviving car crashes has been the mantra of the National Highway Traffic Safety Administration (NHTSA) for nearly half a century.

But imagine what would happen if cars stopped hitting things. NHTSA might cease to exist and insurance companies might shrivel up and disappear. (Not really – cars might still be stolen or catch fire – still need insurance!)

Tesla Motors appears singularly determined to achieve both of these objectives: eliminating the need for NHTSA and rendering insurance companies irrelevant.

In the latest Tesla earnings call, CEO Elon Musk and his colleagues noted the company’s offering of Tesla branded insurance in California and its plans to eventually expand across the U.S. As Musk has indicated in past calls, the company is seeking to leverage vehicle data regarding driving behavior to better understand how to underwrite individual driver risk and properly price insurance.

Part of Musk’s motivation is to counter what he feels is the lousy underwriting currently available in the broader insurance industry based as it is on driving history and credit scores. Musk, alone, is in position to obtain a comprehensive view of the typical Tesla owner’s driving behavior.

Musk is also seeking to come to terms with the challenge of vehicle repair which, up until now, has largely been a logistical issue – getting Tesla replacement parts delivered in a timely manner. While Musk has been focused on refining his risk analysis, he noted on the latest earnings call that the company is also learning more about how to better assemble Tesla vehicles in the context of mitigating the cost of repairing those vehicles. For Musk this is just another chapter in the vertical integration saga of Tesla.

Tesla is hoping to have its telematics model of risk analysis and related insurance pricing available to file before multiple state insurance commissions before the end of the year. This isn’t to suggest that every Tesla buyer will buy Tesla insurance – but it does suggest that Tesla will stand behind its products and its owners as the vehicles evolve to ever more comprehensive self-driving capabilities – a concept with which other auto makers and insurers are struggling.

Tesla and Musk are quickly learning that the key source of risk is the driver and the key source of cost is vehicle repair. The company’s objective with its insurance scheme is to mitigate both.

Musk’s secret weapon, of course, is Tesla’s suite of on-board systems and over the air software updates. The on-board systems provide unmatched contextual awareness for the driver and the software updates continually refine and advance the capabilities of the safety systems.

SOURCE: Dashboard display of intersection from a Tesla Model 3

One of my favorite examples of a Tesla providing nearly comprehensive contextual feedback to the driver occurs both while driving a Tesla and while standing at a traffic light. The Tesla vehicle’s external camera are all seeing and always watching and, if you glance at the central display while driving the car, will render images of passing and approaching motorists and pedestrians as they appear.

At traffic lights, which the vehicle is able to detect including the signal status, the car will identify surrounding vehicles and pedestrians in the crosswalk displaying them in the car. It’s hard to describe the surprise and delight that this capability engenders with the driver. The icing on the cake, though, is the steady stream of near monthly updates to the safety system including, most recently, a chime to alert the driver to the light changing green – thereby eliminating the annoyed honk from the idling driver behind you.

The big difference between Tesla Motors and the rest of the automotive industry is Tesla is clearly engaged, on a daily basis, in solving the challenges of cars hitting things. Industry data reveals that new cars are becoming steadily more expensive as are the cost of repairs due in part to the cost of replacing damaged safety systems. This means that the cost of insurance is rising as well.

Musk’s focus on insurance means he is ultimately focusing on reducing the total cost of ownership – an industry sweetspot previously owned by Toyota. That’s bad news for Toyota and every other legacy auto maker.

Insurers are struggling to come to grips with the onset of advanced driver assistance features (ADAS) such as forward collision avoidance, lane keeping, and blindspot detection. Consumer Reports, AAA and the Insurance Institute for Highway Safety variably promote and disparage these features on usability grounds – raising doubts regarding the efficacy of ADAS technology.

Claims management service provider CCC notes steady, if small, declines in crash rates due to the widespread adoption of automatic emergency braking in North America. What is missing is an alignment between auto maker safety system adoption and insurance industry underwriting. LexisNexis has taken on the task of helping insurance companies enhance their underwriting with deeper insights into the car-by-car deployment of ADAS tech. In other words, when you buy a car equipped with safety systems you ought to be able to get a discount based on the historical impact those systems are having on claims frequency – regardless of usability issues.

Compared to what Tesla is pursuing on the insurance front the rest of the industry, including auto makers and insurers, are twiddling their thumbs and tut-tutting over their actuarial tables. Says Musk: “I want to be clear. We're building a great -- like a major insurance company. If you're interested in revolutionary insurance, please join Tesla. I would love to have some high-energy actuaries especially. I have great respect for the actuarial profession. Your guys are great at math. Please join Tesla.”

Maybe Musk is asking for too much, shooting for the stars… “high energy actuaries?” Is that a thing? Maybe at Tesla.