Introduction
The transportation sector stands out as a significant contributor to GHG emissions, prompting governments worldwide to embark on a concerted effort to transition away from fossil fuels by identifying and harnessing cleaner energy sources. In this pursuit, electric vehicles (EVs) have emerged as a compelling and environmentally responsible alternative. They offer the advantages of reduced or zero emissions, efficient energy utilization, and diminished maintenance requirements.
The early EVs faced limitations due to their high price point, performance concerns, and the nascent state of charging infrastructure. However, technological advancements, along with growing environmental awareness, gradually transformed public perception. Nevertheless, it was the supporting government policies that played a pivotal role in catalyzing the industry’s growth. Government initiatives urging original equipment manufacturers (OEMs) to transition toward net-zero emissions, coupled with incentives provided to the public to embrace EVs, were instrumental in driving market adoption.
Nonetheless, EVs remain in the early stages of their evolution, a phase that mirrors the typical trajectory of emerging technologies. As with any nascent technology, EVs introduce certain risks that evolve over time until a safer and more dominant design prevails. This article explores the novel risks associated with EVs and delves into the response of the insurance industry to the transformative impact of EVs. Identifying the risks that are unique to EVs, creating insurance products that are tailored to their specific needs, setting precise pricing strategies, making changes to current processes, reimagining of operational models, and creating new ecosystems are all part of this response.
Risks on the Road
The primary goal of EVs is still the same as that of conventional internal combustion engine vehicles (ICEVs): to transport people safely from one destination to another. However, when it comes to the core powertrain components and the way they work, the construction of an EV is different from that of an ICEV. Conventional vehicles are propelled by fossil fuel-powered internal combustion engines (ICE) that convert the fuel to mechanical energy through combustion. EVs, on the other hand, are propelled by electric motors that are powered by rechargeable batteries and convert electricity into mechanical energy. While ICEVs have more moving parts and require regular maintenance, EVs have fewer moving parts and require less maintenance.
EVs are still in the early stages of evolution, and every component in an EV is undergoing research to improve efficiency and safety. The dominant design, standards, and regulations are yet to emerge. Till then, EVs present the insurance industry with new risks (see Figure 1). EVs and their components are expensive when compared to conventional vehicles, which caused the need for increased insurance coverage. The conventional ICEVs are predominantly mechanical and, over the years, have started incorporating sensors and software to provide safety and comfort. In contrast, EVs are essentially managed by advanced sensors, software, electronics, and connectivity. Software is at the core of EVs, and the sophistication of these algorithms defines the features, functions, and value of any EV. A faulty component or piece of software could cause major problems, resulting in an increased product recall. Failure to install important software updates, whether inadvertent, deliberate, or due to unforeseen circumstances, could pose a new safety hazard for EVs.
The most apparent characteristic of EVs is their heavier curb weight when compared to ICEVs of similar types. The battery pack in the EVs is the main reason for the increased weight. For example, a 100-kilowatt-hour (kWh) battery could add 400–500 kilograms. The original equipment manufacturers (OEMs) try to offset this increase in weight with the use of lighter body materials. A higher curb weight has its own advantages and disadvantages. The advantage is that the vehicle will be more stable on the road and may not roll in the event of an accident. This will protect the passengers during a collision. However, the increase in weight could result in a severe impact when the EV collides with another lighter vehicle, a pedestrian, or a cyclist on the road, causing serious injuries or death.
The existing repair network and infrastructure are well-oiled for ICEVs but ineffective for servicing EVs. The technological advancement that sets the standard for EVs results in a scarcity of dedicated service centers and skilled technicians. The integrated nature of the components, their complexity, and their sensitivity to any damage create the situation where, after an accident, the parts will need to be replaced, not repaired, thus inflating the cost. Besides, more time is required to repair EVs, as there is a need to remove the battery pack due to safety reasons before performing any important repair work and reinstalling them properly. Risks could also arise when a component or software problem necessitates a product recall decision, but the owner is non-compliant. The four essential powertrain elements—the battery pack, electric motor, charging system, and regenerative braking system—presently stand out as the most prominent and specialized areas of concern.
Battery pack
The battery serves as the principal component in an EV, and the performance of the vehicle is dependent on the material from which the battery is constructed. There are several types of batteries made with different combinations of lithium, nickel, cobalt, and manganese. Currently, lithium-ion batteries are considered the standard battery option as they are relatively light in weight, charge quickly, have a high-power density, which makes them highly efficient in terms of energy stored relative to their weight, offer the best mileage on a full charge when compared to other battery options, and have a longer battery life. However, a concern with lithium-ion batteries is that in the event of physical damage, overcharging, over discharging, or exposure to external fires, they may initiate thermal runaway—an ongoing, self-sustaining exothermic chemical reaction. Thermal runaway will make the battery overheat, catch fire, and/or explode. These fires are difficult to extinguish and may generate high levels of toxic gases.
