CHINA’S rapid adoption of new-energy vehicles (NEVs) is posing a problem for many insurers in the country. They are losing money on insuring the vehicles, as strict pricing rules mean they cannot raise their premiums to the point of profitability. This is despite already charging far more to insure NEVs.
The SU7, Chinese tech giant Xiaomi’s debut NEV, retails for 215,900 yuan (S$39,873). However, getting it insured costs around the same as for a combustion-engine vehicle more than twice its price. This is more or less standard, as NEV owners are about twice as likely to file a claim, according to data provided by LexisNexis Risk Solutions.
Risky business
Insurers’ gauge of NEVs’ risk probability – a policyholder’s likelihood of filing a claim in a year – is higher than for traditional fossil-fuel cars.
Liu Shulin, president of the CIRI Auto Technology Institute, a research institute specialising in insurance-related car technology, cited several reasons for NEVs’ elevated risk probability in an April article.
One reason is that NEVs can accelerate significantly quicker than traditional cars. Liu pointed out that a Tesla Model 3 can hit 100 km per hour in just 4.4 seconds, nearly twice as fast as a similarly priced BMW combustion-powered car.
Another reason is that NEVs, particularly their batteries, are expensive to repair. Some NEVs can only be repaired by their manufacturers instead of general auto repair shops, pushing up costs.
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Liu also cited the widespread adoption of NEVs in the ride-hailing industry – which means they are being driven far further per year, piling on extra risk and wear.
Some NEV owners are finding that they’re simply judged to be too risky to insure. Some road-tripping NEV drivers have complained that they could not renew insurance policies on their NEVs because their vehicles covered more than 20,000 km in the previous year. That works out to an average of more than 54 km per day.
Pricing premiums
As at the end of last year, around 4.7 per cent of the vehicles on China’s roads were NEVs, but they accounted for more than 8 per cent of automotive insurance premiums, according to industry data.
China’s number of insured NEVs soared from around seven million in 2021 to over 20 million in 2023, with their total premiums skyrocketing from more than 30 billion yuan to almost 100 billion yuan.
Despite this, insurers are usually losing money when they insure NEVs. Their loss ratio – which measures the ratio of losses, including paid claims and other related expenses, compared with premiums earned – is higher than for traditional vehicles. NEVs’ combined ratio, which is calculated by adding an insured item’s loss ratio and expense ratio, is usually higher than 100 per cent.
The higher the reading, the less profitable insuring an item becomes. A reading above 100 per cent means that the insurer that offers the policy will lose money on it. The expense ratio includes the insurer’s operating costs, such as management expenses and marketing costs.
The combined ratio for household NEVs normally stands between 105 and 110 per cent, and that for ride-hailing NEVs is roughly between 120 and 130 per cent, according to a source who works in car insurance at a midsize property insurance company.
The reading is much higher for new-energy trucks, usually between 140 and 150 per cent but can go up to above 200 per cent, the source said.
Regulatory roadblocks
Usually, insurers would avoid making money-losing deals. However, government support for the NEV industry makes this a challenge.
Guidelines on promoting the development of green insurance, issued by the National Financial Regulatory Administration (NFRA) in April, require insurers to proactively provide insurance coverage for NEVs. The aim is to help the country reach its goals of achieving peak carbon emissions by 2030 and carbon neutrality by 2060.
One solution is for insurers to simply raise their premiums until they could start turning a profit. But China’s current insurance rules prevent this.
Automotive insurance premiums in China are influenced by an autonomous pricing coefficient. A higher coefficient results in a higher premium.
The autonomous pricing coefficient is in principle determined by the insurer based on a number of factors, including the model of the vehicle and the insurance firm’s own bargaining power. But regulators have imposed a ceiling on this coefficient, which isn’t high enough for insurers to make a profit from NEVs.
Reforms that allow insurers greater latitude in setting their autonomous pricing coefficient when pricing NEV insurance products, recently proposed by the NFRA, China’s top financial regulator, could be a solution. The reform would lower the floor of the coefficient and raise its ceiling, granting insurers more flexibility to charge higher or lower rates.
If implemented, this could lead to lower premiums for low-risk NEVs and pricier premiums for high-risk ones, such as those used for the ride-hailing business, industry insiders said. On average, NEV insurance premiums are expected to go up marginally, they said.
Insurers’ autonomous pricing coefficients on certain models produced by XPeng and BYD may go up under the new mechanism, a car insurance specialist in a major property insurance firm told Caixin. That is because XPeng vehicles’ loss ratios are high, and some BYD NEVs are widely used for ride-hailing, according to the specialist.
Multiple industry insiders warn that the new upper limit of the autonomous pricing coefficient is not sufficient to cover all high-risk vehicles. Some suggest that the cap should be removed, so insurers will not keep losing money on NEV insurance products, and NEV owners will not be turned away when they want to renew plans. CAIXIN GLOBAL
