No, You Shouldn’t Pay Your Insurance With Bitcoin

Elon Musk recently reversed course and stopped allowing Teslas to be bought with Bitcoin. He attributed this decision to his (long overdue) realization that Bitcoin mining is bad for the environment. My guess is another motivation may have been very few people actually were using Bitcoin to buy Teslas.

We recently saw an insurance company decide, they too would take bitcoin as payment, in this case for insurance premium. I won’t mention who (sticking to my ground rules about avoiding writing directly about other insuretechs when I can), but it won’t take you too much googling to figure out who it is.

What follows is a more general discussion about whether it is a good idea for an insurer to accept payment in Bitcoin. My judgment is that it’s a terrible idea. Keep reading if you want to know why.

Demographics

It seems logical to conclude that the type of people who want to buy with Bitcoin are the same people who already own it. 90% of Bitcoin owners are male. More than half are under 34 and 85% of are under 44. Elon probably realized this didn’t match up well with his customer demographic (the average Tesla buyer is 54).

Would an insurance company be interested in this demographic? Well, it depends what they write, but for the most part, I think we can agree, no, they wouldn’t.

The obvious exception to this is non-standard auto. Young, male drivers…bring ’em on!

If you are looking for a way to stand out in a crowded market for non-standard risk and your two options are hiring Shaq to promote your brand or advertising you will take payment in bitcoin, well, I could sorta see the appeal of the latter!

However, there are big transaction costs to buying and selling Bitcoin which will impact your profitability, but maybe there is reason to think it will reduce the credit risk somehow given it’s a non-standard product? Like maybe you only allow a bitcoin option if you pay in full upfront? That might be interesting.

Risk Selection

So let’s say you are focused on non-standard auto and you think you have a novel way to improve credit by accepting payment in Bitcoin. Now, what?

Your next goal is probably to make sure your drivers can produce an underwriting profit. Of course, as we all know, pricing young male non-standard drivers is difficult.

Ideally, you would want to focus on identifying the safest drivers in that pool. There are certain characteristics you could try to find proxies for that might suggest someone is less aggressive. You could use UBI to monitor driving behavior. You could try to figure out which young drivers use their car less or maybe which only use it outside of rush hour traffic.

What you wouldn’t want to do is seek out drivers who show evidence of risky behavior when they’re not driving because there’s probably some correlation between aggressiveness outside the car and behind the wheel.

Risk Seekers

See where I’m going? A big part of owning bitcoin is because it’s exciting. It’s an adrenaline rush watching the volatility. It’s arguably a form of gambling. It’s an act of rebellion. It’s not something that tends to appeal to those who are sober and measured in their behavior.

Now, let’s think about how that correlates when that person gets in a car…want excitement? See how fast you can accelerate when the light turns. Adrenaline rush? Weave among traffic. Gambling? Floor it to pass on a two lane rural road. Rebellion? Don’t wear a seat belt. Sober? Hopefully they’re driving sober.

Someone who wants to buy auto insurance with bitcoin is very likely THE WORST driver you can find. They are extremely high risk. Any advantage you get in conversion or quote volume from the free media will be more than offset by the leap in the loss ratio!

If Tesla sells a car for Bitcoin, it doesn’t matter to Tesla if they wreck it afterwards (they might even buy another Tesla!). If an insurer sells insurance for Bitcoin, they are lowering their profitability due to the adverse selection risk. And, by the way, it’s terrible for the environment.