Premium rates may rise if instances of EVs catching fire go up

Following the recent incidences of battery fires in electric vehicles (EVs), the underwriting model of the motor insurance policies may undergo changes, leading to a rise in premium rates, provided there is a significant jump in the frequency of such incidents. 

"The recent events would not force insurers to take any immediate action. Now is the time for collection and evaluation of data to improve underwriting models as we go along. Revision or increase of premium rates may be considered if the frequency of such instances (fire) goes up significantly," says Adarsh Agarwal, chief distribution officer - corporate business at Digit Insurance.

Questions about EVs' safety have risen after four cases of fire involving scooters from Ola Electric, Okinawa and Pure EV were reported.  The news of EV batteries catching fire has also raised alarm, with the government initiating a probe into these incidents.

"The electric vehicles, in fact, enjoy a lower third-party premium as compared to petrol and diesel vehicles. In terms of own damage premium, damage to the vehicle on account of fire is a covered risk and inbuilt in the price. Depending upon the experience of frequency of such incidents, insurance companies may revise the own damage premium in the future," says Rakesh Jain, CEO of Reliance General Insurance.

In India, the EV market is expanding and is expected to grow at an estimated CAGR of 90 per cent from 2021 to 2030 and will be worth more than $150 billion by 2030, according to a report by RBSA Advisors, a transaction advisory firm. But it is still a small market when compared to internal combustion engine (ICE) vehicles. In India, EV sales accounted for barely 1.3 per cent of total automobile sales during 2020-21.

"The current situation will definitely push OEMs (original equipment manufacturers) to evaluate their offerings and come up with sustainable solutions. Having said that, such instances have been far and few, especially given the number of EV two-wheelers plying on Indian roads today and therefore, it wouldn't change insurers' perspective immediately. Having said that, if such events go up in number, underwriting models may have to be re-looked at, and at the time of renewal of existing policies, premiums may see a change. Depending on the damage caused, OEM-issued warranty will also come into play during the initial years," says Agarwal.

There are multiple issues that insurers are grappling with when it comes to motor insurance for electric vehicles. Another major concern is to rightly depreciate the electric vehicle, as the cost of the battery is around 50 per cent to 60 per cent of the total cost of the car, which makes the treatment of depreciation a bit tricky.

"A problem is that the traditional motor insurance has a defined schedule of depreciation that applies. The same depreciation schedule might not go true for the battery. The battery will probably depreciate much more rapidly than a traditional vehicle or traditional motor insurance tariff. So, when we are providing insurance for the electric vehicles, we need to take care of that aspect so that it is rightly depreciated and there is no loss to the customer as well as you are not inviting moral hazard against the insurance company," Agarwal had said earlier.

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