Daybreak - You can buy an EV in China. But can you afford to insure it?

Episode Date: December 30, 2024

*This episode was originally published on September 24, 2024Half of the world’s electric cars are on China’s roads, thanks to a wave of smart incentives for both consumers and manufacturers, such as tax breaks and purchase subsidies. The payoff is tangible: the smog that once shrouded some major cities has lifted, and road noise has dropped significantly.But it brought unexpected costs and challenges that nobody saw coming. Tune inDaybreak is produced from the newsroom of The Ken, India’s first subscriber-only business news platform. Subscribe for more exclusive, deeply-reported, and analytical business stories.

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, you've probably heard me, my interruptions, my analogies, and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too? It's for a special announcement. For the last few months, I and Sita Ramon, Ganesh, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

We want to tell the secret sauce stories of India's greatest companies. Stories of how they were born, how they fought to survive, how they build their organizations and culture, how they manage to innovate and thrive over decades, and most importantly, how they're poised today. To do that, Sita and I have been reading books, poring over reports, going through financial statements, digging up archives, and talking to dozens of people. And if that wasn't enough, we also decided to throw in video into the mix. Yes, you heard that right. Intermission has also had to find its footing in the world of multi-camera shoots in professional studios, laborious editing, and extensive post-production.

Sita and I are still reeling from the intensity of our first studio recording. Intermission launches on March 23rd. To get an alert as soon as we release our first episode, please follow intermission on Spotify and Apple Podcasts or subscribe to the Ken's YouTube channel. You can find all of the links at the ken.com slash I am. With that, back to your episode. When it comes to adopting electric vehicles,

China seems to have it all figured out. Just look at the stats. Half of all the electric cars in the world are currently in China. Now, is this because people in China just care about the environment more? Well, not exactly. We all know that China is the world's biggest carbon emitter. So the Chinese government over the years has been going all out trying to reverse that image. And a big part of that project has been EV adoption.

But the question then is how do you get millions of people to buy an EV over your conventional ice vehicle? Well, the answer is pretty obvious. subsidies, give them a better deal. So China went ahead and introduced a wave of incentives, not just for consumers but also for manufacturers. In the end, not only were more people buying EVs, more people were also making them. And that's how we got here.

China is now home to half of the world's EVs. There is a flip side to all of that. And that is that this has become an extremely competitive market in China, with hundreds of companies fighting for skin in the game and most of them failing. And that's just the manufacturers. People purchasing EVs are facing a whole other predicament. They are now facing unexpected costs and challenges

that no one really saw coming. The main one? Insurance. You see, premiums for insurance coverage for EVs carry, well, a premium. It can go up to 80% higher than a vehicle with an internal cover. combustion engine, your regular ice vehicle. So while that cost is initially offset by subsidies, the higher insurance payments often come as a huge surprise later on. As you would imagine, they can really add up. There are long-term expense that most people don't factor in while making that leap from fossil fuels to power cells. Now, the reason these premiums are higher is because

insurers are grappling with a rising number of claims and financial losses in this vertical. EV technology is associated with a whole other set of unique risks and complexities. And this isn't just a problem in China. It affects EVE owners everywhere. You see, globally, it costs about 20% more to insure an EV than a vehicle that burns petrol or diesel. And this is largely because of EV's high accident rates and difficulty to repair. In fact, the risks are so high that insurers are also starting to turn away EV owners. The result of all of this is people hitting reverse gear on their plans to switch to an ED.

It's as counterproductive as it gets. How did China get to this point? And can we get past this little speed bump? Welcome to Daybreak, a business podcast from the Ken. I'm your host, Rahil Philippos, and I'll be joining my colleagues Niktha Sharma every week to bring you one business story that is worth understanding and worth your time. Today is Tuesday.

A big reason behind the high EV adoption. rates in China is commercial fleets opting to switch to battery-powered vehicles. It isn't just consumers like you or me suddenly deciding that our cars need to be battery-powered. One stat states that in China, 87% of new ride-hailing cars were EVs as of 2023. Now, because commercial vehicles cover much longer distances and are used so frequently, they're also more prone to accidents. I'm sure you know where I'm going with this. because of these factors, insurers have a lot to lose. Repairing a collision damaged EVs tends to be much more difficult than repairing an ice vehicle.

The spare parts aren't as easily available and it also doesn't help that maintenance procedures for EVs aren't standardized. That's primarily why EVs are more expensive to insure. Significantly more expensive than insuring an ice vehicle. But of course, more and more people are still. buying EVs. So now the industry is facing immense pressure to temper the rising cost of EV insurance. The thing is, they are figuring it out as they go along. Because this type of insurance coverage, specialized commercial coverage, did not even exist until about 2021. These policies now offer specific protections for components like batteries, electric motors, chargers and control systems.

And this is a growing pillar for insurance companies in China. Evie insurance companies in China. EV insurance is now valued at around $14 billion and is expected to almost double by 2025. But despite these promising numbers, insurers are still losing money. And that's because income from premiums just isn't enough to cover payouts. So it makes it difficult for insurers to turn a profit. Now, many EV owners say that they've been denied coverage when renewing their policies. Others had to purchase additional products or pay higher premiums.

to keep their coverage. And very often, insurers don't have a clear explanation to offer. In some cases, vehicles with high mileage or those that have been the subject of multiple claims are outright rejected because insurance providers deem them too risky. But shake-ups are coming. For instance, the National Financial Regulatory Administration proposed changes to EV Insurance Rules in April. One statute called for an adjustment that would give insurers more

flexibility in setting premiums, allowing them to lower prices for safe drivers and charging more for those with riskier behavior. To keep pace with the evolving market, Chinese insurers are now rethinking their business models. More on that in the next segment. There are a bunch of automakers in China that have spotted a huge opportunity here. They're going down the Tesla route and launching their own insurance products. These companies like B-YD and Neo are using data. gathered from vehicles under the control of consumers to develop something called usage-based insurance or UBI, which analyzes individual driver's behavior to adjust pricing.

They are trying to undercut insurers. Meanwhile, major insurers are hopping on the bandwagon of using driver and vehicle data as they attempt to figure out how to make EV coverage profitable while bringing down costs for consumers. Take, for instance, the case of the case of, of private insurance companies, People's Insurance, Pingy Ann and China Pacific. I may be mispronouncing that, I apologize.

They have collaborated with an affiliate company of the Chinese conglomerate Alibaba Group and Group subsidiary and Insurance Agency. Through this partnership, they're able to ensure data sharing between insurers, automakers, retailers, and national big data monitoring platforms. Based on this, they're able to create

personalized policies based on a driver's profile, behaviors and vehicle. And it seems to be working. One such model was launched in May 2024. The head of Ant Insurance's EV Insurance Division said that adding data trackers offer differentiation, meaning lower premiums for 38% of customers, while 15% are classified as high-risk users and therefore make higher payments. So this is just one of the ways in which insurance policies can be designed

as the EV landscape continues to evolve. But of course, needless to say, there is a long way to go. As China pushes EV adoption into high gear, the challenges in the insurance sector are becoming increasingly urgent. Dynamic pricing models, data-driven insurance products, and collaborations between automakers and insurers that are being developed and piloted in the country will likely chart the cost for global insurance practices in the EV space.

Daybreak is produced from the newsroom of the Ken India's first subscriber-focused business news platform. What you're listening to is just a small sample of our subscriber-only offerings. A full subscription unlocks daily long-form feature stories, newsletters and podcast extras. Head to the ken.com and click on the red subscribe button on the top of the website.

Today's episode was hosted by Rahil Filippo's, produced by me, Snigda Sharma, and edited by Rajiv Sien.