Electric Vehicles Not Getting Rightly Depreciated, Say Insurers

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One of the most noticeable and key differences between fuel-powered cars and electric vehicles may be the rechargeable battery pack. Electric vehicles (EVs) do not use a fuel-powered engine but rather rely on energy stored in rechargeable batteries.

If your vehicle depreciates in value, having electric vehicle insurance could save you from facing financial trouble. However, the depreciation of EVs can be a debatable issue.

Insurers are facing several challenges in providing coverage for electric vehicles (EVs). Since the cost of the battery accounts for about half to two-thirds of the entire cost of the automobile,  correct depreciation of electric vehicles can be a big concern. This makes the depreciation treatment somewhat complex.*

The rate for depreciation on electric vehicles in India is currently the same as those for Internal Combustion Engine (ICE)  vehicles. There is typically a lifespan of 10 – 15 years for a gasoline or diesel engine. But for electric vehicles, a battery typically lasts two to four years after which a replacement is required.*

Traditional auto insurance, however, has a set depreciation schedule that might cause problems. It is possible that the battery may not follow the same depreciation pattern. The battery’s value is likely to decrease at a faster rate than that of a standard car. So when insurers provide electric car insurance, they need to take care that the customer doesn’t lose money and the insurance company doesn’t face moral hazard.*

In general auto insurance, mechanical and electrical breakdowns may not be covered. In electric vehicles, the battery is a vital component of an electric car, accounting for sixty per cent of the vehicle’s cost, including sensors. As a result, a minor collision in which the battery gets destroyed may result in a constructive total loss. Hence, applying a 50% depreciation rate to the battery component may be currently customary.*

In 2020-21, only 1.3% of all vehicles sold in India were electric vehicles. However, a report by RBSA Advisors, a transaction consulting business, projects the industry would develop at an anticipated CAGR of 90% from 2021 to 2030 and may be worth more than $150 billion by 2030. *

EVs lack mechanical components because of which their impact on wear and tear may be low. Once insurers reach a certain volume of business in electric vehicle insurance, an actuarial review may be possible, which might eliminate the depreciation problem with EVs.*

The depreciation rates are linked to residual values and the material composition of the parts, among other factors, the issue appears to be significant. Since there is no engine, many insurers do not provide these coverages under the existing ‘engine protect add-on’ Still, the battery and sensor damage due to water infiltration may require a new approach.*

Furthermore, because the motor insurance product is fixed, as specified by IRDAI, there is no provision for incorporating a differential structure for battery depreciation in existing policies. At present, insurance companies have no way to break from this or adjust the depreciation plan.*

IRDAI introduced distinct premium rates for private EV third-party liability insurance coverage in 2019. Compared to rates for ICE vehicles in similar categories, the premium rates are 15% less expensive.*

* Standard T&C Apply

‘Insurance is the subject matter of solicitation. For more details on benefits, exclusions, limitations, terms, and conditions, please read the sales brochure/policy wording carefully before concluding a sale. ‘

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