Could California’s EV Adoption Goals Raise the Cost of Car Insurance?

California has ambitious plans to completely phase out the sale of new non-EV vehicles over the next decade, but what does that mean for drivers’ pockets in the state? Starting in 2026, California will embark on a plan to phase out the sale of gas-powered passenger vehicles, with a goal to transition to 100 percent EV sales for new vehicles by 2035. 

While EVs are becoming more affordable to purchase, they still cost significantly more to insure than non-EVs. When considering average rates for these vehicles, Californians may be in for sticker shock when they go to buy their first one.

It’s no secret: living in California is expensive. The state trails Hawaii with the second-highest cost of living in the U.S. in 2024. But auto insurance — one of the most important expenses in the average American’s budget — has long been something of an exception to the steep cost of living in the Golden State. Thanks to strict pricing regulations, California auto insurance premiums don’t trend too high above the national average; this might be about to change. 

California plans to phase out the sale of gas-powered vehicles by 2035

In 2022, the California Air Resources Board (CARB) approved a rule to codify the zero-emission vehicle (ZEV) adoption measures set out in Governor Gavin Newsom’s Executive Order N-79-20: a plan to phase out the in-state sale of all gas-powered passenger vehicles by 2035. The rule — part of California’s larger efforts to fight climate change and reduce dependence on fossil fuels — sets California auto dealers on a path to selling 100 percent electric and plug-in hybrid vehicles in the next decade.

While the target seems ambitious, California’s already well on its way to being the EV capital of the nation. Data from the Department of Energy shows that as of December 31, 2023, California accounted for 35 percent of all electric vehicle registrations nationwide, with a total population of approximately 1.2 million EVs. And that number is growing: according to the California Energy Commission, 2024 has already seen 343,213 new zero-emissions vehicle sales, making up 25.4 percent of the new vehicle market as of the third quarter of 2024. 

In other words, that 35 percent target for 2026 isn’t too far off. But are Californians ready to shoulder the costs of EV adoption? 

How California’s ambitious emissions goals could impact the cost of auto insurance

In a press release from August 2022, CARB highlighted consumer savings as a potential benefit of the switch to zero emissions vehicles, pointing out that EV owners can save significantly on both fuel and maintenance.

But while financing costs, fuel and maintenance all contribute to the total cost of car ownership, insurance is the most expensive hidden cost of vehicle ownership, according to Bankrate’s Hidden Cost of Car Ownership study — and switching to EVs could cause this cost to shoot up for Californians. 

How insurance prices are set in California

To understand how EV adoption could impact insurance prices in California, it’s worth looking at how the state sets the price of insurance. 

Auto insurance rates are more tightly regulated in California than in most states. Common rating factors like credit history and age are prohibited in the Golden State. Instead, insurers must base rates on three mandatory factors: 

• Driving history: An insured’s recorded driving history, including tickets and accidents
• Annual mileage: The estimated or actual annual mileage of the insured vehicle(s)
• Driving experience: The number of years an insured has been licensed to drive

Beyond these three mandatory factors, insurers can choose additional factors to use in rating calculations — including the type of vehicle on the policy and “vehicle characteristics,” which include: 

• The size of your car’s engine
• Safety and security devices installed in your vehicle
• Damageability
• Repairability

In other words, if your insurance company expects your vehicle to generate more or bigger claims, they can charge a higher rate. These vehicle-specific rating factors allow insurers in California to charge more for EVs compared to traditional gas-powered vehicles with EVs generally being more complex and costly to repair.

Could EV ownership make auto insurance less affordable?

CARB isn’t alone in predicting that EV ownership may be more affordable for Californians in the near future. Bloomberg reports that three automakers now sell at least one EV with 300+ miles of range that costs less than the average purchase price of a new vehicle. With new EVs entering the market every year and tax credits on offer from federal and local governments alike, purchasing an EV is within reach for more Americans than ever. 

But while buying an EV is more affordable than ever before, owning one still comes with steep costs — and insurance may be overlooked in analyses of cost parity. Neither CARB nor Bloomberg address the cost of insurance as a consideration for EV owners. A March 2024 study by Atlas Policy found that the total cost of ownership for EVs may already be cheaper in some cases, but the study stated outright that it assumed that insurance costs would not differ between EVs and internal combustion engine (ICE) vehicles.  

Let’s take a closer look at what it actually costs to insure an electric vehicle in California. The table below compares the average annual premiums for full and state minimum coverage for the five most popular EVs in California, which together make up over 50 percent of all new EV sales in the state this year. 

