The electrifying cost: how EV claims data is reshaping motor insurance pricing and reserving

Introduction: the silent revolution under the bonnet

The quiet hum of electric vehicles (EVs) is rapidly becoming a familiar sound on our roads, heralding a greener, more sustainable future for transportation. With governments pushing for electrification and consumer adoption accelerating, EVs are no longer a niche market; they are mainstream. Yet, beneath their sleek designs and efficient powertrains, a silent revolution is reshaping the landscape of motor insurance claims. This transformation presents actuaries with an electrifying challenge: how to accurately price and reserve for a risk profile unlike any before.

Initial optimism often suggested EVs might be cheaper to insure due to fewer moving parts and advanced safety features. However, emerging claims data tells a different story. This article will delve into how the unique characteristics of EV claims are driving increased severity, introducing complex reserving challenges, and demanding a fundamental re-evaluation of traditional pricing models. For claims professionals, understanding these actuarial shifts is not just academic; it empowers them to better manage costs, identify emerging risks, and contribute strategically to the financial health and future direction of motor insurance portfolios.

The severity unveiled: unpacking the higher cost of EV claims

While EVs boast impressive safety ratings and often incorporate cutting-edge Advanced Driver-Assistance Systems (ADAS), the reality of their repair costs is proving to be a significant differentiator. Traditional motor insurance models, built on decades of Internal Combustion Engine (ICE) vehicle data, are struggling to accommodate the unique cost drivers of EV claims.

Consider a seemingly minor rear-end collision involving an EV. In an ICE vehicle, this might result in a bumper replacement and some cosmetic work. For an EV, the scenario can be dramatically different.

Now, let us delve into this challenge, assessing the following case scenario:

The undetected battery damage dilemma: a claims professional receives a first notification of loss (FNOL) for a low-speed rear-end impact on an EV, with initial visual assessment suggesting only minor bodywork damage. The critical issue here is the potential for underlying battery damage, even if not immediately visible. Failure to identify and properly assess this early could lead to significant cost escalation later in the claim lifecycle.

Implications for pricing and reserving:

• Pricing: such scenarios drive a significantly higher average claims severity for EVs, necessitating higher premiums for comparable damage types.
• Reserving: the increased likelihood of total loss impacts total loss frequency and severity assumptions, requiring higher initial case reserves. Claims professionals’ early, accurate assessment is critical for setting appropriate reserves.

This issue is compounded by:

• Specialised parts and labour: EVs utilise unique components – from power electronics and high-voltage cabling to bespoke charging ports. Sourcing these parts can be challenging, leading to delays and higher costs. Furthermore, the scarcity of technicians certified to work on high-voltage EV systems means labour rates are often higher,  repair slots are limited and EV repairs often require manufacturer-approved repair shops due to warranty constraints.
• ADAS integration: EVs are typically laden with sophisticated ADAS features. A seemingly simple bodywork repair can escalate significantly if it requires the recalibration of multiple sensors, cameras, and radar units integrated into bumpers, windscreens, and side mirrors.

These real-world scenarios demonstrate that the ‘cost per claim’ for EVs is often substantially higher than for ICE vehicles, which in turn necessitates adjustments to traditional premium calculations by insurers.

Reserving for the unknown: the actuarial challenge of EV claims

The increased severity of EV claims naturally leads to greater volatility and uncertainty in actuarial reserving. Traditional reserving methods, which rely heavily on stable historical claims development patterns, find themselves on shaky ground when confronted with the nascent and rapidly evolving EV claims landscape.

The limited historical data for EVs means actuaries have fewer benchmarks to predict ultimate claims costs accurately. This creates significant challenges.

Let us assess this through the following case scenario:

Managing the extended claims lifecycle: a claims professional is managing an EV claim where the vehicle has been off the road for several months due to a global shortage of a specific battery module and the complex diagnostic process required. The professional’s challenge is to proactively manage customer expectations, hire car costs, and regularly update the reserve, knowing that the claim’s lifecycle is significantly longer than for an ICE vehicle.

Implications for pricing and reserving:

• Reserving: such extended durations make it harder for actuaries to estimate Incurred But Not Reported (IBNR) reserves, as the ‘tail’ of claims development becomes longer and less predictable. This directly impacts the accuracy of financial reporting and capital requirements.
• Pricing: longer claims durations can indirectly influence pricing through increased claims handling expenses and potential for higher hire car costs.

Furthermore, the potential for high-severity outcomes means individual case reserves for EV claims often need to be set significantly higher than for comparable ICE claims. A claims manager might set a substantial initial reserve for an EV with suspected battery damage, even before full diagnostics, due to the known high cost implications. This conservative approach is necessary but can tie up capital if not managed with precision.

It’s also important to recognise that frequency isn’t driven solely by traditional accident risk – new and evolving exposures are emerging as EV adoption grows. For example, incidents like electrical surges during home or public charging can lead to unexpected claims, while behavioural factors such as overconfidence in advanced driving support systems or owner errors as drivers adapt to unfamiliar technologies may also contribute to claim frequency. These new risks add further complexity to reserving and pricing, underscoring the need for actuaries and claims professionals to stay alert to patterns that don’t have ICE equivalents.