EVs are shipped aboard roll-on/roll-off ships that are designed to carry wheeled cargo, such as cars. It is said that a high battery state of charge (SOC) and stowage of EVs near one another increase the risk of fire. While different battery types require different safety measures, the standards for safe shipment procedures are still evolving. Batteries do have a healthy lifespan of eight to ten years, after which they degrade. However, early degradation occurs due to reasons such as how it is charged and discharged and the ambient conditions. For example, regular use of rapid charging and driving in cold weather are said to reduce the efficiency and life of a battery. Weather conditions also have an impact on battery performance. Monsoons pose a challenge for safeguarding batteries, as heavy rain can potentially lead to water ingress, causing short circuits and overheating. Additionally, using a battery with an incorrect product it was not designed to be used with could result in overheating and potential fire hazards.
Specialized skills and adherence to specific safety protocols are imperative when repairing or replacing a battery. Unauthorized service stations or incorrect calibration can potentially lead to warranty voidance. Due to their sensitivity, even a minor collision can result in irreparable damage to batteries, necessitating their replacement. Given that the battery is the most valuable component of an EV, such a situation could potentially lead to a total loss of the vehicle.
“Range anxiety,” the concern that the battery might deplete before reaching the intended destination, has posed a significant obstacle to the widespread acceptance of EVs. Range depends on battery capacity, driver behavior, vehicle speed, and the terrain. EV drivers are at a considerable risk of experiencing a breakdown due to flat batteries in “charging deserts” that have limited charging infrastructure, both in urban and rural settings, necessitating the need for roadside assistance. Another emerging solution for tackling the wait time while recharging batteries is battery swapping, also known as battery-as-a-service. In this process, a depleted battery is quickly exchanged for a fully charged one at a swapping station or service center. However, a key concern with this approach is the reliability of these swapping stations, and it’s often challenging to assess the state of health of the replacement battery.
Electric Motor
Electric motors are the essential core of the EV propulsion system, representing the second-most significant component. They perform the crucial function of converting stored electrical energy from the battery into mechanical energy, which propels the vehicle forward. Electric motors are classified into two main groups: alternating current (AC) and direct current (DC) motors. Within each group, there are many types of motors based on criteria such as power rating, torque, efficiency, size, weight, cooling system, voltage rating, speed range, and control mechanism. Each type of electric motor has its own advantages and disadvantages, and the choice of electric motor for an EV depends on the vehicle’s design and intended purpose. Unlike ICEVs, electric motors offer instant torque, which could cause rapid and abrupt acceleration. It might take new EV drivers some time to adapt to this difference, thus increasing the risk of accidents and collisions, resulting in claims for vehicle damage and bodily injuries during the adjustment phase. Additionally, electric motors could pose a hazard from post-accident electric shocks, potentially harming individuals. Electric motors produce power from the interaction of magnetic fields, causing significantly reduced mechanical noise when compared to the combustion processes occurring within an ICE.
Furthermore, the presence of fewer moving parts and the absence of noise stemming from exhaust emissions provide a quieter driving experience. This may cause accidents and injuries to pedestrians and cyclists who may not be aware of the approaching vehicle. To mitigate this risk, regulations are emerging to create noise by installing an acoustic vehicle alert system. Electric motors are vulnerable to water damage, potentially leading to short circuits. Electromagnetic interference from the EV or the charging infrastructure has the potential to induce unintended vehicle movements, which can result in accidents. Electromagnetic interference could even raise health concerns for individuals with specific medical implants. Electric motors and transmissions heavily depend on advanced electronic control systems and intricate software. Software malfunctions or cyber attacks can cause malfunctions that affect performance. Compared to a combustion engine, electric car motors have fewer parts, which makes maintenance easier. However, repairs can be costly and complex, demanding more time for diagnostics and calibration. As a result, repair services tend to be increasingly OEM-driven rather than relying on traditional independent repair shops.
