“Electric vehicles (EVs) have become an undeniable catalyst for change in the automotive industry as they continue to grow in popularity and market share. With approximately two million currently on the road, accounting for about 1% of all vehicles in operation, the current EV market share may seem relatively modest; however, the future paints a different picture as EVs are projected to capture anywhere from 30% to 50% of new car sales globally by 2030.” – CCC Intelligent Solutions
The auto finance industry is responding to the rising demand for EVs by partnering with climate finance platforms to offer seamless EV loan solutions to dealerships. This plug-and-play approach is gaining traction, particularly in high EV adoption regions, and aims to cater to environmentally conscious consumers. Specialized teams are deployed to educate dealerships about EV loan offerings and support the application process, signaling a growing commitment to sustainability and the adoption of EVs.
S&P Global recently reported that San Francisco achieved a groundbreaking milestone in the growth of electric vehicles, with half of all new retail vehicle registrations in March 2023 being electrified - a rate more than three times higher than the national average. The Bay Area's high EV and hybrid shares, coupled with continued growth in electrification in April 2023, indicates a shift towards sustainable transportation in the region, potentially inspiring other major metropolitan areas to follow suit. However, nationwide efforts are needed to improve charging station infrastructure, provide financial incentives, and promote EV awareness for accelerated electrification on a national scale.
As EV adoption accelerates, it brings about significant implications for various stakeholders. The three prominent stakeholders when it comes to EVs are borrowers, lenders, and insurance providers. Each face challenges and considerations.
Borrowers in the EV Market
1. Financing and Incentives
For starters, borrowers’ credit history and financial standing play a crucial role in obtaining financing for costly EVs which can influence the loan approval process and terms. The same S&P Global article referenced above states, “One key demographic element among electrified buyers: They are well off financially. Almost half of San Francisco buyers (46.6%) enjoyed a household income of more than $200,000”. Borrowers should be aware of any government incentives or rebates available for purchasing an EV as these factors can impact the overall loan amount and financing terms. Understanding and navigating these incentives becomes crucial for borrowers to optimize their electric vehicle acquisition.
2. Cost Considerations: Electric vehicles often come with a higher upfront cost compared to traditional internal combustion engine vehicles. While the long-term operational savings on fuel and maintenance are evident, borrowers must weigh these benefits against the initial investment when making purchasing decisions. Once the borrower has secured financing, the borrower must consider specialized repair techniques necessary to maintain unique EV components, such as their batteries and electric drivetrains.
3. Downtime and Delays: Extended repair downtime and charging inconveniences are common complaints among Electric Vehicle (EV) owners. Due to the intricate technology and specialized components, wait times for repairs can be lengthy. A recent Cox Automotive survey reported that about a third of people surveyed cite a lack of charging availability as a the top reason they would not buy an electric vehicle, but seven major automakers are looking to rectify that. Additionally, the higher repair costs of EVs may result in more frequent total loss declarations by insurance companies, causing further disruption and inconvenience for consumers who rely on an EV for daily transportation.
Lenders in the EV Market
1. Evolving Risk Profiles: Lending institutions face the challenge of adapting to the changing risk profiles of EV loans. Electric vehicles are shown to have longer lifespans and require less maintenance, necessitating shifts in default and risk assessment models.
2. Financing Terms and Interest Rates: Lenders must develop innovative financing terms and interest rates that align with the unique characteristics of EVs, such as altered depreciation rates, battery life, and technological advancements.
3. Depreciation for Resale and Asset/Investment Value: EVs typically experience higher initial depreciation compared to traditional internal combustion engine vehicles. The technology in EVs is rapidly evolving, leading to improved models and features being released regularly. As a result, older EVs may lose value more quickly in the resale market. As a lender (and insurance company), you should be concerned about accurately assessing an EV’s value for insurance purposes or securing loans against EVs that might depreciate more rapidly than expected.
Insurance Providers in the EV Market
1. Assessing Risk and Rates: Insurers face the challenge of accurately assessing the risk associated with insuring electric vehicles. Determining premiums and rates might differ from traditional vehicles due to different repair costs and technology considerations. Roadside assistance providers and insurers must ensure their staff and network of service centers are trained and equipped to handle EV repairs promptly and effectively. Mechanical breakdown protection, or extended warranties, require tailored coverage for EV components. Insurers and providers must assess the unique risks associated with EVs to offer comprehensive coverage.
2. Specialized Coverage: With the growing demand for electric vehicles, insurance providers are developing specialized coverage options to address the unique needs of EV owners, including coverage for battery-related issues, and charging equipment.
3. Climbing Total Losses: EVs tend to have higher repair costs, primarily due to their sophisticated technology and specialized parts. In the event of accidents or damages, the cost of repairing an EV can be considerably higher than that of a conventional vehicle. As a result, there is a higher probability of an EV being declared a total loss by the insurance company. This can be a concern for the insurance company, as it may lead to increased payout amounts.
As electric vehicles (EVs) continue to gain popularity and become more prevalent on the roads, it is inevitable that claims frequency for accidents and damages involving these vehicles will also increase. The high-tech and complex nature of EV components can contribute to more severe claims, resulting in higher repair costs. This potential impact on insurers' financials and claim settlement processes necessitates a proactive approach.
To adapt to the changing landscape and address these challenges, stakeholders in the automotive market, including borrowers, lenders, and insurance providers, must be open to embracing the rise of EVs. One efficient solution to navigate this evolving market is to seek out a comprehensive outsourced program with insurance tracking for collateral damage claims. By doing so, stakeholders can streamline their processes and be better equipped to handle the growing demands and complexities associated with EVs. This inclusive approach will empower all parties involved to move forward with confidence, efficiency, and inclusivity in the automotive industry.