Tesla car insurance enters China, "comeback"?

Tesla (TSLA) made a "comeback" in the Chinese insurance business.

Huawei Street View · TradeWind (ID: TradeWind01) noticed that "Tesla Insurance Brokers (China) Co., Ltd." (referred to as "Tesla Insurance China") has appeared in the "Enterprise Name Declaration Registration" announced by the State Administration for Market Regulation on July 5.

According to the disclosure, the main entity is a "limited liability company (wholly foreign-owned)", which most likely indicates Tesla's planned establishment of an insurance brokerage company.

Currently, the status of this entity name is "reserved name", which means that the name has been declared and approved, but has not been registered yet.

According to regulations, companies need to register during the name reservation period. The reservation period is usually 2 months, so it is speculated that Tesla is expected to complete the registration before September 5, otherwise the name will not be reserved.

It is worth noting that this is less than 4 months since Tesla cancelled its previously established insurance brokerage company in mainland China.

In 2020, Tesla Motors Hong Kong established a wholly-owned subsidiary, Tesla Insurance Brokers, in the mainland Chinese market, specializing in insurance brokerage business; however, the company never obtained regulatory approval and was cancelled in April this year.

In comparison, the newly established Tesla Insurance China has changed its entity type from the previous Hong Kong and Macau Taiwan legal person sole proprietorship to a wholly foreign-owned entity.

Huawei Street View · TradeWind (ID: TradeWind01) inquired Tesla about the company's declaration and progress, but the other party stated that they currently have no relevant information to provide.

Compared to before, there are two changes in the layout of Tesla's insurance business this time: adding "(China)" to its name and changing the entity type from Hong Kong and Taiwan legal person sole proprietorship to foreign-owned sole proprietorship.

This means that the newly established Tesla Insurance China may no longer go through a Hong Kong company, but will be directly established by its headquarters.

With the new entity ready to go, whether Tesla's car insurance business in China will make a comeback, how it will unfold in the future, and what real challenges it will face, the market is waiting for answers.

A comeback?

The entity that was cancelled less than 4 months ago may have a chance to return to the market.

According to QCC, Tesla Motors Hong Kong established a wholly-owned subsidiary, Tesla Insurance Brokers Co., Ltd., in August 2020 for insurance brokerage business in the mainland.

Previously located in Shanghai Lingang, the site of the "Gigafactory", with a registered capital of 50 million yuan, Tesla Insurance Brokers had a "luxurious" lineup.

In terms of executives, the initially planned legal representative, chairman, and general manager were all then Tesla's Vice President and Head of Greater China, Zhu Xiaotong; in September 2023, it was changed to the current President of Tesla China, Wang Hao.

Following the "license first, then certificate" principle, after Tesla Insurance Brokers completes registration, its insurance brokerage business still needs approval from the relevant departments of the China Banking and Insurance Regulatory Commission before it can operate.

This approval has yet to come.

Since 2018, regulatory authorities have tightened the issuance of insurance intermediary licenses, and it was not until November 2023 that BMW (China) Insurance Brokers and Angufangsheng Insurance Brokers, two foreign-owned insurance brokerage companies, were approved to operate After waiting in vain for a long time, the previous Tesla insurance broker was officially deregistered in April this year.

However, Tesla did not give up on the Chinese market, known as the "blue ocean".

At the beginning of the year, Musk emphasized on social media that Tesla will actively promote the landing of Tesla's Full Self-Driving (FSD) in China.

During the first quarter earnings call, he reiterated, "We plan to release FSD as a regulated autonomous system in any market where we can obtain regulatory approval, including China."

At the end of April, Musk began his visit to China.

Subsequently, Tesla obtained the "green light" for data security, becoming the first foreign-funded company in China to meet four automotive data security compliance requirements: anonymization of facial information outside the vehicle, default non-collection of cabin data, in-vehicle processing of cabin data, and significant notification of personal information processing.

The next day, Tesla reached an agreement with Baidu, allowing the use of Baidu's map license for data collection on public roads in China.

The feasibility of FSD landing in China has been further enhanced.

When asked about Tesla's layout of car insurance in the Chinese market, TradeWind01 from Wall Street View inquired about the issue, to which Tesla responded that they currently have no relevant information to provide.

The UBI Revolution in Smart Driving

Although Tesla's path in the Chinese insurance market has not yet been opened, it has been involved in the insurance field in the United States for 8 years.

