Sunday, June 4, 2017

Why does it cost more to insure a Tesla?

The AAA is raising rates to insure Tesla's, and Tesla is angry:
The rear-wheel-drive Tesla Model S is involved in 46 percent more claims than average, and those claims cost more than twice the average, it said.

it wasn't clear whether this was due to Adverse Selection (people who buy Tesla's are worse drivers, or more prone to file claims, and the Tesla is expensive to repair) or Moral Hazard (those who buy Tesla's drive more recklessly after they buy).

Remember Adverse selection is caused by hidden information about a person's type, moral hazard is caused hidden information about actions.

6 comments:

  1. Hello,

    I've just begun taking Managerial Economics at Washington State University. I'll attempt a novice assessment and say that Tesla would be angry because this action is likely to reduce demand (at least a little) and may discourage future buyers. Especially at a time where Tesla is introducing the more affordable Model 3 to a new market segment.

    ReplyDelete
  2. I would also think that regardless of adverse selection or moral hazard, insurance companies are having to pay out more more to cover higher repair costs to more (Tesla) customers. Increased insurance costs are sure to impact at least some potential Tesla customers when deciding to purchase a Tesla model, or not.

    ReplyDelete
  3. I think this has to be do to the higher costs to repair a Telsa car vs. other cars in the markets. However, if a report does show that a Tesla is involved in 46% more claims than others car, they should do more fact finding to see if the automobile has a defect or if the driver is the cause. I would think it has to do more with the driver than the actual car.

    ReplyDelete
  4. It would be interesting to see the demographic information from the insurance companies: gender, age, income, etc. This may help differentiate between moral hazard and adverse selection. For example, if young males with high income constitute a large number of Tesla owners, then moral hazard would be high in this population (young males are more reckless). If there was a more cohesive population of Tesla owners, perhaps it would trend towards adverse selection, a population that drives more recklessly just because they know insurance would cover accidents.

    ReplyDelete
  5. Your blog is very useful for me,Thanks for your sharing.

    ดูหนัง

    ReplyDelete
  6. It is safe to assume the AAA Insurance division utilizes marginal analysis so as not to lose money and the auto insurance business is very competitive (Froeb, p. 70). Therefore, despite Tesla’s claims to the contrary, AAA raising the price of insurance for Tesla automobiles is due to the frequency of claims and the average cost of satisfying the claim (Eisenstein, p. 1). Because the insurance actuary process already has different rates depending on age, gender, and prior history, the need to rectify the pricing could be twofold (Harrow, p. 1). First, the cost of repairs of an all-electric vehicle was unknown to AAA for Tesla vehicles until experience on claims was gained. Second, the frequency of claims is logically tied to both adverse selection and moral hazard.

    The average Tesla buyer is 88% male and earns $271K annually and is 35-50 years of age (Prenzler, p. 1). Because male gender and age is already a factor in insurance, adverse selection for AAA whereby males in this age earning large income could be more risk-takers would explain the higher accident rate. The high acceleration rate of 0 to 60 mph in 2.5 seconds would be appealing to those who want to drive fast but they probably didn’t disclose this enjoyment to AAA when applying for insurance. Hence, AAA is gaining Tesla drivers who like to go fast and thus have accidents at a higher rate than first estimated.

    The issue of moral hazard is the Tesla owner decision to drive fast because they know the vehicle is capable of fast acceleration and since they have insurance, they bear little monetary risk if an accident occurs.

    References:

    Eisenstein, P., (2017), It’s Going to Cost You 30 Percent More to Insure That Tesla, NBC News, dated June 6, 2017, downloaded from https://www.nbcnews.com/business/autos/it-s-going-cost-you-30-percent-more-insure-tesla-n768711

    Froeb, L. et al (2016), Managerial Economics: A Problem-Solving Approach, 4th edition, Boston, MA: Cengage Learning

    Harrow, R., (2017), Getting the Tesla Model 3? Don’t Forget About the Insurance, Huffington Post dated April 9, 2017, downloaded from https://www.huffingtonpost.com/robert-harrow/getting-the-tesla-model-3_b_9637776.html

    Prenzler, C., (2016), Results Of Tesla Owner Survey, CleanTechnia, dated April 20, 2016, downloaded from https://cleantechnica.com/2016/04/20/results-tesla-owner-survey/

    ReplyDelete