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Electric vehicles not getting rightly depreciated, say insurers  

Electric vehicles not getting rightly depreciated, say insurers  

There are multiple issues that insurers are grappling with when it comes to motor insurance of electric vehicles (EVs). 

Currently, the depreciation rates for electric vehicles are the same as of Internal Combustion Engine (ICE) vehicles Currently, the depreciation rates for electric vehicles are the same as of Internal Combustion Engine (ICE) vehicles

There are multiple issues that insurers are grappling with when it comes to motor insurance of electric vehicles (EVs). One of the major concerns is to rightly depreciate the electric vehicle, as the cost of the battery is around 50 per cent to 60 per cent of the total cost of the car, which makes the treatment of depreciation bit tricky.  

Currently, the depreciation rates for electric vehicles are the same as of Internal Combustion Engine (ICE) vehicles. In a petrol or diesel engine, the engine lifetime is usually 10 to 15 years. But in the case of EVs, the average life of a battery is somewhere between 2-4 years.   

“A problem is that the traditional motor insurance has a defined schedule of depreciation that applies. The same depreciation schedule might not go true for the battery. The battery will probably depreciate much more rapidly than a traditional vehicle or traditional motor insurance tariff. So, when we are providing insurance for the electric vehicles, we need to take care of that aspect so that it is rightly depreciated and there is no loss to the customer as well as you are not inviting moral hazard against the insurance company,” says Adarsh Agarwal - Chief Distribution Officer at Digit Insurance.  

In India, EV sales accounted for barely 1.3 per cent of total automobile sales during 2020-21. But the market is expected to grow at an estimated CAGR of 90 per cent from 2021 to 2030 and be worth more than $150 billion by 2030, according to a report by RBSA Advisors, a transaction advisory firm.   

“The volumes are too low for anyone to comment on this. In motor insurance, we cover any loss to battery against accidental and Act of God perils. Electrical and mechanical failure is not covered. As we know, the battery is a critical part of an EV vehicle and it constitutes 60 per cent of the vehicle price including sensors. The result of this can be that a minor accident in which the battery gets damaged can result in constructive total loss,” said Raghavendra Rao, Chief Distribution Officer, Future Generali India Insurance. 

Rao further argues that currently it is the norm to apply 50 per cent depreciation on the battery component.  

“As EV does not involve mechanical parts, they have minimal effect on wear and tear. The depreciation issue in EV may get resolved once the insurers build up some volume of business it will be possible for actuarial evaluation,” he added.   

The issue seems pronounced as the depreciation rates are linked to the residual values, the material composition of the parts, among other things.  Rao points out further that, “As there is no engine many insurers are not providing these covers under the existing ‘Engine protect add on’ but battery and sensors may get damaged due to water ingress may need to be looked at differently.”  

In existing policies, there is no provision to incorporate a differential structure for the battery depreciation because the motor insurance product is fixed which is defined by the Insurance Regulatory and Development Authority of India (IRDAI). “We can't deviate from that or make changes in the depreciation schedule,” Digit’s Agarwal added. 

Separate premium rates for private EV third-party liability insurance cover were introduced by IRDAI in 2019. The premium rates are a 15 per cent discount compared to rates for ICE vehicles of similar categories.