Similar to the current situation in China, at that time, the new energy vehicle insurance in the United States also faced the embarrassing situation of "car owners complaining about high prices while insurers suffer losses".

When launching its own insurance products, former Tesla CFO Kirkhorn stated during the third quarter earnings call in 2021 that Tesla's high premiums had received many complaints.

"Customers complain that the insurance prices are too high, which reduces the affordability of Tesla," Kirkhorn said. "Our mission is to make our products more affordable to more people."

However, the insurance industry still felt that Tesla's premiums were too low.

According to Reuters, from 2015 to 2016, the non-profit insurance research organization Highway Loss Data Institute in the United States pointed out that Tesla's collision and property damage claim rates were much higher than those of traditional large luxury cars.

Based on this, the American insurance company AAA-The Auto Club Group stated in 2017 that it would increase Tesla's insurance rates, potentially by up to 30%.

To prevent high premiums from affecting sales, Tesla had to protest while accelerating the preparation of its own low-cost insurance business.

In 2016, Tesla's first insurance project, Insure My Tesla, was piloted in Australia and Hong Kong, and expanded to North America the following year; three years later, Tesla launched the "anonymous fleet", which directly assesses customer and vehicle risks through data modeling, providing prices with reductions of 20% to 30%.

In 2021, Tesla launched its own Usage Based Insurance (UBI) car insurance; as of the end of February this year, this business has been operating in 12 states in the United States.

Compared to the practice of setting premiums based on reference claims data, the UBI model can personalize insurance rates based on vehicle, driver, road conditions, and other information, achieving precise pricing With the emergence of new energy vehicle insurance, due to the natural advantage of car companies in data collection, they can directly collect driving behavior and mileage data through various sensors and safety rating systems installed in the vehicles, making risk control more precise in the stage of selecting insured persons and setting premiums.

Under new technologies, Usage-Based Insurance (UBI) is revitalized as a pricing model that was once marginalized.

Currently, Tesla's UBI has two characteristics: first, it adopts a subscription model, with monthly payments and real-time pricing adjustments; second, the prerequisite for car owners to subscribe to UBI is to subscribe to Full Self-Driving (FSD).

Tesla states on its official website that real-time insurance will calculate monthly premiums based on driving behavior and frequency.

For example, the pricing model will consider the level of driving safety.

According to Tesla's official website, "Real-time insurance uses Beta (driving safety rating standard) to quantify the level of driving safety. Premiums are based on the mile-weighted average of daily safety ratings over the past 30 days, with higher ratings resulting in lower premiums."

Beta is evaluated by combining vehicle sensors with Autopilot, and factors affecting it include collision warnings, emergency braking, aggressive steering, unsafe following distance, speeding, late-night driving, forced disengagement of Autopilot, and driving without a seatbelt.

With technological support, Tesla's path in insurance should be smooth sailing.

The most authentic first-hand data can assist its UBI model in achieving precise pricing, reducing premiums, thereby enhancing the competitiveness of its vehicles; driven by car sales, its insurance business has specific scenarios, which can bring substantial income.

Musk once estimated that the valuation of the group's insurance business in the future may reach 30-40% of the revenue from the automotive business.

In 2022, Tesla's premium income is about $300 million, with quarterly growth rates around 20%.

Challenges in North America's "Trial and Error"

Behind the seemingly closed-loop solution and rapid growth, Tesla's car insurance encountered many practical problems when it was implemented.

First, as the business grows, Tesla's car insurance faces high cost burdens.

In the first three quarters of 2023, Tesla's insurance subsidiaries, Tesla Property & Casualty and Tesla General Insurance, in Texas, where the business was first launched, had a combined cost ratio of 146% and 121% respectively.

Car insurance is a type of insurance with significant economies of scale.

Even with an ideal UBI pricing model, if penetration rates cannot be continuously improved and economies of scale cannot be leveraged, Tesla's car insurance will ultimately struggle to become profitable.

Second, Tesla's cost-cutting approach in car insurance has led to a criticized inefficient service experience.

Due to budget cuts and understaffing, Tesla's car insurance customers often have to wait for weeks or even months to receive compensation.

According to Reuters, in early 2022, Tesla Insurance insured over 50,000 vehicles in California, but had only a dozen or so claims adjusters.

Furthermore, as an original equipment manufacturer, Tesla is better at car repairs, and may lack experience in handling personal injury cases, which can easily lead to complaints.

