Thermal runaway: not your average motor risk

The growing penetration of electric vehicles (EVs) as a consequence of countries’ greenhouse gas emission reduction strategies is forcing insurers and reinsurers to reassess their approaches to the all-important motor insurance class. “As the global community further progresses on its decarbonisation journey, EVs are gaining relevance in the automotive industry,” said Sihle Mntungwa, a Re/insurance specialist at Swiss Re. He was one of three presenters invited by the Insurance Institute of Gauteng (IIG) to discuss the impact of EVs on insurance.

Slow on the uptake; but important nonetheless

The uptake of EVs has been slow domestically, with the National Automobile Association of South Africa (NAAMSA) reporting fewer than 1 500 fully electric vehicles sold in the country since 2018; but the country’s geographic location coupled with its established automotive manufacturing and mining capabilities could make it an attractive manufacturing hub for both EVs and lithium-ion batteries. “There are various factors that will impact the domestic transition to electronic vehicles including government subsidies; the affordability and availability of EV models; and the extent of the country’s recharging and repair networks,” Mntungwa said. 

Having more repair shops and more skilled technicians spread across South Africa would have a significant positive impact on the uptake of EVs, and reduce costs across the broad motor insurance value chain. “Insurers and reinsurers must develop a deeper understanding of the processes that are required to underwrite EVs effectively; as sales ramp up, it becomes essential for the industry to take a first-mover approach by either setting new standards or upgrading existing standards in assessing risk exposures,” Mntungwa said. Swiss Re pointed out that each activity in the EV value chain presented different and distinct risks to those for traditional internal combustion engine cars. 

Pay close attention, these cars be different

EVs have higher curb weights; instant torque; lower noise outputs; special tyres; and are manufactured from costlier rare materials than today’s diesel- or petrol-driven cars. And these are just some of the factors that might influence insurers’ claims and underwriting decisions. Early movers in the EV insurance market must ensure that they extract sufficient risk-based premiums from insureds; promote the safe adoption of this emerging technology; and partner with firms across the value chain including battery manufacturers; original equipment manufacturers (OEMs); and software providers, to name a few. 

Zaheda Mohamed, an underwriter at Swiss Re, started her presentation by acknowledging the pivotal role that the insurance industry would play in risk management around EVs. She set out to identify the underwriting considerations under each section of the EV value chain, from the assembly line, to transportation, to on-the-road exposures. 

South Africans are not significant purchasers of EVs as yet, which means that the insurance industry’s initial risk exposures will come from EV manufacturing and exporting activities rather than domestic on-the-road use. Insurers and reinsurers must, therefore, keep a close watch over the auto manufacturing sector as new entrants square off against established incumbents, each seeking an edge in the competitive EV market. “The industry must watch out for new entrants [and] determine their capabilities; their ability to maintain and record procedures; their ability to meet lead times; and their quality assessment measures, among others,” Mohamed said. 

One of the principle underwriting concerns in the manufacturing segment is the likelihood of product recall, a common occurrence among established, traditional auto manufacturers. “EV manufacturers must maintain sound recall systems that are regularly tested on real world scenarios,” said Mohamed. Points to consider include the integrated nature of the EV manufacturing supply chain, and the overlap between the EV and tech sectors. Other risks arise as auto manufacturers shift EV production to purpose-built manufacturing facilities, forcing insurers and reinsurers to reconsider risk assessments of construction sites and EV assembly lines. 

Batteries up in smoke, frequently

The batteries used in modern EVs are the most expensive and most hazardous component in these vehicles, presenting unique challenges to underwriters. “The lifespan of an EV battery is dependent on various factors including the operation of the battery; the cell chemistry; and the charging and discharging of the battery … battery health is one of the most challenging issues for the insurance industry,” Mohamed said. Nowadays, fires caused by EV batteries have become a major risk during the transportation of EVs, especially by sea. Other underwriting considerations include ownership of goods during transit and whether ‘goods in transit’ or ‘care, custody or control’ applies. 

The main underwriting considerations change when the EV reaches a dealership. As the proportion of EVs to traditional vehicles at local motor dealerships swells, different risk mitigation and transfer strategies will become necessary. Mohamed pointed out that dealers might have to hold fewer EVs on showroom floors; make special arrangements for storage of such vehicles; and ensure that repair areas are isolated from other buildings. “EVs, and especially those under repair, should not be placed too close to third party property due to the highly flammable nature of batteries,” she said. “Fire measures need to be followed,  as do strict battery protocols”. 

EV write-offs on the rise

Swiss Re warned that the motor insurance industry could expect a sharp rise in the number of write-offs as the proportion of EVs versus traditional vehicles swelled globally. “We already see this happening in the US, where the cost of repairing these vehicles is so high that many manufacturers or insurers have chosen to write-off the vehicles, at a huge cost to the industry,” Mohamed said. Batteries and their propensity to catch fire dominated the on-the-road risk discourse too, with a special warning to emergency response services insofar as putting out battery fires and / or recovering EVs post-accident. 

Nirvana Deonandan, a claims expert at Swiss Re was last up to discuss the claims implications of the widespread adoption of EVs. “The risk attaching to EVs is not necessarily higher, but the risk patterns are different compared to traditional vehicles,” she said. For example, EV vehicle weights can result in more severe crashes, while their quiet operation can contribute to more frequent accidents involving cyclists and pedestrians. Another observation is that drivers switching from traditional vehicles to EVs might be unaware of how quickly an EV can accelerate, leading to loss of control. The good news for insurance claim teams is that EV drivers tend to drive more conservatively, perhaps to extend battery life. 

Swiss Re said that recent European claim statistics point to a lower claims frequency for EVs. The German Insurance Association actually found a frequency reduction of 20% for EV versus traditional motor ‘own damage’ claims, and a reduction of 8% for EV versus traditional motor third party liability claims. Deonandan said there were reasons for lower claim frequencies such as differences in usage patterns between EVs and traditional vehicles and the tech-backed advanced driver assistance systems installed in many EVs. Unfortunately, the same data supports that the average severity of EV claims is around 35% higher than for traditional vehicles due to higher EV parts and labour costs. 

On smart EVs and cyber risk

Insurers and reinsurers are also closely monitoring the fire risk posed by EVs, though there is no evidence to support that there is a greater risk of fire from everyday use of an EV compared to a diesel or petrol vehicle. Thermal runaway events can, however, cause EVs to catch fire while charging, in storage, following an accident, or in use. These fires typically lead to the total loss of the insured vehicle. 

“Cyber is another potential risk exposure,” concluded Deonandan. “EVs require regular software updates and a failure to install same could in compromise safety or cause damage”. Case in point, in June 2023 Jaguar recalled some of its EVs due to a fire risk that stemmed from a software issue. 

Writer’s thoughts:

The good news for brokers and risks advisers is that insurers and reinsurers are doing the hard work to identify and underwrite the risks presented by electric vehicles (EVs). Have you bought comprehensive cover for an EV recently? How did the EV premium compare to that for an internal combustion engine vehicle? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za