Insurers Braced for Shocks From Electric Car Growth

The growth in the use of electric cars is set to be significant in the coming decade but will come with real challenges for insurers and the wider motor market.

Allianz Global Corporate & Specialty (AGCS), has published a new report which highlights the future of mobility is clearly electric, but the transition will lead to a fundamental change in risk for manufacturers, suppliers and insurers alike and will have a significant impact on automotive product liability insurance.

The publication “The Electric Vehicles R-EV-olution: Future Risk And Insurance Implications”, predicts the use of electric cars is expected to soar in future as their cost gradually declines, the choice of available new models likely doubles within five years, their driving range increases and consumers, as well as governments, demand greener low-emission vehicles. The International Energy Agency has predicted there could be more than 100 million electric cars on the roads in 2030 – up from around seven million today – with annual sales in the region of 20 million, driven by growth in China – already the world’s largest market – the European Union (second largest), Japan, Canada, the US and India, in particular.

“From supply chain networks to production processes to the product itself – the automotive industry will have to respond to many emerging risks to make the transition to electric vehicles happen,” says Daphne Ricken, Senior Underwriter Liability at AGCS. “The anticipated growth of electric cars brings the prospect of new defect or performance issues; more expensive repair costs; new fire and cyber threats; and even reputational issues around sustainable sourcing and disposal of critical components and raw materials for batteries.”

The insurer added while the coronavirus crisis may dampen the outlook for global electric car sales for 2020 and beyond, the anticipated long-term growth also brings a range of technical and operational risks, both from a product liability perspective and in a number of areas.

Tests conducted by the Allianz Centre for Technology Automotive (AZT Automotive) have shown that the high voltage components of electric cars are well-protected and will not be affected in most crashes. Statistical evaluation of Allianz claims also showed that electric vehicles are less likely to be involved in accidents today given they typically drive short distances with limited mileage overall. However, any damage sustained can be, on average, more expensive than for conventional cars.

“If the battery in an electric car has to be replaced, it can result in a total loss in many cases. In addition, the fact that they can only go to specialist repair shops can contribute to costs,” says Carsten Reinkemeyer, Head Of Vehicle Technology And Safety Research at AZT Automotive.

The report added battery life and performance are critical issues for electric cars. Given the high cost of replacement or repair of battery units, a failure to live up to performance guarantees will pose questions around liability for manufacturers and suppliers.

As with conventional vehicles, defective electrical components and short circuits can spark a fire, while lithium-ion batteries may combust when damaged, overcharged or subjected to high temperatures. High voltage battery fires can be very intense and difficult to extinguish and can also release high levels of toxic gases – such fires can take 24 hours or longer to control and be made safe. Due to the relative rarity of such fires to date, response and rescue services have limited experience of dealing with such incidents.

Interestingly, despite their green credentials, environmental issues can represent a potential liability and reputational risk for vehicle manufacturers and suppliers.

“A rapid uptake in electric cars will require manufacturers to source sustainable supplies of critical components and raw materials as they ramp up production,” explained the report. “For example, battery technology will drive a huge increase in demand for cobalt and lithium, outstripping current supply, lithium supply has been predicted to triple by 2025. Effective recycling and reuse of materials will therefore be essential. Environmental and social concerns will also put emphasis on the sustainable sourcing of minerals, as well as traceability and transparency of supply chains. High voltage batteries could also pose a pollution risk, if not properly disposed of.”

Electric cars are also likely to have increased connectivity and reliance on data, sensors and software, including artificial intelligence, to manage vehicle systems and aid driving. As with conventional vehicles, increased connectivity is likely to give rise to cyber vulnerabilities, including the threat of malicious attacks, system outages, bugs and glitches. There have already been product recalls in the automotive sector as a result of cyber security.

In terms of insurers, electric mobility will have many implications for the industry, in particular automotive product liability insurance, and claims, as technology creates new risks and exposures, and as liability shifts within the supply chain.

“Electric vehicles will consist of fewer but more integrated parts and components. What may have been three parts in a conventional car could be only one part in an electric car. However, the lower number of parts is increasingly connected through sensors and embedded software, adding a new layer of complexity and raising questions around how these parts interact and which producer or supplier is liable for a potential defect or faulty control,” Ms Ricken said. “The increased complexity of the automotive supply chain and the reliance on software and technology producers will lead to new exposures and split liabilities in the value chain.”

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