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In a recent uTube presentation Sandy Munro said that while the competition is playing checkers, Musk is playing chess. Toward the end of the presentation he mentioned Tesla Insurance as a huge moneymaker with no details, it's not his field. I spent five years selling insurance and made a very comfortable living. More importantly, I got to know the entrails of the industry.

Insurance proper is NOT a moneymaker, it's a commodity and competition drives prices down to the breaking point. Extraordinary events can easily bankrupt a company and for safety they "huddle" via co-insurance (a group of insurers sharing a risk like Lloyd's of London underwriters shared the risk of sailing ventures) and via re-insurance, selling a part of the risk portfolio to re-insurers. In addition they have deductibles to make sure clients also run part of the risk.

If insurance is such a crappy business, what's the attraction? Buffett LOVES it. Why? Three letters, "OPM." Other people's money. Under the last four presidents, what has been the government's principal activity? Printing money. To save the banks in 2008 and they liked it so much that they now print money at the drop of a hat -- the perfect cure-all! But private parties can't do it, it would be forgery. Private parties must rely on debt instead but debt is very dangerous as it can easily become an imploding chain reaction, like in 2008 as lenders call in their debts in times of crisis. But there are ways to get other people's money that they can't easily ask back. Prepaid services are one way, pay now, buy later. Insurance falls in this category.

The insurance premium consists of two amounts, enough money to cover the risk itself and an additional amount to pay for running the business. The latter is a wash. The former is OPM you can play with, typically it is invested. In what follows I'll talk about the Tesla advantage in both cash flows.

Insurance is a commodity. In commodities the second lowest cost producer sets the market price and breaks even. The low cost producer makes money, the difference between his cost and the market price set by his competitor. To get the full version, read Reinventing The Bazaar by John McMillan. Every investor should read this great book.

Reinventing the Bazaar: A Natural History of Markets by John McMillan

Tesla has a number of advantages including not having a salesforce of insurance brokers and agents. Other insurers have to spend money collecting and validating risk data which Tesla collects from all its cars on the road at no extra expense. Applying how commodity prices are set, Tesla is the low cost producer and can make a profit selling at the cost of the next lowest cost insurer. Tesla, unlike the average insurer, can run the business at a profit.

Using the OPM
Insurers have to invest the OPM which means running an investment department and the market is risky. Tesla is a growing business that needs capital, cash flow, to fund its growth. No investment department, no market risk, no dilution going to capital markets!

While auto insurance companies don't have work shops and must rely on third parties to fix broken cars, Tesla does the repairs in-house, no money diverted to third parties. Tesla would recycle total wrecks. A closed loop.

Four dimensional chess!

Denny Schlesinger
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