China’s new energy vehicle (NEV) market has grown fast in recent years with about one in three automobiles sold in the country last year an NEV, according to data from China Association of Automobile Manufacturers.
This sizable market should be a boon for motor insurers in China. However, a recent report by Moody’s finds that the growing insurance premiums from NEVs do not necessarily mean growing profitability. On the contrary, the report points out that motor insurers will face challenges of limited underwriting margins in the short term due to hard-to-adjust premium prices and mispriced risk; and, as a result, they need to update the existing car insurance model to secure their positions and profit in the expanding NEV market.
The strong growth of China’s NEV market has benefitted from a national policy push on green transition. China’s government has set a target for NEV sales to reach 45% of all auto sales domestically by 2027, up from the 31.6% in 2023.
Over the last decade, the government has prompted consumers to purchase NEVs through a series of preferential policies, such as price subsidies and tax exemptions, which has translated into high double-digit annual growth rates for NEV sales over the period.
Along with this, there has been an increase in NEV insurance underwritings. A report led by the Institute of Digital Finance at Peking University and Tencent Research Institute found that in 2023, NEV premiums reached 100 billion yuan (US$14.04 billion), accounting for 11.5% of total automobile premiums, up from only 0.2% 10 years ago. NEV premiums have also significantly outgrown those of the internal combustion engine (ICE) vehicles.
Nevertheless, Moody’s says the growing insurance premiums from NEVs could mean a thinner margin for China’s motor insurers for several reasons.
Profits vs premiums
The big question is, why haven’t profits grown with premiums? First, NEVs tend to have a higher accidental rate than ICE vehicles. The power systems for NEVs are intricate and vulnerable – susceptible to damages even in minor collisions. Repairment of some parts, such as batteries, is also more complex because of the specialized supply chains and the required technicial expertise involved. Despite insurers charging higher premiums for NEVs, many insurers may incur increased losses from the more frequent claims.
In addition, insurers in China cannot increase insurance prices for NEVs at will. In fact, China’s insurance industry is strictly regulated with the NEV insurance pricing formula determined by financial regulators; and insurers can only adjust for certain factors in the formula, resulting in a capped premium being charged. As the NEV market keeps growing, regulators are now considering whether to loosen or do away with the limiting factors in the formula and allow for more pricing autonomy for insurers.
Moreover, insurers face a data insufficiency problem in the premium actuarial. Regulations dedicated to NEVs were only launched in late 2021, a situation that equates to insurance price estimations lacking an extensive track record and being subject to risk mispricing. The risk is further complicated by the fact that many commercial use cars are being misclassified as home use ones.
In China, many people will buy NEVs to run ride-hailing businesses because they are cheaper and the charging costs are lower than the petrol costs would be if they were using an ICE. In 2023, over 80% of ride-hailing cars were NEVs, according to China Passenger Car Association data. Ride-hailing cars deteriorate faster due to their more intense use and are more prone to accidents, so their premiums should logically be higher.
However, for cost-saving purposes, buyers will often register their cars as being for home use, but use them for ride hailing. Current regulation has no specifications on this, and insurers can only choose to charge a higher fee in the second year if they determine that the vehicle is being used for ride hailing.
Solving the conundrum
Facing all these challenges, Moody’s points out motor insurers in China need to increase their technical know-how and expand their dataset to cover both vehicle- and driver-related data. For example, insurers need a deeper understanding on NEV performance metrics, such as vehicle fire rate, and gather more such data by collaborating with NEV parts suppliers. Similarly, insurers may need to cooperate with ride hailing platforms to gather more driver-related data to alleviate the mis-categorization problem.
Because data is core to insurance pricing, NEV manufacturers have a unique advantage should they choose to enter into the insurance business themselves. In fact, some famous Chinese NEV brands, such as BYD, NIO and Xpeng, have established their own insurance brokerage firms or acquired such firms to enhance the insuring capabilities of their own cars. Though they are not likely to compete with established insurers on NEV underwriting, they can shed light on the future direction insurers should take to deepen collaboration on data sharing.
Finally, incumbent insurers should consider updating their business models by expanding their NEV repair networks. Currently, insurers are highly reliant on franchised repair shops endorsed or owned by NEV makers, which are more costly. Therefore, cooperating with more repairing shops can help insurers reduce reliance on existing repair service providers and, hence, reduce costs. Alternatively, insurers can collaborate with NEV manufacturers to bargaining for lower spare part prices.
These ex-ante and ex-post solutions for better NEV insurance pricing should help insurers to seize the opportunity from China’s growing NEV market, whose compounded average growth rate is estimated to be around 20% in the next five years, according to market research consultancy Frost & Sullivan. That said, large insurers are in a more advantageous position, while small and medium insurers need to be more vigilant so as not to miss out on the profits.