Third, Tesla's seemingly transparent and scientific pricing standards still face many doubts Reuters also pointed out that Tesla has been accused of systematically exaggerating the vehicle's range by manipulating the algorithm that controls the estimated range in the car, thereby increasing insurance premiums, which has led to federal investigations and multiple class-action lawsuits.

However, if the insurance business fails to bring a better experience to its customers, or even tarnishes Tesla's reputation, then Tesla's car insurance seems to have lost its original purpose.

The problems currently faced by Tesla's car insurance were also predicted by some industry insiders.

Adam Dunning, global industry leader at Kaje Insurance, once commented that Tesla's car insurance could suffer heavy losses.

Dunning said, "Tech companies think technology is the most difficult part, and they view insurance as an old, outdated industry. But when they realize the complexity of insurance, it's hard not to lose money."

Buffett has also stated that Tesla's self-operated car insurance is not wise.

"Driving style, braking force, turning speed are all important, I don't doubt the value of data, but car companies do not have an advantage in this area," Buffett once said. "The success rate of car companies entering the insurance industry may be as high as the success rate of insurance companies entering the automotive industry."

Zhang Lei, CEO of Cheche Technology, told Wall Street News · Xinfeng (ID: TradeWind01) that insurers still have certain advantages in the face of car companies attempting to enter the car insurance market.

"Insurers have accumulated actuarial experience and talent in long-term development, have mature systems and methods in risk management, and have service networks and claims teams that can provide timely, professional service and support," Zhang said.

Motivation and Challenges

One of the biggest goals of Tesla's car insurance at present may be to promote new car sales by reducing insurance costs.

After all, when entering the car insurance market in North America, Reuters once pointed out that the biggest motivation for Tesla's self-operated insurance is to prevent potential customers from giving up buying cars due to high insurance quotes.

However, expanding the battlefield from North America to mainland China will also pose greater challenges for Tesla's car insurance business.

Currently, the new energy vehicle insurance market in China is similar to North America in many ways, especially in the context of high maintenance costs, where the dilemma of "car owners calling expensive, insurers calling losses" is common.

But for Tesla, the advantages shown in North America may be difficult to replicate in the Chinese market.

Firstly, the strong competitiveness demonstrated by Tesla's automotive business in North America may be difficult to fully replicate in the mainland market.

Amid the emergence of new forces in China's car manufacturing industry, Tesla faces strong competitors and a more intense competitive landscape domestically.

At the beginning of Tesla's car insurance entry, it still relies on the automotive business to drive it. Without a sufficient base of new car sales, it will be difficult for premiums to scale.

Secondly, Tesla's car insurance business in China is still limited to the brokerage sector, with a lack of pricing power, making it difficult for the UBI model that has dominated the North American market to take root.

Wang Guojun, a professor at the School of Insurance at the University of International Business and Economics, told Wall Street News · Xinfeng (ID: TradeWind01) that the biggest advantage of OEMs doing insurance is the synergy between car manufacturing and insurance. In order to reduce claims, cars must be safe. When cars are safe, insurance rates decrease.

However, all of this is still based on pricing power Unless Tesla further obtains a property insurance license, its expertise in UBI pricing will only be in vain.

Currently, the supply of property insurance licenses for automobile companies remains tight, with no new property insurance companies approved for establishment by regulators for over 2 years.

Among China's new energy vehicle companies, only BYD (002594.SZ) has acquired a property insurance license through the restructuring of Yi'an Property Insurance, becoming the only main factory to obtain a property insurance license.

Although the equity prices of property insurance companies have fallen in recent years, the proportion of equity sold on various platforms is generally small, making it difficult to transfer controlling equity.

Wang Guojun stated, "If Tesla only obtains an insurance brokerage license, its effect will be far less than that of a property insurance license."

However, some industry insiders believe that the brokerage business may just be the beginning of Tesla's car insurance layout in China, and it is not ruled out that more actions may be brewing in the future.

Initially entering the insurance market, Tesla only cooperated with insurance companies as distributors to provide products to customers.

Due to the lack of underwriting licenses, Tesla collaborated with multiple insurance companies such as AXA General Insurance in Hong Kong and QBE in Australia in 2016, launching an insurance package called Insure My Tesla.

Based on past experiences, during cooperation with insurance companies, Tesla can to some extent participate in decision-making, adjust sales costs to reduce customer premium expenses, and enhance the attractiveness of its automotive products.

There is currently no conclusion on how Tesla will disrupt the domestic car insurance industry, but in the fiercely competitive mainland new car sales market, time is running out for Tesla