EVs are First Step in Auto Insurance Transformation

By Graham Jarvis

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12th May 2021

Despite a slump in car sales during the pandemic, ING Group expects care sales to rebound by 8% in 2021.

However, EV insurance premiums are typically higher than those of other cars, demonstrating that they are riskier for insurers than being bound by a policy for a comparable ICE vehicle. This is because EVs are more expensive to repair – few workshops are qualified to fix them, parts are costly and unibody construction techniques lead to more cars being written off following low-speed crashes.

Nonetheless, David Williams, managing director, underwriting and technical services at AXA, finds that there has been an increase in the take-up of EVs. It’s slow but it’s progressing. He adds: “If you want to buy an EV, it’s more expensive than the internal combustion engine version. This will change – when you build more of something, the price comes down.”

In his view though, the bigger issue is the need to have an available repair network that’s adequately tooled. “You don’t want a repair shop that’s not dealt with EVs before and, as we see more EVs on the road, we will see more repairers and the repair shops will invest in more training,” he says before commenting that insurers will want to provide a guarantee, a warranty, to ensure that any repair job can be done correctly and safely to the highest standards.

He adds: “Generally, it is a case that the insurance trends are the product trends, not EV trends specifically as they are still not dominating [the market]. In terms of the broader view, we are seeing people less worried about the limited range.” Range anxiety has traditionally been a hurdle in the mind of consumers to the adoption of EVs, whether connected and autonomous or not.

Technological improvements are increasing EV range and subsequently reducing consumer anxiety about them. However, he says there are concerns about whether lithium-ion batteries are sufficient. In his view battery technology needs to move on from where it is – particularly as there are prototype autonomous vehicles (AVs) that are electric. The batteries are a vital part of the structure of the vehicle.

Insurance models

That said, to what extent is it true that EVs will change CAV insurance models and products? He doesn’t think EVs on their own will change insurance models. However, he accords that they will be an essential part of any transformation.

He comments: “EVs can respond more quickly in terms of acceleration and braking than ICE vehicles. The engine is more suited to building into a CAV. We see CAVs as being safer and able to save lives. Globally, 1.35M people died on roads and it’s still the biggest cause of death of males under the age of 25. EVs are an essential part of delivering safer and more efficient roads: better car-sharing, and better mobility generally. It’s opening up transport because of the reduced cost per mile (with CAVs). Uber are obsessed with EVs and AVs because they are getting the cost down per mile, almost to the point where it is the same cost as owning a vehicle.”

By keeping costs down, people who feel cut off from society can feel liberated. For example, he asks: “There may be a point in time when I won’t be able to drive owing to age or disability and, so, if I can easily access a way of travelling that’s as cheap and much safer, why wouldn’t I want to do that?” Yet, there will be a mixture of transport modes on the roads for quite a while now. Despite this, he predicts that about 70% of people are going to live in cities by around 2030.

“If you look at the AV aspects of CAVs, they are going to work in urban transport and we are already seeing this with Addison Lee autonomous vehicles being tested in cities,” he reveals while suggesting there is a move away from vehicle ownership. This will entail people hiring or leasing different vehicles for different purposes, whether for short distances such as undertaking the daily school run or commuting to work. “The motor manufacturers talk about moving from being motor manufacturers to mobility service providers. You would then only pay for a big expensive vehicle when you want to explore the countryside,” he explains.

Insofar as insurance is concerned, he says Tesla is having some issues with its insurance package despite having great potential. That may be because it isn’t significantly different to what’s on the market. He says Tesla talks about having more data to price the insurance more accurately and then to make it link into repair services.

Williams explains: “Tesla felt it was needed because it was difficult to get insurance at a competitive price. If you look elsewhere, there are schemes where you can buy insurance, for instance from VW-Audi, but it’s not cheap and they will insist on expensive labor rates and on providing their own brand-new manufactured parts. With Tesla it was very difficult to get parts for them. That can lead to vehicles being written off rather than repaired. So, Tesla came up with its own insurance package. However, it’s really the brand itself that is the biggest threat to the conventional insurance market. If you have a Tesla, you are probably prepared to pay a bit more and they should be able to offer, using data, a more bespoke price.”

There is, nevertheless, the risk that Tesla’s approach could push up the price for some drivers. Out in the market, there are insurance packages based on UBI. Getting a low-priced premium in this instance would require the driver to have a low score but if they aren’t achieving a good driver behavior score, drivers will find that the cost of the insurance increases. So, for example, Tesla drivers with a good score could reduce their insurance costs with their premiums going down. “Eventually, all insurers will want to use data to influence driver behavior – pointing out the errors of their driving style, so that eventually the cost of insurance can be reduced for everybody”, he claims.

EV purchasing motivations

However, will UBI put automotive customers off buying EVs, or will insurance incentives prove to be a key motivation for the purchase? Inevitably, some drivers will be put off particularly if they don’t want their insurers to know that they are regularly speeding. With price being a motivator, this could change.

Williams explains: “If they are getting a genuine benefit, then it won’t put them off. The other aspect, if you look at telematics models up to now, you had to pay for a black box to be fitted and that doesn’t offer a cost-advantage. Going forward, the telematics will be installed in the vehicle as standard and so there won’t be a price disadvantage. As an industry, and as a company, we will be pushing the safety aspect, making people aware of how they can improve their driving. This will outweigh any concerns about Big Brother watching you.”

Insurers are unlikely to keep premiums down to attract people to certain types of vehicle. Instead of immediately offering discounts, insurers want to know and understand the reasons to offer them in the first place. “Insurers are trying to find out what is fitted to the vehicle in terms of safety features, so they can reflect this in the insurance price,” he says before adding that the increased production of electric vehicles and higher safety feature numbers will lead to reduced costs – including reduced insurance premiums.

Dramatic change

Williams concludes that over the next five years: “EVs are going to be part of a dramatic change in the shape and style of mobility; they will help create safer roads and have a positive impact on the environment and they will also encourage different ownership models whereby people only use a vehicle when they need it, rather than having one sitting around unused.”

People will, subsequently, spend less on a vehicle that depreciates in value, while sitting on the road. He also forecasts that vehicle insurance premiums will fall quite dramatically because the roads will be safer, with fewer accidents – meaning that insurers will have to pay out less. This will be replicated for fleet commercial vehicles too. As for EVs, they will have a significant impact. However, the move away from vehicle ownership, the push for behavioral data and towards autonomous driving will create a bigger insurance transformation than how a particular vehicle is powered.