Insuring EV risks

The latest report from the Insurance Council of Australia (ICA), titled Charging Ahead: Electric Vehicles & Insurance, emphasises a crucial ten-year period for the insurance industry to support the transition to electric vehicles (EVs).

The report delves into key issues, including battery fires, safety regulations, and challenges faced by insurers in covering EVs. It also addresses the higher insurance costs for EV owners compared to those with petrol or diesel vehicles, a gap the industry is aiming to reduce. 

Battery fires

The ICA predicts that EVs could account for anywhere from 72–99 per cent of Australia’s new vehicle sales by 2050 – a significant increase from the seven per cent recorded in 2023 and eight per cent in the first five months of 2024 – which has highlighted the growing importance of properly managing risks related to EVs.

While the risk of battery fires is low, they are difficult to extinguish, meaning they carry significant implications for both personal and commercial insurance sectors, encompassing auto, property, and other insurance types, depending on the fire’s location.

Instances of EVs catching fire in home garages, public parking facilities, or at dealerships and repair sites pose a notable risk of damaging structures and nearby properties. 

Data indicates that road-registered EVs do not pose a higher fire risk compared to traditional internal combustion engine vehicles. However, in the event of EV battery fires, a different approach is required, potentially necessitating more time, resources, and water to manage the incident. 

The challenge stems from lithium-ion batteries, which serve as a potent fuel source that can sustain fires for hours before being fully extinguished, posing a substantial challenge for firefighters. 

The ICA stresses the importance of investing in research and training for first and secondary responders to ensure the safety of individuals and the environment in EV incidents. Comprehensive training for first responders such as fire, police, and paramedics, as well as secondary responders like tow trucks, salvage yards, and recycling facilities, is vital to equip all involved parties with the necessary knowledge and skills to effectively handle such situations. 

In addition, the ICA sees educating consumers on safe EV maintenance and handling as essential, including guidance on how to safely charge and maintain their vehicles and protocols to follow in the event of an accident or fire involving their EV. 

Safety regulations

When assessing the risks associated with EVs in Australia, insurers consider current safety regulations, testing procedures, and technical specifications for both EVs and their charging infrastructure.

These include non-mandatory regulations for EV charging infrastructure, specific Australian Design Rules (ADRs) related to high-voltage electrical components, and guidelines outlined in the National Construction Code (NCC) that establish minimum requirements for EV charging in new developments. 

As the market evolves and new EV charging technologies emerge, the ICA aims to promote collaboration among insurers, the EV industry, first responders, and regulatory bodies to strike a balance between ensuring safety and adapting to new risks and technologies without imposing unnecessary burdens on stakeholders. 

Insurance costs

A significant factor influencing insurance premiums for EVs is their higher purchase price compared to internal combustion engine (ICE) vehicles.

The greater initial cost of acquiring an EV leads to higher insurance expenses. However, as EVs become more prevalent, increased competition is driving down prices.

Another consideration is the cost of repairs for EVs, which has been found to be higher and more time-consuming than for ICE vehicles.

Studies indicate that repairing an EV can cost up to 25 per cent more and take 14 per cent longer than fixing the equivalent ICE vehicle.

Factors contributing to these higher repair costs include the specialised and costly technology and parts used in EVs, the need to import parts for repairs, limited aftermarket replacement options, and a shortage of trained EV technicians in Australia. 

Furthermore, the scarcity of service centres capable of handling EV repairs may necessitate transporting vehicles long distances for servicing, further increasing costs. Inflation and disruptions in the supply chain also contribute to the overall expense of repairing EVs. 

The ICA has shed light on the complexities surrounding battery repair and recycling for EVs, highlighting key challenges and potential solutions in a recent report. The cost of replacing EV batteries, ranging from US$5000 to US$20,000 (AU$7,500 to AU$30,000), poses a significant financial burden, amounting to up to 40 per cent of the EV’s total value. This high cost often leads to a trend of replacing the entire vehicle rather than repairing the battery packs after collisions. 

Consumers seeking cost-effective options can explore the second-hand EV market, where prices start at around $10,000, significantly lower than new EVs.

However, insuring second-hand EVs comes with considerations highlighted by the ICA; for example, imported EVs, known as ‘grey imports,’ may pose additional risks due to warranty and support challenges, leading to potential issues with compatibility with local charging infrastructure and missing crucial software updates that can affect performance and efficiency.

Insurers must consider these factors when insuring second-hand EVs to ensure comprehensive coverage that addresses the unique challenges associated with imported vehicles. Regular battery testing remains crucial to monitor the condition of batteries and maintain consumer confidence in the reliability of second-hand EVs. 

Moving forward, the ICA report recommends that state governments revise laws related to written-off vehicles to allow more vehicles, including EVs, to be repaired instead of scrapped.

There is currently inconsistency in how these laws are applied, with New South Wales having particularly strict regulations. Revising these laws is vital for enhancing the circular economy and fostering the growth of the second-hand EV market in Australia by increasing supply and thereby reducing prices.