Charging system
The “charging system” includes various elements, like home and outdoor charging infrastructure, as well as hardware components such as charging stations, ports, connectors, cables, and the necessary software for user authentication, billing, and remote monitoring. The range of EV charging systems varies from home-based Level 1 (120 Volts) chargers to public Level 2 (220/240 Volts) chargers and high-power DC (480 Volts) fast chargers, all designed to meet the diverse needs of electric vehicle owners. The primary hazard associated with EV charging is fire. The cause of the fire is often outdated electrical wiring and an unstable power supply in the charging location. If charging is done at home, such incidents could damage both the EV and the property. When using public charging stations, the consequences may extend to damaging other vehicles and nearby properties. The charging stations and ports are exposed to weather events like heavy rain and flooding that could pose risks. Additionally, these stations are susceptible to acts of vandalism, such as tampering with electrical components or the charger, which could cause serious accidents during charging. Charging involves the transmission of high-voltage electricity, and malfunctions can result from factors such as physical damage, wear and tear on the charging port, connector, cable, or software glitches. There is also a potential risk of electric shock from a compromised charging system.
EVs are renowned for their advanced software algorithms that control various functions. It is essential to note that when the EVs connect to charging stations, the cable not only transmits power but also exchanges a multitude of data. This expanded risk surface increases the vulnerability to potential cyberattacks, which could involve data theft or the introduction of viruses to manipulate the system. In a basic data breach scenario, personally identifiable information like car ID, owner details, location, billing, or financial data could be at risk. More severe cyberattacks have the potential to compromise EV security, damage software-controlled components, infiltrate the owner’s home systems, undermine payment infrastructure, or breach the energy management system of the grid. The charging infrastructure is still being developed, and the stations are not evenly distributed. While more charging stations are available in urban areas and places where affluent communities live, they are sparse in rural areas and places where low-income communities reside. This could lead to charging anxiety, a feeling of uncertainty regarding charging station availability, and potential overcrowding, resulting in extended wait times. In areas with limited charging options, there’s a risk of racial segregation and discrimination for drivers.
Regenerative braking system
Another important component of EVs is the regenerative braking system (RBS), also known as kinetic energy recovery. This system operates when the driver applies the brakes or eases off the accelerator. The electric motor operates as a generator to convert the vehicle’s kinetic energy into electric energy, and this energy is sent back to the vehicle’s storage for future use. The challenge with RBS is that a significant drag occurs when the driver applies the brakes or releases the accelerator pedal. While this may not cause problems at lower speeds, RBS may not provide the required deceleration in high-speed or emergency situations. In such circumstances, drivers will need to apply brakes with significant force or use conventional friction brakes. It is important for drivers to be aware of this and adapt their driving behavior accordingly. Besides, RBS may be less effective in adverse weather conditions such as ice, heavy rain, or snow. The intensity of the regenerative braking varies based on the type of EV and the road conditions. Due to this, new EV drivers may find it challenging to gain confidence in the effectiveness of braking. RBS may generate a significant amount of electrical energy, which, if not managed properly, can lead to battery overheating. An efficient working thermal management system is essential to maintaining the temperature within safe limits.
Insurer’s Toolbox
Personal transportation underwent a radical transformation in the late 19th century when it moved from the horse-driven carriage era to motorized vehicles. For over a century, ICEVs have had a tremendous growth trajectory in variety, capacity, and number sold. Every component in ICEVs got reinvented, remodeled, and refined to make personal mobility faster, safer, and more efficient. The auto insurance industry that provided coverage to the ICEVs simultaneously grew by appropriately responding to the evolving risks of the automobile industry. As the industry amassed risk data pertaining to the ICEV, such as vehicular data, driver profile and demographics, driving behavior, the environment in which the vehicle is being driven, claims data, and their interconnections, insurers designed different types of risk coverage that were actuarially modeled and accurately priced. The processes for assessing and underwriting the homogenous or individual risks, arriving at the risk premium, post-accident services, inspection of the damage, settlement of claims, and the terms and conditions of renewing a contract were defined. The ecosystem that comprises gas stations, licensing, repair service networks, and third-party data providers to support driver’s license status, traffic violations, and accident history has progressively evolved. Most importantly, the laws governing road transport and insurance were formulated, stipulating the pre-requisites for drivers and mandatory or non-mandatory insurance coverage.
When compared to the radical transformation that ICEVs ushered in, the change that EVs are bringing in is incremental. Except for the energy source, the technology that drives the vehicles, and the ecosystem network, most components in EVs closely resemble or are derived from traditional ICEVs. The current generation of EVs has upended all the earlier versions due to their relatively superior performance. The EVs are still in their nascent stages and are continuing to see efficiency improvements. The evolution of the insurance industry and its response to the growth of EVs can be visualized in three stages: rooted to ICEVs, finding their own turf, and taking flight (see Figure 2). While these aren’t fixed divisions, markets may vary in their maturity for different attributes based on the extent of EV adoption and advancement.
