Tesla’s decision to offer car insurance on their cars has been tickling my brain recently. Of course I am not an expert on Tesla nor insurance, but the simple characteristics of the new offering and Tesla’s state of affairs offers a lot to think about.
I would like to argue that this new practice is simply a new form of debt for Tesla for a few reasons. First, insurance is a very capital intensive business. Just like debt, there are ~fixed~ payments that must be made. I put squiggles because of course there is no guarantee on the cost of running business, but actuarily there is an expectation.
Second, just like debt, running this business provides further access to upside. Tesla is creating more value for their customers (and potential ones but more on that later) and so they can make additional revenue. Debt also provides this because if I 10x my business, I still only owe my fixed payment.
The flip side of this is also true. Even if my business shrinks, I still owe my fixed payment. Equity does the opposite and offers a proportion of the success. For this reason, many companies look to raise capital from equity in their early stages and from debt when they are more mature.
This is intriguing because Tesla already is a capital-intensive business and has a lot of debt, so it makes you think if this level of theoretical leverage is acceptable. Furthermore, the primary goal of any portfolio is to diversify (unless you want to gamble of course.) You can diversify within any realm of course, but it seems problematic that Tesla would only be offering insurance on one type of car. In other words, they placed a bet on their cars. A single software or hardware issue can cause their entire fleet to have issues leading to incredible losses. Insurance usually plans on only a small percentage of their clients making claims, this is hopefully true here but not necessarily.
Ultimately, I think about this like an LBO in which they are taking on high levels of debt to create an outsized equity return. The issue is it takes a lot of success to generate that return and if a certain bar is not met, it can mean failure for the company.
The last part to consider which may redeem them is that there is an element of cross-sell. The additional revenue is not just insurance premiums. They will hopefully get new customers because Tesla is offering them reduced premiums which just lowers the switching cost of buying a Tesla.
Does this make it worth it? Did Tesla just make a risky bet on themselves? Time will tell.