On average, a full coverage auto insurance policy for one of California’s five most popular EVs costs $3,014 per year. By contrast, the average cost to insure California’s three most popular non-EV models — the Toyota RAV4, Toyota Camry and Honda CR-V according to Edmunds — is just $2,142 per year. In other words, the majority of California’s current EV owners are paying 41 percent more, on average, for auto insurance. 

Why EVs cost more to insure

The higher price tag for EV insurance comes down to one key factor: the cost of repairs. 

“EVs cost more to insure versus their ICE counterparts because they generally cost more to buy and thus more to repair or replace,” says Chong Gao, director of product management R&D for Mercury Insurance. While EVs may need less frequent maintenance than gas-powered cars thanks to their simplified electric motors, key components like EV batteries can carry shockingly high price tags. “The battery is a large expense in and of itself if it needs to be replaced,” says Gao, “and underwriters need to take such risks into consideration when writing policies for EV owners.” 

But the cost of parts is just the beginning of the story. “Additionally,” Gao notes, “EV repairs require technicians who have specialized knowledge and can charge more for their services, ultimately resulting in higher premiums for EV owners.” This lines up with the findings of CCC Intelligent Solutions’s Q3 2024 Crash Course Report, which found that the cost of labor for EVs account for a higher percentage of the total cost of repairs (TCOR) than that for ICEs.

What’s more, EV owners file claims at a higher rate and higher cost compared to non-EV owners. The 2024 LexisNexis U.S. Auto Insurance Trends Report noted that claim frequency for EVs was 17 percent higher than for passenger vehicles overall, while claim severity was 34 percent higher. And Mitchell’s Q2 2024 Plugged-In EV Collision Insights Report showed a 45 percent increase in claim frequency for collision-damaged EVs over the past year. And those claims are likely to cost insurers more than claims for non-EVS. 

Taken together, the data paints a clear story: EVs cost insurance companies more money than gas-powered cars. Insurers, in turn, pass those costs on to their customers through increased premiums.

Would the fuel savings of EV adoption offset the possible increase in insurance costs?

Here’s the good news: EV adoption could lead to inflated insurance costs for Californians, but it’s just one piece of the puzzle. 

Insurance costs are high for EVs, along with repairs and maintenance and other hidden costs like depreciation. But other costs — like fuel — are likely to go down with EV adoption. 

Bankrate’s Hidden Cost of Car Ownership study estimated that Californians spend an average of $2,043 per year on gas. Combined with the costs of maintenance, repairs, insurance and vehicle taxes, this brings the annual hidden cost of car ownership to an average of $7,745. 

What happens if California switches to 100 percent EV sales? Based on the data above, we can expect fuel costs to drop and insurance costs to increase. On average, EV insurance for popular models costs $745 more per year than insurance for non-EVs, adding nearly $800 to the cost of ownership — but that’s less than half the annual cost of fuel. Add in federal tax credits of up to $7,500, and the savings associated with buying an EV could more than offset the added insurance costs. 

The bottom line

California’s EV adoption goals will likely increase the cost of auto insurance in California as insurers’ cost of doing business in the state rises. But other ownership costs — particularly fuel and upfront purchase price — could offer significant savings, particularly as automakers work to put out more affordable EVs like the Hyundai Ioniq 5. If you’re considering the switch to an EV in California, intentional research and shopping — before and after you purchase an EV — could help you manage the cost of insurance.

• Methodology
  

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  Bankrate utilizes Quadrant Information Services to analyze October 2024 rates for all ZIP codes and carriers in all 50 states and Washington, D.C. Rates are weighted based on the population density in each geographic region. Quoted rates are based on a single, 40-year-old male and female driver with a clean driving record, good credit and the following full coverage limits:

  • $100,000 bodily injury liability per person
  • $300,000 bodily injury liability per accident
  • $50,000 property damage liability per accident
  • $100,000 uninsured motorist bodily injury per person
  • $300,000 uninsured motorist bodily injury per accident
  • $500 collision deductible
  • $500 comprehensive deductible

  To determine minimum coverage limits, Bankrate used minimum coverage that meets each state’s requirements. Our base profile drivers own a 2022 Toyota Camry, commute five days a week and drive 12,000 miles annually.

  These are sample rates and should only be used for comparative purposes.

  Model: To determine cost by vehicle type, we evaluated our base profile with the following vehicles applied: Honda CR-V, Ioniq 5, Rivian R1S, Tesla Model Y, Tesla Model 3, Toyota RAV4, Volkswagen ID.4 and Toyota Camry (base).