Rooted to ICEV
The introduction and early adoption of EVs, which we are currently observing in several markets, mark the initial stage. The components of an EV go through a lot of changes. The current generation of EVs has been around for two decades, and market adoption improved only after governments incentivized buyers. The insurance industry does not have adequate data related to the various types of risks emanating from EVs and their driving conditions. Almost all the risks mentioned in the earlier section relate to the first stage. This lack of accurate understanding is a shortcoming for profiling safety, modeling risk, and pricing. Hence, insurers base the risk on EVs as an incremental variant of ICEV. Selected risk coverage is included as an add-on to conventional motor policies. As the purchase and repair costs of EVs are high and the risks are still less understood and modeled, the insurance premium remains comparatively higher.
An important attribute of ICEVs is that they are disentangled from OEMs because of their mechanical nature. Once the ICEVs are on the roads, they are mostly detached from OEMs as an ecosystem of reliable third-party component manufacturers and repair service providers exists. However, EVs are driven and powered by sensors, software, and data. Due to this, they remain closely entangled with OEMs. EVs require higher expertise for servicing, and the market is presently controlled by the OEMs. As a result, insurers heavily rely on OEMs for evaluating risks and handling claims. The risks associated with various models of EVs, and their components vary. Due to this, insurers homogenously group EVs broadly based on their type, which acts as a proxy, to assign them to specific risk groups. Unique risks can only be identified when adequate risk data is gathered. The control over information about the vehicle components, data, and service network gives OEMs an enviable lead over insurers. Additionally, many OEMs are venturing to provide insurance to EVs on their own. OEMs have traditionally provided several financial services to their customers, and insurance is becoming a new addition. OEMs are providing insurance to EVs through their own start-ups or in collaboration with incumbents. It is likely that OEMs dominate such collaborations, and the role of the insurers may be restricted to capacity providers and extending process support.
The insurance risks from EVs can be grouped into three categories. The first category encompasses risks that are identical to ICEVs. These include risks such as natural disasters, vandalism, personal injury, and property damage liability, and uninsured or underinsured motorist risks. For these risks, there is no change in the way the risks are assessed, and the policy conditions remain the same. The second category is where the risks remain the same but exhibit increased frequency, severity, or need a different response. These include risks such as product recall, breakdown assistance, and post-accident repair, to name a few. In the event of a product recall, the new reasons that could create a need for it, such as battery risk, software bugs, and other manufacturing defects, are to be calibrated for pricing the risk. For breakdown assistance, while some roadside assistance, such as towing support, is the same, instances of breakdown due to a flat battery are a new risk. When the EV is driven through “charging deserts”, this could necessitate an increased need for support. However, it may be deemed discrimination if higher premiums are charged to residents for driving through “charging deserts”. An increase in the cover amount and proportionately higher premium may arise because of the repair costs inflated by the replace or repair paradox, the possibility of total loss and vehicle write-off after an accident, and a reduced subrogation recovery. These risks need the inclusion of specific policy wording, definitions of cover limits, and deductibles.
The third category comprises risks that are entirely novel and specific to EVs. This category includes newly emerging risks associated with EVs, including flat batteries, battery fires, charging equipment damage, property damage resulting from fire incidents, electric shocks, regenerative braking issues, cyber hacks, challenges related to drivers transitioning to EVs, and liability risks. Currently, insurers offer varying levels of insurance coverage, and the industry has not yet fully developed standards. For batteries, insurance companies offer battery repair or replacement coverage, which includes damage from electrical overload and costs for decontamination. Battery fires result in a total loss of the EV, and the cost associated with such a risk is to be factored into the premium. Both fires and electric shocks that lead to personal injuries need to be considered in the pricing. Fires occurring during the shipment of EVs require a reevaluation of the standard procedures for transporting EVs and a reassessment of marine cargo insurance premiums. With respect to battery degradation or deterioration, there is currently a lack of dependable long-term battery performance data, and the depreciation scales have not been established. As a result, the risk associated with battery degradation has not been actuarially modeled and integrated into insurance coverage. Insurance coverage for battery swapping solutions is relatively straightforward when the ecosystem is controlled by OEMs. However, when the market becomes more decentralized, such coverage becomes possible when the close connection between EVs and their batteries is decoupled and authorized battery swapping solutions are available. The risks associated with driver adaptation to electric motors and regenerative braking systems can be mitigated only through driver training. In addition, insurers may consider the possibility of extending the accident forgiveness endorsement on EV policies, specifically for certain types of claims, and for a limited duration.
