The challenges of EV-specific insurance

Major questions about electric vehicle (EV) risks remain unanswered, as insurers look to build business in this fast-growing sector, a Swiss Re expert has warned.

These unanswered questions matter because sales of EVs are forecast to make up more than 30 percent of new car sales globally by 2030, according to a report by the Swiss Re Institute (SRI).

“Small insurers are hesitant to write EV. Larger insurers say that they hope to grow the books by pushing EV sales without a good understanding of EVs. However, with the fast growth projections ahead, either way is not viable. They still need to get comfortable with this topic,” according to Luigi Di Lillo, lead products and partnerships in Swiss Re’s automotive team.

As a contributor to the SRI report titled ‘Gearing up for the electric vehicles ecosystem’, he said that the questions insurers still need to answer are myriad.

“For example, can the repair network handle large numbers of EVs? Are claims assessors prepared for EV claims? Those are very important questions, which are not being tackled today the way we feel they should be.”

The size of the global EV market is predicted to reach $434.4 billion by 2028, up from $165.1 billion in 2021, according to forecasts from Vantage Market Research. This data also found that Asia-Pacific is the largest and fastest-growing region. With growth comes opportunity for insurers.

If insurers want to be ready to accommodate this kind of risk in their portfolio, Di Lillo said, they need to consider that it’s “a different risk” from those of internal combustion engine (ICE) vehicles—“not only because of the technology, but also because of driver behaviour and driver characteristics”.

Early adopter lessons

Swiss Re took much from its EV market experience in China, Di Lillo said. Typical EV drivers in the country are younger and less experienced. Exposure is much higher because the vehicles are used for long ride-hailing and taxis, and driving an EV comes with different challenges such as abrupt acceleration and almost silent running, which is an issue for drivers as well as pedestrians.

“Claims frequencies for EVs are significantly higher than for ICEs in China, although we see different trends in other markets. For example, EV claims frequency is lower than for ICEs in Germany and in the US because of different usages and different driver types,” he said.

“We cannot generalise a certain propensity to risk in all the markets, but there are local characteristics that affect these kinds of behaviours.”

This fast-evolving landscape requires “new actuarial approaches and risk assessment”, Di Lillo stated, adding that a lack of data is also an issue.

With this in mind, the reinsurer has been building a set of products around EV risk, with the two most prominent being the Swiss Re EV Risk Score, and EV Advisor.

“The EV Risk Score is a factor that insurers can use, on top of their predictions on their own base models, to correct for the specific behaviour of electric vehicles. EV Advisor is there to advise the clients—insurers—on how to better underwrite and price the risk of EVs.”

The reinsurer has an extended warranty programme running in China. This uses information from national databases on battery status, charging patterns and different driver types, as well as collaborating with academic institutions.

“If we put all these together, we have a powerful combination to build specific coverages for EVs. Once you know correction factors, you know what the weak spots are. Then you could say: ‘I have to build a product which is specific for the electric motor, rather than the battery’, and so forth,” Di Lillo explained.

Get set, go!

As the insurance opportunities grow with the market, are re/insurers ready to create the EV-specific risk cover and products clients need?

Things have changed since the first transitions to EVs in early adopter markets such as China and Norway. Those transitions came with many obstacles. Costs were high and the vehicle technology was immature, with battery performance offering a very limited range.

“Insurers want to make sure that the score they are using is representative of the behaviour of vehicles on the road.” Luigi Di Lillo, Swiss Re
“The price for insurers was very high loss ratios. Nowadays, we see a more positive trend in several markets and the rollout of EVs is mostly an opportunity with some smaller challenges on the way,” Di Lillo said.

“Insurers understand they cannot ignore the uptake of EVs in their portfolio and they are taking small steps to offer EV-specific coverages.”

He acknowledged the difficulty for insurers as they have a limited exposure, so they have a very limited dataset on which they can validate claims using an EV risk score.

“The risk score validation procedures and methodologies should change because insurers want to make sure that the score they are using is representative of the behaviour of vehicles on the road. There is not only a problem of building the scores on a limited dataset, but also their validation when insurers start using them.”

Di Lillo emphasised positive trends including insurers using EV risk scores such as the product from Swiss Re. “They are starting to see some very positive effects, especially in the UK, with EV Risk Score, but they are very small steps. Insurers need a lot of convincing to make sure that they start using it properly.”

Di Lillo contributed to a two-part report titled “Gearing up for the electric vehicles ecosystem”, from the Swiss Re Institute.
Gearing up for the electric vehicles ecosystem
Gearing up for the electric vehicles ecosystem - Risks along the value chain - Part II | Swiss Re