The growing EV landscape poses challenges and opportunities for insurance

CHICAGO – According to a recent Pew Research Center survey, about four in 10 Americans (38%) say they’re very or somewhat likely to seriously consider an electric vehicle (EV) for their next vehicle purchase. As momentum for electric vehicles (EVs), plug-in hybrids (PHEVs), and other low- and zero-emission vehicles grow, insurers are exploring the opportunities and challenges that lie ahead.

The American Property Casualty Insurance Association has released a new paper “Electric Vehicle Adoption and Impacts for the Insurance Industry.” It examines electric vehicle adoption and its impact for the insurance industry and presents an overview of EV technologies, insurance considerations and potential challenges, as well as a summary of recent policy and regulation driving EV adoption.

“Many of the risks associated with EVs are similar to those for conventional vehicles,” said Ethan Aumann, senior director, environmental issues, and resiliency for the American Property Casualty Insurance Association (APCIA). “However, EVs present some unique risk factors that can drive insurance costs higher, including higher upfront and repair costs, longer repair times, and increased vehicle weight due to the battery pack. There are also risks related to vehicle and charging station connectivity, such as data security and privacy concerns. The lack of consistency in EV design and battery standardization poses additional challenges for auto insurers. On the other hand, the vehicle's and driver's underlying risk characteristics ultimately drive the insurability and premium charged for auto policies. Additionally, there are also opportunities associated with EVs because of enhanced safety through the use of advanced vehicle features.”

Some highlights of the report include:

• Analysts estimate that EV sales in the U.S. have accounted for around 6.5 percent of new vehicle sales in the first half of 2023 and may reach cumulative sales in 2023 of over one million EVs for the first time.

• The high upfront cost of EVs is one barrier consumers face when considering the purchase of an EV today and is one factor affecting claims costs. The introduction of additional models in coming years and maturing supply chains are also expected to exert downward pressure on EV prices over time.

• In addition to higher upfront costs, some studies have shown that EVs take longer to repair and are more expensive to repair than conventional vehicles. Several factors contribute to these trends, including the necessary retooling of auto parts manufacturers, assembly plants, and repair shops, required training of repair technicians, and the adaptation of supply chains for new components.

• EVs can deliver instantaneous high torque from a stop, resulting in much faster acceleration than many conventional vehicles. Depending on the driver’s familiarity with EVs and how aggressively the vehicle is driven, this enhanced performance of many EVs could either be a safety concern or benefit that allows a driver to avoid a collision.

• The battery in an EV can account for as much as one-third of the total vehicle weight, and EVs are considerably heavier than conventional cars. Heavier vehicles can cause more damage to road surfaces, as well as other vehicles, people, or property involved in an accident.

• The risk of EV battery fires has direct implications for personal and commercial lines, including auto and property insurance and other types of insurance depending on where the fire occurs.

• Along with the potential for improved safety and mobility stemming from connected vehicle features, there are cybersecurity risks associated with data leaks or hacking. A potential risk of using public charging stations is their vulnerability to being hacked.

Another challenge for insurers is being able to know which cars they insure have advanced features such as driver assistance since it is no longer the case that a vehicle identification number (VIN) or the make, model, and year reveals everything insurers need to know about a vehicle’s risk characteristics. There is also inconsistency in the terminology manufacturers use to describe advanced driving or safety features. “Increasingly these and other risk mitigation features are available for EV’s and newer cars in general,” said Aumann. “But it is especially important for insurers to have information regarding the safety features to accurately assess risk."

The rapid adoption of EVs is also presenting challenges for insurers assessing and pricing risk. “The relatively recent adoption of EVs means there is limited use and loss data for insurers to consider when trying to understand, accurately predict, and price risk associated with increasing numbers of EVs,” said Aumann. “But as a greater number of EVs are on the road for a longer period, insurers will have additional historical data to more accurately assess risks associated with EVs.”

With the EV adoption rate increasing and the policy and regulatory environment shifting to spur EV adoption the automotive landscape is changing. “As a practical matter, insurance companies are prepared to meet the increase in market share of these vehicles by training claims adjusters, making sure their direct repair networks can handle the needed replacements, and using available loss data to help in risk evaluation,” said Aumann.