'Regulatory labyrinth' slows but does not stop Tesla insurance launch

Newly published data shows that Tesla Inc.'s quest to create what CEO Elon Musk once described as "revolutionary insurance" has encountered some of the same challenges that conventional carriers tend to face upon entering a new market.

Not only have the idiosyncrasies of the process for filing forms, rates and rules for new auto insurance products served as a point of frustration as Tesla's managing general agency pursues geographic expansion in the product line, but the electronic vehicle manufacturer's book of business has also encountered the higher loss ratios that are typically associated with market entries.

Nonetheless, the data shows the sort of rapid expansion in the automaker's initial insurance program in California that could bode well for future uptake among Tesla owners in other states once the company navigates the nuances of the regulatory process and the product gains wider availability.

State National Insurance Co. Inc., the Markel Corp. subsidiary on whose paper Tesla Insurance Services Inc. writes business in California, disclosed in a November filing with the California Department of Insurance that the loss and defense-and-cost-containment expense, or DCCE, ratio for the program hit 104.4% in full year 2020 as it nearly quadrupled in size. That ratio compares to a result of 45.2% for State National's other California private auto programs and a statewide result of 55% in a year where claims frequency had been significantly reduced during the pandemic. Aside from the Tesla program's impact on State National, the highest California private auto direct incurred loss and DCCE ratio among individual entities with in-market direct premiums written of more than $10 million was 88.0% for American Modern Property & Casualty Insurance Co.

Tesla program written premium surged to $47.5 million in 2020 from $12.2 million in 2019 and zero in 2018, the State National filing said. For the trailing-12-month period ended June 30, 2021, figures in the filing show that total State National private auto writings in California — including but not limited to Tesla business — climbed to $78.7 million from $55.4 million in calendar year 2020. The insurer's non-Tesla California private auto written premiums fell by 26.9% from calendar year 2019 to 2020, and State National indicated in a February 2021 filing that it was no longer offering three unrelated programs in the state.

High loss ratios are commonplace for books of private auto policies that are almost exclusively reliant on new business. One would expect loss ratios to normalize over time as those books mature with a growing share of renewing customers.

Root Inc., which like Tesla Insurance Services offers telematics-based auto insurance products, explained in its most recent Form 10-Q that "premiums from a customer's second term and beyond ... have lower loss ratios as compared to new premiums in the customer's first term." Pandemic-related effects make for unusual year-over-year comparisons, but Root's gross loss and loss-adjustment-expense, or LAE, ratio for the third quarter of 2021 of 103.3% represented an improvement from the company's 126.0% direct loss and LAE ratio for the same period two years prior. (The value reported on a gross basis incorporates business written on Root's behalf by a third-party carrier beginning in August 2021).

Tesla currently markets insurance coverage in California written through State National and in Texas through Redpoint County Mutual Insurance Co. Subsidiaries of American Family Mutual Insurance Co. SI filed in certain other states for a Tesla auto insurance program.

Musk, speaking during Tesla's annual shareholder meeting in October, said "aspirationally," the insurance product would be available in "most of the country next year." At the same time, he lamented the amounts of time and effort required to bring insurance products to market.

"So, like, the degree in which insurance is a regulatory labyrinth is insane," Musk said in response to a question. "It was, like, designed to be hard. ... There's a zillion applications and you have to wait for a bunch of time. ... And, then, the states also have different regulations, so you aren't legally allowed to offer the same insurance in every state. So you've got to adjust the software to be different [in] every state. It's basically very complicated."

Musk foreshadowed the November filings in California as he explained that Tesla would be "upgrading" its product in the state. The November filing includes several proposed revisions to the program's rating plan to simplify pricing design and to update certain rating factors based on claims data since its inception.

"We want to have the same kind of real-time insurance where your insurance costs are based on your actual driving history, which is the right way to do it," Musk said. "But," he continued in an apparent reference to limits associated with the 33-year consumer protection law known as Proposition 103, "we're currently not allowed to do that in California for some reason. So we're trying to get permission from the regulators to be allowed to give accurate scores for insurance."

California is also unique in the challenges carriers have faced in obtaining rate increases since the onset of the pandemic. The regulator last approved a rate increase on that type of business in April 2020, and it has been particularly aggressive in pushing carriers to issue additional premium credits based on the highly favorable 2020 private auto underwriting results that many of them produced. The Progressive Corp., for example, recently vowed to slow its growth in California due to unique structural challenges in calculating actuarial indications to support rate increases.

The State National/Tesla filing is notable in that its proposed rate increase of 4.1% overall represents the largest such hike submitted to the California Department of Insurance on private auto business, excluding motorcycle and recreational vehicle policies, in more than a year. It compares to an actuarial indication of rate need of 53.4%. Much of the proposed increase's effect would come in the form of a 150% rate increase on rental reimbursement coverage, which compares to an indicated change of 424.7%.

The proposed effective date for the rate increase is March 1, 2022.