Having smashed past the $100 billion mark in January, and becoming the most valuable U.S. car manufacturer of all time, Tesla (NASDAQ: TSLA) is having a bit of a moment lately. However, many investors are dubious about the stock and wonder how a carmaker producing relatively small amounts of cars can be worth so much.
What many don’t realize, however, is that Tesla has a secret side business in a multi-billion-dollar industry: motor insurance.
How can Tesla make money from insurance?
It is estimated that the global motor insurance market reached $880 billion in 2019 and will continue to grow at 6.2% CAGR through 2025. With the likes of Warren Buffet’s Berkshire Hathaway (NYSE: BRK.B) among others having considerable grip over the market, why then is Tesla getting involved?
Tesla has already got a lot going on for it, with a stock price that is up more than 80% in the past month alone, a successful new Shanghai Gigafactory, and a European counterpart on the way. Tesla Insurance however, has actually been around since September 2019, having agreed to allow insurance giant Markel (NYSE: MKL) to write its underlying policies. However, Musk has made his intentions clear of becoming a fully independent insurer in the future.
Currently, the service is only available to Tesla vehicles in certain U.S. states, but it plans to expand over time. For those eligible for Tesla Insurance, the company claims to offer premiums 20% to 30% lower than rivals. It can do this because it already has all the real-time data from Tesla drivers, so it can estimate incidents and repair costs more accurately than most insurers.
Why is Tesla offering insurance?
It is the first manufacturer to offer insurance with its very own ‘black box’ inside the car itself. Competitors such as NIO (NYSE: NIO), Ford (NYSE: F), and General Motors (NYSE: GM) are nowhere near such a service.
Tesla is also entering the market at a good time, with the insurance industry as a whole undergoing several changes with the focus shifting from local human underwriters to automation driven by big data and AI. As a leader in this field, Tesla is at the forefront of such a movement, and has the distinct advantage over Big Tech data farmers Google (NASDAQ: GOOGL)(NASDAQ: GOOG) and Amazon (NASDAQ: AMZN), in the fact that it actually makes its own cars.
Tesla also wants to disrupt another industry
As if carmaking, battery manufacturing, and solar energy wasn’t enough, it seems that Tesla also wants to take on ride-sharing giants Uber (NYSE: UBER) and Lyft (NASDAQ: LYFT). It was revealed this week that it would be launching its own ride-sharing app under which drivers will be insured by Tesla Insurance.
CEO Elon Musk has been teasing the product for some time now, and it was originally meant to be withheld until Tesla’s cars became autonomous. However, the so-called Tesla Network was revealed to be getting the go-ahead sooner than expected at last week’s earnings call, and will reportedly be 30% cheaper than the competition. It is unclear as to how Musk plans on making a profit from a completely unprofitable market.
Can Tesla Insurance work?
It is, of course, early days yet for Tesla insurance, but Elon Musk’s controversial car company has just added another revenue stream to its already successful company. As well as that, it is beginning to disrupt a massive industry that many customers have grown tired of. As Tesla sales and production continues to grow, and more people opt for Tesla Insurance, who knows how Tesla could branch out in the future.
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MyWallSt operates a full disclosure policy. MyWallSt staff currently holds long positions in Tesla. Read our full disclosure policy here.
Editor at MyWallSt
Jamie is the Content Editor here at MyWallSt. His favorite stock is Apple, which is also the first stock he ever bought. Jamie is not only a big fan of its products, but he believes that the tech giant has a whole lot more to give the world, and hasn't even scraped the surface of its potential.