Standard home insurance policies do not require homeowners to disclose ownership of an EV. These policies cover damage from electrical fires, including the expenses for repairing or rebuilding the property. However, insurers have yet to incorporate the additional risks associated with EVs and liabilities when neighboring properties are affected. Charging stations require coverage for damages to their own property and cyber insurance. Additionally, they need increased liability coverage for potential damage to vehicles at their stations and neighboring properties. Insurers offer cover for the theft of charging cables and damage to charging equipment, but wear-and-tear related damage is not typically covered. The manufacturing of EVs and their components is concentrated globally, leading to supply chain risks. Insurers need to factor in these risks when developing business interruption, contingent business interruption, and non-damage business interruption coverages. For insurers, there are a few challenges that are still unresolved, such as if a product liability warranty is extended when charging equipment manufactured by a third party instead of an OEM is used and a risk event occurs.
Finding their own turf
The maturity of EVs and an increase in the variety of models characterize the second stage. EV components such as batteries become safer, and the charging infrastructure also improves considerably. The dominant design for EVs and their components emerges. There is an exponential growth in the market share of EVs, and government incentives are gradually reduced. There is an extensive collaboration of OEMs and regulators, and the standards are created. At this stage, EVs are poised to cross the chasm that typically follows the early adopters in the technology adoption life cycle, moving towards finding mainstream buyers among the early majority. As the vehicular risks are reduced, the insurance premiums decline. The flow of EV-specific data increases, and insurers can understand the risks associated with every type of EV and individual component. The risk modeling and assessment are done at a granular level. This helps insurers design standalone EV-specific policies that are not influenced by the legacy of ICEVs. This phase is characterized by the introduction of niche covers such as for battery or motor type, battery swapping, and battery degradation. The wealth of available risk data empowers insurers to enhance their usage-based insurance offerings. This includes the development of novel usage-based insurance solutions that incorporate EV-specific factors such as battery usage patterns, battery degradation information, driver behavior, and the driving environment.
A potential disentanglement of EVs from OEMs could happen due to their wide proliferation. The inability of OEMs to expand their service networks to cater to the mass market or due to regulatory intervention may result in the proliferation of authorized and decentralized repair networks that follow the guidelines defined by the OEMs. This will considerably reduce the repair costs and the associated insurance premiums. This disentanglement may also create third-party data aggregators and data platforms for wider market collaboration and insights.
Taking flight
The third stage is characterized by the mass adoption of EVs even by the late majority in the technology adoption life cycle and the emergence of several models. It could be a time in the future when many of the current research activities start showing positive results. For example, redesigned battery electrolytes enable the battery to work even at temperatures down to minus twenty degrees Celsius, as opposed to the current generation of batteries that work at temperatures between zero and forty degrees Celsius. Solid-state batteries with higher energy densities replace the liquid electrolytes in a lithium-ion battery with ceramic or other solid materials to reduce the fire risk. Lighter batteries with improved thermal stability, faster charging capabilities, and a range exceeding 1,000 miles per charge are available. The electric motors become more stable with optimized cooling, increased controllability, and reduced installation space. Uniformity standards are defined for the charging equipment, making them agnostic to the make or model of the EV. The reduction in vehicular weight also improves the vehicle’s efficiency.
These innovations could potentially reduce or completely remove most of the risks enunciated in earlier stages. This will considerably reduce the cost of EVs, their risks, and the corresponding insurance premium. The surge in data flow enables insurers to enhance their risk models with greater precision, incorporating real-time into usage-based insurance. As EVs incorporate more advanced driver assistance systems and artificial intelligence, the interaction behavior between humans and machines becomes one of the key factors for risk assessment and pricing. As the insurer and OEM relationships mature, embedded insurance could be extensively leveraged for creating seamless purchase and service experiences.
The Road Ahead
The future of transport is EV, and we are currently in the process of transitioning towards it. However, the shift from fossil fuels will not be easy due to the maturity levels of ICEVs and the superior user comfort they provide. EVs are currently in the nascent stages of change, and the auto insurance industry is beginning to respond to the change. After finding success with early adopters, the existing technological challenges in EVs could become potential roadblocks for crossing the chasm and finding mainstream buyers. The changes are dynamic, and hence, insurers will have to closely monitor their progress. They will have to work with OEMs, individual component manufacturers, software providers, and service networks to understand the nuances and design appropriate basic coverages, additional coverages, and endorsements.
