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.

5 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.

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  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.

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  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.

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  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.

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