Insuring electric vehicles

What is behind the surge in electric vehicle (EV) production?

Thomas Egli: Ultimately, it comes down to climate change and the urgent need to reduce CO2 emissions. The EU, for instance, has set a goal of reducing emissions from transport by 60% by 2050 compared to 1990 levels. Producing cars with cleaner internal combustion engines will help but won’t do enough to meet this goal. In fact, some countries plan to phase out new fossil-fuel vehicle sales even sooner. In the UK, Prime Minister Boris Johnson recently announced a climate plan that would ban the sale of new gas-powered vehicles starting in 2030. Denmark has a similar policy. Other countries are reportedly considering following suit.

Many of these policies focus on 2030 because the battery packs – which represent about 30% of the overall cost – are expected to become considerably less expensive by then. They currently cost about $137 per kilowatt hour (kWh). According to Bloomberg New Energy Finance (BNEF), the price of battery packs will fall to about $101 per kWh by 2023, and to $58 per kWh in 2030. At these levels, EVs will begin to cost about the same as similar fossil-fuelled models. BNEF also predicts that beginning in 2030, 26 million EVs will be sold annually, representing 28% of global new car sales.

What are the risks associated with this rapid growth in EV production?

Thomas Egli: Despite extensive testing, anytime you introduce a new type of vehicle, it is possible that not all the potential causes for official recalls or pure service campaigns will have been discovered. With EVs, a particular concern, of course, is the battery pack. For instance, EV manufacturers recently recalled more than 150,000 cars following more than a dozen reported fires. Although investigations are ongoing, media reports attribute the fires to “a serious defect… in the lithium-ion battery”.

Some of these EV fires got a lot of media attention and naturally caused people to question whether an EV is more likely than a gas-powered car to catch fire. Although the technology is still relatively new, the short answer, for now anyway, seems to be “probably not”. In fact, because EVs have far fewer moving parts, they may be less defect-prone and therefore safer.

In a study conducted in 2017, for instance, the US National Highway Traffic Safety Administration found that the risk of fires in EVs should be “somewhat comparable to or perhaps slightly less” than gasoline-powered cars. More recently, the German automobile association ADAC noted that “self-ignition of an electric car without external influence while driving, standing or charging due to a technical defect is extremely rare”. However, electrical fires are more difficult to fight and could spread more readily to adjoining vehicles or property. In fact, in one recent incident, the fire destroyed the owner’s garage and caused extensive damage to the home.

Also, and importantly, when a gasoline-powered car catches fire, it is almost always due to a gas or oil leak. These typically are isolated – although not infrequent – events that seldom lead to a recall. That is not the case when a defect in a lithium-ion battery causes an EV to catch fire. Thus, although the incidence of fires in EVs compares favourably to gas-powered vehicles, the implications for manufacturers are much more significant. And these are amplified when many companies rely on the same supplier for a critical component like battery packs.

What are some of the other challenges?

Peter Knaus: These recent battery-related recalls offer a glimpse into the risks associated with an operating model that relies on broad, shallow supply chains. Broad meaning that manufacturers depend on dense webs of primary, secondary and tertiary suppliers. Shallow in the sense, as Thomas noted, that many manufacturers use the same supplier for a particular material or component.

Now, suppose a manufacturer wants to quickly increase the production of a new type of vehicle. In that case, it also must find new suppliers capable of delivering a wide variety of materials and components.

With EVs, for instance, that could include companies supplying lithium-ion batteries to consumer electronics manufacturers. Undoubtedly, many of these are seeing the same estimates Thomas cited and are eager to be part of this exciting new market. However, although the technologies are fundamentally similar, the production processes are not the same. And as the manufacturer both implements new processes and scales up production, there could be a greater likelihood of quality control issues.

Although not specifically related to batteries, we saw some incidents like this during the pandemic. When country lockdowns prevented them from getting the materials or components they needed, many companies had to quickly line up new sources. And in some cases, the incidence of substandard materials or defective parts was significantly greater.

This also underscores the importance of taking the time to thoroughly evaluate new suppliers. I understand that the automotive industry is highly competitive – what sector isn’t? – and companies want to move quickly. But product recalls are costly and complex. The reputational risks also are considerable. That is why we always urge clients not to cut corners when assessing a new supplier. And to take appropriate mitigation measures, like requiring all tier one suppliers as well as their sub-suppliers to have product recall insurance covering the costs of removing and replacing the defective part.

Germany is now the second-largest market for electric cars and last year one in seven new cars had an electric or partially electric engine. This, combined with the sometimes challenging supply chain situation, has led many companies to invest in the local production and recycling of battery cells in Germany and other European countries.

How can you as an insurer help support this shift to EVs?

Thomas Egli: The automotive risk landscape is undergoing a massive transformation, given the pending change to EVs.

As the industry continues to transform, we need to work closely with clients, brokers and outside experts to develop relevant and appropriate solutions for managing and mitigating various risks. That, of course, will also require extensive collaboration internally and externally, and I look forward to helping (excuse the pun) drive that process. As a forward-looking partner to the automotive industry, we especially need to assess the overall lifecycle of EV batteries since those account for about 40% of the value chain. This requires detailed risk analyses and close collaboration between our clients and specialised risk engineers.

Peter Knaus: I would add that, as a leading global insurer, we also have an obligation to support all relevant efforts aimed at reducing CO2 emissions. Since transport currently accounts for about 30% of global CO2 emissions, a critical priority for automotive manufacturers is creating greener vehicles. Here in Germany, we are proud to have many clients that are part of the broad automotive ecosystem and, consistent with what Thomas just said, we too expect to support them in managing and mitigating the different risks they face, as we all striving to reduce carbon emissions.