Your Electric Vehicle's insurance premium will stay expensive … at least for a while !

With one fifth of global carbon emissions originating in the transport sector, the push towards Electric Vehicles in recent years has been obvious (though EVs effectiveness in contribution to a greener world is still up for debate, given that large parts the EV manufacturing process - from mining to construction - are heavily fossil fuel dependent). While partial to fully electrified cars were being launched for the last 3 decades, it's only now that we are seeing EVs putting up a fight for market share to Internal Combustions Engine Vehicles (or ICE - an ironic acronym for sure).

With greater adoption of EVs, comes the obvious question of insurance premiums which contribute significantly to the running cost of any vehicle. The premiums we pay for traditional or ICE vehicles are not cheap but as most people who have purchased an EV in recent years would have realized, despite subsidies in some cases, premium costs for EVs in most markets remain higher than those for traditional vehicles. The answer to this delta in premium prices clearly lies in the risks which insurers have to account for while pricing a motor insurance policy.

In case of ICE vehicles, the understanding of risk involved has evolved over ~125 years & naturally insurers have a lot of data to assess clearly how much risk they carry while underwriting a car.

First motor liability policy was underwritten in 1897!

Though it's unfortunate that despite all this data, thanks to high competition, fraud & other pricing controls, insurers run unsustainable loss ratios for motor policies in several markets.

Greater uncertainty in risks involved.

Higher premiums for EVs clearly emanate from the higher number & level of unknowns which insurers have to deal with. Some of the top risks which insurers need to account for include, but not limited to:

Potentially higher cost of repairs: With sophisticated circuitry & expensive components - often manufactured only by Original Equipment Manufacturers (OEM) - the replacements costs are bound to be higher in case of any accidents or repairs. At the same time, there are few repair shops & trained personnel who can manage the servicing for an EV - which implies much high labor costs. This is unlike typical vehicles which can be operated upon by a wide set of garages & personnel including those with limited specialized training.

Different acceleration profile: EVs typically have the capability to reach peak speed faster than ICE vehicles and which can lead to incidents for the increasing number of drivers switching from older vehicles. Other drivers on road might as well might not anticipate the acceleration profile leading to accidental losses - at least in the initial years of EV adoption. However, this factor might stop having an impact as people get accustomed to EVs gradually.

Much lower noise: While a positive attribute from a noise pollution perspective, this can affect third party losses. While those outside a traditional car get to know about a moving car from several meters afar and can prepare accordingly, EVs are generally quiet vehicles and often pass undiagnosed by other passerbys. This can definitely lead to accidents for third parties who would not get adequate time to react to the presence of an EV.

Higher weight vs. traditional vehicles: Thanks to the high weight of batteries, EVs are typically much heavier than ICE vehicles. While this means greater stability for an EV as the centre of gravity tends to be lower, this can lead to greater impact for third parties in accidents increasing third party losses.

Unknown battery & charging infra fire risk: So far the risk of fire in battery & at charging stations appears to be low. However, this risk profile may change with greater use & wear and tear making fire risk a factor worth considering. However, we can hope that technology would continue to evolve keeping the overall fire risk low.

Battery performance + complexities from battery swap: Currently insurers have limited view of EV's battery's performance as it ages - which translates into an unknown risk. Another angle which comes into picture is battery swap arrangements which may see greater adoption especially for commercial users. Currently most batteries being new won't affect new users much - but with varying ageing profiles across batteries gradually & potential risk of counterfeit batteries seeping into such arrangements, this may increase the risk involved.

Risks from different driver profile - especially on the commercial side: Fleet based service providers are likely to adopt EVs increasingly which may lead to a single car being driven by multiple drivers. Inconsistent driving patterns can affect car & battery performance leading to more than expected breakdowns & accidents. Also, commercial drivers would be more inclined to use the vehicles closer to the cars' manufacturer prescribed performance limits increasing the risks involved (e.g., commercial EVs would be discharged & charged more frequently & would be driven more kms per charge).

