The bumpy road to the
electric r-ev-olution

“The automotive industry is hurtling toward a future that will change transportation the same way electricity changed how we light the world,” wrote General Motors (GM) President Mark Reuss in an Op Ed for CNN Business [1].  Reuss was making it clear that the primary question surrounding the transition of BEVs into the mainstream was “when” and not “if”.

Indeed, the race is already well underway for manufacturers, with legacy car brands throwing themselves into multimillion dollar partnerships with electronics and battery experts. Whether it is Volkswagen and Swedish battery-makers Northvolt, Toyota and Panasonic, or even GM themselves and their $2.3bn cooperation [2] with South Korean tech giant LG, the electric revolution is coming. The auto industry is banking on it.

With so much skin in the game, some insurers and industry experts are looking at the rapid shift to BEVs with some trepidation.  While the concept of an electric-powered vehicle is far from new (see below), its widespread adoption is. And it seems that outside factors have as much to do with this as advancements in the technology. “Political promises and targets are certainly influencing the market,” says Harald Wuesteney, Liability Risk Consultant at AGCS. New legislation such as the EU’s 2030 carbon dioxide emissions limits aims to push manufacturers and suppliers into the technology. “We will see a rise in BEVs over the next few years. Insurers and manufacturers alike must adapt and welcome the transformation to a carbon-neutral economy,” says Wuesteney.

While 2020 is set to be a landmark year for BEV sales – over one million are expected to be sold in Europe alone [3], contributing to the rapid growth of a market forecasted to reach 8.4 million sales globally by 2025 [4] – there are still concerns about how legacy car brands will transition into the new market. “From production processes to the supply chain – as well as the product itself – the automotive industry is having to evolve, which creates new exposures along the value chain – from data quality to operational transparency to just-in-time manufacturing to more obvious things like the weather and cyber-attacks,” says Daphne Ricken, Senior Underwriter Liability at AGCS.

Insurers are supporting the automotive industry, whether it be for traditional manufacturers with very complex supply chains and numbers of components, to BEV manufacturers, with slightly less complex mechanics but equally complex supply chains, with a full-range of property, third-party and products liability, marine, financial services and other insurance products. Although exposures and responsible parties may shift somewhat, as we will see, most insurance products will be available for BEV exposures. In time, new products are likely to be introduced to cover specific BEV exposures.

With a battery-powered vehicle, motorists get the benefit of no refueling costs and zero exhaust emissions and with many BEVs now capable of over 300 miles driving range from a single charge, “range anxiety” – the fear that the BEV will run out of power before the next charging possibility – has lessened. However, battery life before replacement is still a significant issue for manufacturers. “Manufacturers are pushing their suppliers to develop new batteries with ten to 12 year or even lifetime guarantees,” says Andreas Bemm, Senior Risk Consultant at AGCS.

Other conditions, such as the climate of where the vehicle is situated, could play a part in the battery’s longevity, as studies have shown that batteries need more frequent charging if exposed to extreme temperatures [5]. The potential failure to live up to the promised battery warranty period exposes the question of liability – namely, who is responsible if batteries underperform? How easily can parts be dismantled and reinstalled? With potentially high costs, determining liability can be a point of friction between the supplier and the manufacturer. With the possibility of numerous BEV batteries falling short of their warranty period, manufacturers could be impacted. “If the defective part in the battery pack can be clearly identified, the liability then will fall back to the supplier or sub-supplier of the defective part,” says Wuesteney, “However, if this cannot be proven, the issue of replacing and disposing of the battery pack would then stay with the car manufacturer.”

The increased complexity of the supply chain, new products and manufacturing processes will lead to split, reallocated or newly-created risk exposures within the value chain. Those developments need to be evaluated and rated by insurance underwriters but they will also

constitute a confusing environment which will increase claims complexity. Therefore, insurers have to review and foster their claims-handling abilities and processes to be able to manage the risk evolution caused by BEVs. Additional aspects to bear in mind are compliance (contract certainty), process design, quality and management, including documentation that will be vital to be able to determine triggering and affected parties and allocate responsibilities accordingly.

The specific insurance implications start with liability coverages – most importantly, products liability. New uses for BEVs in which batteries are put to different applications, such as a dynamic environment like a sports car, confronted with G-forces and ground shocks while being driven, or different day-to-day uses, where the usual mode of operation will be challenged, are just a few examples of their impact. “A concern for insurers is the lack of real data regarding the rate degradation – the speed at which a battery’s capacity declines – of the battery’s life span,” says Bemm.

More combined parts for new applications will impact manufacturers. For example, BEVs will generally have fewer parts than current motorized vehicles, but these will be combined more so that three separate parts today may become one part tomorrow. How they are combined will play an important role when assessing exposures. And while the number of sub-products will be reduced in BEVs, more microproducts will be available, each probably designed and produced separately.

"While the individual components are simple to insure, the uncertainty comes in the form of how the different parts interact in the battery, and how difficult it is to identify separate components within each part when a defect is found," says Wolfram Schultz, Global Practice Leader Heavy Industries & Manufacturing, AGCS.

Other, non-technical issues, such as contractual mismatches in various stages within the product chain, further complicate matters for insurers. 

 “Liability is a moving target,” adds Ricken. “The transition to electric vehicles shows again how we constantly have to be on top of new legal and technical environments.”  

Existing hardware used differently may also have liability implications. For instance, new production processes – like 3D or 4D printing established hardware pieces – may change the characteristics, impacting liability responsibility. Or new untested applications could create a new exposure, as could the day-to-day evolution of products like sensors, which will be “smarter” than in the past. 

Besides products liability exposures, other insurable risks will be third party cyber-risks resulting from increased data volumes and connection requirements; professional indemnity (PI) risks due to morphing pure products with embedded software; errors and omission (E&O) risks for suppliers who manufacture small batches of products; fire and explosion, toxic fumes or contamination risks related to the handling of lithium ion (Li-Ion) batteries; and employers liability risks due to toxic fumes, fire risks and heat exposure to 3D and 4D printing processes.

Other exposures apart from liability will be property insurance due to fire; marine insurance due to handling, labeling and special transport requirements of Li-Ion batteries; first-party cyber insurance due to the immense amount of data-handling by manufacturers or suppliers; product guarantee insurance related to product life-cycles; and credit insurance related to the change of suppliers within the supply chain.