Can Tesla Dominate the World of Data-Driven Auto Insurance?

Tesla (TSLA -3.40%) is expanding into data-driven auto insurance. Many legacy insurers already offer this option to customers. But given Tesla's penchant for gobbling up market share, this begs the question, could the company be a future disruptor in the auto insurance space? In the following segment of Backstage Pass, recorded on Oct. 15, Fool contributors Toby Bordelon, Trevor Jennewine, and Rachel Warren share their thoughts.

Toby Bordelon: I'm moving right along here. The Tesla's fun, I want to do the Tesla question. Tesla is always fun to go out there. Today I saw an article -- they are offering an insurance product in Texas. They do, I think, now offer some insurance in California. They're rolling out a product in Texas based on the safety score. I don't think any of you guys drive Teslas at all or have been aware of Tesla.

The safety score is the thing where they've got going on right now, where they're rolling out their full self-driving, in theory, the beta self-driving -- we could do a whole show on that -- but they're theoretically rolling that out, based on your safety score. If you have a high safety score, you get first, which makes sense when you think about it, but they're using the safety score to offer insurance product in Texas where your premiums might change monthly based on your safety score.

You drive safe, lower premium. If you're braking hard, accelerating hard, taking the corners hard, higher premium, perhaps. It's similar, I think you may be aware of the programs other insurers offers, State Farm, Allstate, Progressive among them, where you can plug a device into your car, connect to an app, and if you drive well, it's going to give you a discount. But as far as I know, those are only discounts, you don't actually raise your prices, basically you're driving. It's just -- here's the price and if you drive safely, you get a discount.

Technically, they're opt-in for now and there is no actual penalty if you drive like a maniac. But here's the question: Should Tesla expand this offer over time? What do you think? In terms of data-driven auto insurance, who's going to make the most money in the next five years off of insurance, data-driven auto insurance? Is it going to be Tesla, or is it going to be Upstart, AI insurance company Lemonade, which is rolling out insurance for automobiles but has not done so yet? What do you guys think?

Start with you, Trevor.

Trevor Jennewine: I think there are a couple of tough questions here. I like the idea of Tesla building on its hardware, if that's how you want to refer to a car, building an ecosystem of services on top of that. I think that fits in with the company's growth strategy. They also have the idea that once they have that autonomous vehicle, they'll be able to have the ride-hailing or rightsharing network. I like the idea of insurance. I think it's smart to roll it out in one market. First, see how it goes. When thinking about Lemonade versus Tesla, I think they both have advantages and disadvantages.

I think Tesla has the driving data right now that Lemonade does not. Lemonade, in a recent earnings call, they mentioned that when they roll out their business, they will be getting data from public records and specifically, the way that telematic data is ranked, like this type of behavior is highly risky, etc. That type of thing is public record. So they won't be working with their own dataset at first, they are going to refine it overtime. But if they can get it from public record, anybody else can get it from public records, too. Which means I don't think they're really going to have an edge at first.

Whereas I think Tesla does because it has its own proprietary driving data. On the flip side of that, one thing that Lemonade did mention was that, unlike connected cars, having the mobile app allows them to detect distracted drivers, so they will know if you're looking at your phone while you're driving around, and that's one of the highest predictors of things like accidents. I'm not sure if Tesla can do that or not. I'm not sure if they have internal cameras that are going to make sure you're not using your phone while you're driving.

But if not, I think that gives Lemonade an edge there. As far as who can make the most money, I'm going to go with Tesla, I guess. I honestly think it's a toss up here. Lemonade has lots of customers already enrolled in other insurance products and they think that customer base spends about a billion dollars each year on auto insurance. When they get Lemonade car, their auto insurance product up and running, they'll be able to bundle homeowners or renters policies with auto insurance, which is a pretty common strategy in the industry. I certainly think they both have their advantages, but I'll take a stab at Tesla.

Rachel Warren: I agree with that. It's interesting in terms of the first question of, should Tesla expand the server time? I love a diversified business. I think this is an area that Tesla wants to expand to go for it. It's interesting, the data-driven auto insurance.

For me, what I think about is, you have the biggest names in the industry that are already running these usage-based or connected car insurance programs or a whole range of names for them. Do you think of these big companies like State Farm, Geico, Progressive, Allstate, Liberty Mutual -- the list goes on, they all have their own version of these essentially data-driven programs.

You think of one that's really well-known as State Farm's drive safe and save program, which they market as you can save, I think, up to 30% on your auto insurance based on how safely you drive. I think for Tesla, if it wants to really be competitive in this area and really expand into this market, I think it's where it's going to count with helping its customers beat those savings.

If a customer can use Tesla's program and save more than they would with a traditional legacy insurer, that that may be something that could help it grow that area in the future. But again, isn't this specifically limited to only if you drive a Tesla? If I understand correctly.

Toby Bordelon: Yeah. I think that that's right. That's why I would personally, I think I would go for Lemonade on that theory. That they theoretically have a larger market, but again, you can't buy it yet. We don't quite sure what it's going look like or what the uptake is going to be. There are some questions on that. Then you also have to assume that Lemonade is going to make inroads into the current auto insurance industry that's dominated by a lot of other much larger companies.

They got a lot to do there, whereas Tesla already has that, "Oh, you have a Tesla." Like they could be readily pop it up on your screen or in your car, you want to try Tesla insurance. Easy marketing for them. I'd still think I get Lemonade, but I don't know. If you start a five-year clock now, you're probably not going to get car insurance from Lemonade until 2022, there are already a half-a-year behind best-case scenario. We'll see.  It's interesting, interesting looking at, I think that you should expect to see data used in the auto industry going forward.

I think even though other ones we've mentioned, like State Farm and Progressive, are opt-in in theory, I think you should expect if you don't opt in that the baseline price is going to go up. I think that would be a reasonable expectation for drivers. Hey, practice driving safely because it's probably going to cost you more if you don't in the future.