Finally, the end-of-life management for damaged EV batteries presents a unique challenge. The costs and environmental regulations associated with safely disposing of or recycling large, high-voltage battery packs can significantly reduce the salvage value of a written-off EV. This impacts the net cost of claims for actuaries and adds another layer of complexity to reserving. Claims professionals must be aware of these disposal complexities and their impact on salvage values when assessing total loss claims.

The imperative for bespoke pricing: crafting EV-specific models

Given the distinct claims profile of EVs, simply adjusting existing ICE pricing models is no longer sufficient. Actuaries are increasingly recognising the imperative for bespoke pricing models that accurately reflect the unique risks and costs associated with electric vehicles. This shift toward bespoke pricing also extends to underwriting. Where claims data reveals persistent challenges – such as brands with scarce parts or limited repair networks – insurers may need to consider tighter underwriting criteria. This could include higher premiums, stricter acceptance standards, or even declining to underwrite certain models. Such selectivity is a rational, data-driven response to managing portfolio risk.

Traditional pricing models often rely on factors like engine size, fuel type, and vehicle value. For EVs, these factors are less relevant or even misleading. Instead, actuaries need to incorporate new, granular data points directly informed by claims experience.

Let us consider the following case scenario:

Identifying model-specific risk factors: a claims professional observes a recurring pattern of battery-related incidents in low-speed impacts for a specific EV model, leading to disproportionately high repair costs. The professional’s challenge is to ensure this granular insight is captured and communicated to actuarial teams, as it represents a critical model-specific risk factor that could significantly impact pricing accuracy.

Implications for pricing and reserving:

• Pricing: this granular claims data is essential for actuaries to build accurate EV pricing models, differentiating between EV makes and models based on battery capacity, battery chemistry, and ADAS features.
• Reserving: more accurate pricing leads to a healthier portfolio, which in turn supports more stable and predictable reserving.

Other key pricing factors for EVs include:

• Repair network access: pricing could reflect an insurer’s access to certified EV repair networks, as this directly impacts cost management. Claims professionals must actively manage and report on the performance and availability of these specialised networks.
• Evolving risk factors: Future pricing models might even consider factors like typical charging habits or the availability of charging infrastructure, as these could influence claims frequency or severity. Claims professionals are uniquely positioned to identify these emerging patterns.

The critical link here is the claims data. Without granular, well-documented claims information on repair costs, parts availability, labour rates, and claims duration for EVs, actuaries are operating in the dark. Claims professionals, through their meticulous recording and communication of these details, provide the essential raw material for building accurate and competitive EV pricing models.

The path forward: collaboration and innovation

Navigating the electrifying cost of EV claims requires more than just new actuarial models; it demands a fundamental shift in how claims and actuarial teams collaborate. Claims professionals are the ‘eyes and ears’ on the ground, witnessing the unique challenges and cost drivers of EVs firsthand. Their insights are invaluable.

• Bridging the gap: seamless communication channels are vital. Regular forums where claims professionals can share emerging trends, specific case scenarios, and cost breakdowns with actuaries can provide critical qualitative and quantitative data that might not yet be captured in traditional data warehouses.
• Enhanced data capture: claims systems must evolve to capture granular EV-specific data points – not just the cost of repair, but the cost of battery replacement, specialised labour, ADAS recalibration, and the reasons for extended repair times. This detailed information is the lifeblood of accurate actuarial analysis.
• Continuous learning: the EV landscape is evolving at a breakneck pace. New battery technologies, vehicle designs, and repair methodologies are constantly emerging. Both claims and actuarial teams must commit to continuous learning, monitoring industry developments, and adapting their strategies accordingly.
• Proactive EV sector targeting: insurers should actively target the electric vehicle sector with tailored products and pricing, supported by bespoke claims processes. This includes establishing dedicated pathways for vendor alignment, streamlined part sourcing, specialised claim analysis, and customised reserve setting. Such measures enable insurers to efficiently manage the unique risks and cost drivers of EVs, positioning themselves competitively in a rapidly evolving market

For claims professionals, actively documenting unique EV claims characteristics, providing detailed cost breakdowns, and communicating emerging trends to their actuarial counterparts is no longer just good practice – it’s a strategic imperative. Their operational insights directly inform the financial health of the motor insurance portfolio, ensuring that pricing is fair and competitive, and reserves are robust.

Conclusion: electrifying opportunities

The rise of electric vehicles presents both significant challenges and electrifying opportunities for the motor insurance industry. The increased severity of EV claims, the complexities they introduce to reserving, and the imperative for bespoke pricing models are undeniable. However, for insurers who embrace collaboration, invest in granular data capture, and foster a culture of continuous learning between their claims and actuarial functions, these challenges can be transformed into a distinct competitive advantage.

By understanding and proactively responding to the unique ‘electrifying cost’ of EV claims, we can ensure the motor insurance industry remains resilient, innovative, and ready for the road ahead.

At KPMG, we assist insurers in managing the interplays between claims, reserving, and pricing/underwriting disciplines by providing advanced analytics, strategic advisory services, and technology solutions. Our team works with clients to develop integrated frameworks aiming for consistency and efficiency across all aspects of the insurance value chain. Through our solutions, insurers may achieve improved accuracy, transparency, and agility to navigate a changing market environment