Tesla's potential effects on insurance companies.

garsh

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#1
I had the same thoughts as Jeremy when I watched some morons from CNBC provide their “professional” opinion on Tesla.
He went off in the weeds when he started blaming insurance companies. Insurance companies don't suffer when accident rates go down. Sure, they'll end up charging less, but they'll also end up paying fewer claims, and will therefore still make money.
 
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PNWmisty

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#2
He went off in the weeds when he started blaming insurance companies. Insurance companies don't suffer when accident ratest go down. Sure, they'll end up charging less, but they'll also end up paying fewer claims, and will therefore still make money.
I don't recall him claiming insurance companies would lose money or go bankrupt, just that they would be smaller businesses (much less revenue). The implication is they would spend less money on advertising which translates to less revenue for a cable/TV company that relies on ad revenue. I think it's a solid connection that explains the many reasons why the media seems so unbalanced when it comes to Tesla.
 

garsh

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#3
I don't recall him claiming insurance companies would lose money or go bankrupt, just that they would be smaller businesses (much less revenue). The implication is they would spend less money on advertising which translates to less revenue for a cable/TV company that relies on ad revenue.
I don't see that being true either. If accident rates go down, then the insurance company's costs go down as well. They can charge less and still make just as much money. There's no effect on the money they'll make, or have available for advertising.
 

PNWmisty

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#4
I don't see that being true either. If accident rates go down, then the insurance company's costs go down as well. They can charge less and still make just as much money. There's no effect on the money they'll make, or have available for advertising.
Autonomous cars would decrease the accident rate (or autonomy would never be approved by regulators). This will cause insurance premiums to shrink dramatically. Less revenue = less advertising. Total profits are not going to magically rise because there is this thing called competition. This would happen with or without Tesla participating in the insurance market but Tesla's participation will almost certainly reduce margins for those who don't have Tesla's data. Because the data will direct Tesla to offer the lowest premiums to the safest drivers and the highest premiums to the most dangerous drivers. Assuming Tesla uses the data correctly, this could actually lead to a reduction in profit for those who don't have access to Tesla's data. Because the traditional insurance companies will be insuring the most dangerous drivers (without knowing exactly who those dangerous drivers are.
 
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garsh

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#5
Autonomous cars would decrease the accident rate (or autonomy would never be approved by regulators). This will cause insurance premiums to shrink dramatically. Less revenue = less advertising.
No, because you forgot about costs again. I'm postulating that profit (aka, revenue - cost) is going to remain fairly constant for insurance companies. Advertising comes out of this difference. It won't be affected much.

Total profits are not going to magically rise because there is this thing called competition.
No, but profit isn't going to magically fall either. The insurance company has to cover their expenses. Competition doesn't cause companies to drop prices so much that they become unprofitable. When the companies' costs drop due to lower accident rates, then they can charge less and remain just as profitable.
 

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No, because you forgot about costs again. I'm postulating that profit (aka, revenue - cost) is going to remain fairly constant for insurance companies. Advertising comes out of this difference. It won't be affected much.
It sounds like you are now acknowledging that advertising spending will be affected as their total business shrinks (when you say "It won't be affected much").

I will point out that you are viewing advertising expenses in a non-businesslike way. Traditionally, advertising expenses are viewed as a cost of doing business, not viewed as something that comes out of the profit at the end. While there could be higher profit margins as autonomous cars prove their safety, it's more likely that the insurance companies will need to adjust their premiums to stay competitive with other offerings. And if Tesla enters the insurance market the established insurers, with their lack of data on individual drivers, will be at a competitive disadvantage so it makes more sense that, at best, their margins will remain the same as the total volume of revenue is reduced. That equals less profit. How much they choose to spend on advertising will be up to each insurer but excessive advertising costs will impact their ability to keep their premiums competitive with other insurers and still remain profitable.

Reduced claims/payouts will not cause the profit boost you imagine due to a competitive insurance marketplace. At least not in the long run.
 

garsh

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#7
It sounds like you are now acknowledging that advertising spending will be affected as their total business shrinks (when you say "It won't be affected much").
Nope. Sorry if I wasn't clear. I'm definitely not saying that advertising will decrease. I acknowledge that a large shift in costs and premiums are going to shake up the market, and some competitors will shrink or grow as they adapt to the new normal. But in the long term, there will be no appreciable difference to insurance companies. Profits will not change much at all, up or down, other than normal fluctuations.

When you say "total business shrinks", I would disagree. Insurance companies will continue to handle the same basic number of policies. Revenue and costs will shrink, but the difference (profit) will remain the same. And yes, when I say "costs", I'm just talking about paying out insurance claims, as that's the only part of cost that I see significantly changing.

Traditionally, advertising expenses are viewed as a cost of doing business, not viewed as something that comes out of the profit at the end.
Sure. All I'm saying is that the only part of their "costs" that I see changing is the cost of insurance claims. I'm lumping all other costs into "profit", and basically saying that those other costs (advertising, payroll, etc.) won't be changing.

Reduced claims/payouts will not cause the profit boost you imagine due to a competitive insurance marketplace. At least not in the long run.
I've never stated that there would be a profit boost. I'm saying that - in the long run - there will be no appreciable difference in insurance company profits. Insurance claim payouts will decrease as cars become safer, and competitive pressures will cause insurance premiums to be lowered, as each competing insurance company either tries to attract more customers at a still-profitable price point, or attempts to match their competitors to avoid losing customers. Insurance companies still have to cover their other costs of doing business
 

PNWmisty

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#8
I've never stated that there would be a profit boost. I'm saying that - in the long run - there will be no appreciable difference in insurance company profits. Insurance claim payouts will decrease as cars become safer, and competitive pressures will cause insurance premiums to be lowered, as each competing insurance company either tries to attract more customers at a still-profitable price point, or attempts to match their competitors to avoid losing customers. Insurance companies still have to cover their other costs of doing business
I'm talking about a boost in profit margins. You are saying the total revenue will shrink and they will still make the same amount of profit. That's a boost in profit margins.

What you are failing to consider is that with autonomy causing far few accidents, claims adjusters will be laid off, customer service staff will shrink, etc. The entire business organization will become much smaller and have much less to do. Autonomy is also widely expected to cause a decrease in the number of vehicles insured. It's not realistic to expect profits to remain the same in absolute dollar terms because that would represent a massive increase in profit margins. It would imply that profit margins were shooting through the roof. And that is incompatible with the nature of a competitive insurance marketplace. It would imply illegal collusion between independent insurance companies.

Business 101.
 

garsh

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#9
What you are failing to consider is that with autonomy causing far few accidents, claims adjusters will be laid off, customer service staff will shrink, etc.
Good points.

Autonomy is also widely expected to cause a decrease in the number of vehicles insured.
I can never see that happening. Every vehicle will still require insurance. Accidents will continue to happen - they'll just hopefully happen less often.
 

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#10
Seems fair to assume that competition will drive consistent profit margins. If costs drop, competitors will pass this on to consumers in an effort to win share. The nature of competitive markets. Dropping revenue. Leading to reduced profits (assuming consistent profit margins). If they don't drop prices, leaves room for new entrants who will eye the fat margins.

And the point above about Tesla insuring the good apples and competitors insuring the bad apples is a good one. Information is $$$$$.

One more point .... many insurance companies don't make money on underwriting. They make their money by investing premiums. Warren Buffet loves to write about this in his annual letter to shareholders. If premiums are down, then less money to invest, thus less revenue to make. .... pretty interesting dance that is played in the insurance space.