Electric Vehicles Are Bleeding Insurers Money In This Key Market For Tesla And Other Auto Giants: Here’s Why – BYD (OTC:BYDDF), BYD (OTC:BYDDY)

The rapid increase in the number of new energy vehicles in China has led to a financial conundrum for the country’s insurers. The insurers are finding it challenging to make a profit from insuring these vehicles, despite charging higher premiums.

What Happened: The surge in NEV ownership in China has led to a surge in insurance premiums, but insurers are still struggling to turn a profit. The insurers’ loss ratio for NEVs is higher than for traditional vehicles, making it difficult for them to make money from insuring NEVs, reported Caixin.

China’s NEV market has been growing rapidly, with the number of insured NEVs increasing from around 7 million in 2021 to over 20 million in 2023. Despite this, insurers are generally losing money when they insure NEVs, with the combined ratio for household NEVs typically standing between 105% and 110%, and that for ride-hailing NEVs roughly between 120% and 130%.

Xiaomi Corp.‘s XIACF  first new energy vehicle, the SU7, is priced at 215,900 yuan ($29,735). Despite its competitive retail price, the cost of insuring the SU7 is nearly as high as that of a combustion-engine vehicle that is more than twice its price.

This is fairly typical, as NEV owners are approximately twice as likely to file a claim, according to data from LexisNexis Risk Solutions.

Liu Shulin, president of the CIRI Auto Technology Institute, attributes this to several factors. NEVs accelerate faster, with a Tesla Inc.’s TSLA Model 3 reaching 100 km/h in 4.4 seconds, nearly twice as fast as a comparable BMW (OTC: BMWYY. NEVs’ expensive batteries are costly to repair, often requiring manufacturer service.

Additionally, widespread NEV use in the ride-hailing industry results in higher mileage, increasing risk. Some NEV owners face insurance renewal issues after exceeding 20,000 kilometers in a year.

Insurers typically avoid unprofitable deals, but government support for the NEV industry complicates this. The National Financial Regulatory Administration’s (NFRA) April guidelines require insurers to cover NEVs to support China’s carbon goals for 2030 and 2060.

One solution is raising premiums, but current rules prevent this. Insurance premiums in China are influenced by an autonomous pricing coefficient, capped by regulators, which limits profitability for NEV coverage, according to the report.

The NFRA has proposed reforms to allow greater flexibility in setting these coefficients, potentially lowering premiums for low-risk NEVs and raising them for high-risk ones, like those used in ride-hailing.

A car insurance industry insiders told Caixin that premiums for XPeng XPEV and BYD BYDDY BYDDF models might increase due to high loss ratios and ride-hailing use. However, some industry insiders warn the new limits may still not cover all high-risk vehicles, suggesting the cap be removed to prevent insurers from losing money and to ensure NEV owners can renew their plans.

See Also: Tesla, Ford, GM And Other Automakers Trade Lower In Premarket After Elon Musk And Jim Farley’s Team Fail To Soothe Investors

Why It Matters: The surge in NEV adoption has been a global trend, with China being a significant driver of this shift. In 2023, NIO NIO entered the insurance business alongside other Chinese EV manufacturers, further highlighting the industry’s potential for growth.

This trend has also had a significant impact on the global insurance market. In January, insurance company stocks outperformed the S&P 500 index, driven by the surge in EV and high-tech vehicle sales. This trend was particularly evident in China, where Tesla’s weekly insurance registrations hit a record high in June.

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Image Via Shutterstock

This story was generated using Benzinga Neuro and edited by Kaustubh Bagalkote