Battery theft: While theft may not be very easy for 4 wheelers given the heavy weight of batteries, 2-3 wheelers may face a greater risk of battery theft. Lack of data around this adds another layer of risk for insurers.

Everything's not bad - EVs are already less risky in some ways.

However, besides the above mentioned factors which raise the risk involved in operating Electric Vehicles, there are also factors which do offset the risk esp. when compared to ICE vehicles. These factors include:

New age driver assistance systems: Most new EVs come endowed with latest driver assistance systems which help lower the overall risk involved. While this is also applicable for newly sold traditional vehicles, the overall proportion of such vehicles on road still remains much lower than the proportion of EVs with evolved driver assistance systems.

Better risk profile of personal car owners: EVs still being typically more expensive than traditional gas based vehicles, most EV users are typically more affluent and in several markets younger. This translates into relatively better maintained cars & driving patterns (and at times less heavy usage as EVs are second cars for several current buyers). As EVs get cheaper, this advantage would gradually wear off.

More weight - more stability: While I called this as a negative factor above as higher weight implies greater collision impact in case of accidents leading to more third party losses, however, greater weight also leads to more operating stability & lesser own damage for EV users. Hence, higher weight can be both positive or negative - incident upon the actual claim event.

So what do insurers do next?

So what does this all mean and when do we start seeing EV premiums becoming more benign? It will obviously depend on the reducing cost of EVs because even if the risk levels remain uncertain, the overall drop in vehicle prices should help reduce the corresponding insurance premium per vehicle. However, more importantly, it will also depend a lot on insurers efforts towards accessing better sources of data to accurately estimate the risks involved. Following are some key imperatives for insurers to better manage the overall risk posed by the emerging EV ecosystem & build a better understanding of the claim outgo they can anticipate:

Getting the data needed for accurate risk assessments: Right now the biggest challenge for insurers is the absence of historic data for EVs' operations - whether it be around vehicle usage, battery performance or driver behavior. Being a relatively new area, this problem is not going away anytime soon, but with better partnerships with OEMs, industry bodies and policymakers, all incoming data for EVs can be accessed allowing insurers to leverage latest risk modelling techniques to get a better sense of upcoming risks.?

Measures to eliminate & prevent risks: Insurers can use the same partnerships to collaboratively develop measures which can prevent key risks - especially battery & charging infra fire. Insurers can also play a lead role in developing repair networks - potentially in partnerships with OEMs at least to begin with - which can then help reduce the costs and time involved in repair & maintenance.

Retraining existing employees & value chain partners: Insurers are typically not known to be agile organizations. However, this is a major change - and insurers would have to reeducate their employees - and partners - especially those involved in underwriting, pricing & claims management. Besides a specialization in automotive operations, a good know how of electrical & electronics operations would also be needed now.

Making mobility less risky, but more fun & useful.?

The transition from internal combustion engines to Electric Vehicles appears to be a given currently (unless there is another major technological development which hijacks the future of mobility away from EVs). The efforts insurers put into understanding the risk landscape would not just be important from an insurance premium calculation standpoint but would also help in a big way to reduce the loss of life and assets which EVs would cause in the usual course of things. While we have learnt to live with the large number of casualties & accidents caused by traditional or ICE vehicles currently, it shouldn't be something we should actually be comfortable with.

On an average ~1.3 million people die each year globally. For reference, estimated global deaths due to terrorist activities is barely 2% of this figure.

Hopefully, in the coming years, EVs along with coordinated efforts by policymakers, OEMs, insurers and other stakeholders would make driving & riding fun rather than being risky.

Reference rack

• Unlocking the electric mobility value pools - EY (link )
• Gearing up for the electric vehicles ecosystem - Swiss Re (link )

Disclaimer: the above views are author's own and do not necessarily reflect the opinions of EY or any of its member firms.