Review of the Electric Vehicle Insurance Market in Korea
Growth of the EV Adoption
The growing popularity of electric vehicles (EVs) in Korea has been affecting the motor insurance market, with insurers gearing up for both challenges and opportunities amid the changing landscape of the mobility sector.
The number of registered EVs across the country soared by 68.4% to 389,855 by the end of 2022 compared to a year earlier. Although EVs still represent a small fraction (1.5%) of the total registered vehicles, their share has been rapidly increasing in recent years. This growth trend is expected to accelerate as EV sales rise due to advancements in battery technology, increased consumer awareness of eco-friendly lifestyles, and government initiatives to promote carbon neutrality and boost the adoption of EVs. These initiatives include battery subscription services for EVs, which will lower the price tag of an EV, and financial incentives such as tax credits and direct purchase subsidies aimed at promoting EV sales.
Overview of Motor Insurance for EVs
In 2022, about 157,000 EVs were insured in Korea, accounting for 0.9% of the total insured cars under personal motor insurance policies. The number of insured EVs has been surging recently in line with the proliferation of EVs across the country. The compound annual growth rate (CAGR) of insured EVs was 59.3% between 2018 and 2022, while the total number of insured vehicles under personal motor insurance grew by 2.7% annually on average over the same period. Among insured EVs, foreign cars accounted for 35.8% in 2022, up from 19.6% in 2018.
By age group, drivers aged 40-44 took up the largest portion (17.4%) of the total insured drivers of EVs, followed by aged 45-49 (14.9%) and aged 35-39 (14.5%), whereas for conventional vehicles, the 50-54 age group has the highest proportion at 15.2%. More than 55% of EV drivers purchased their personal motor insurance via the internet compared to 42.5% for non-electric cars. It is generally cheaper to buy car insurance online, and relatively younger drivers of EVs are presumed to prefer the internet-based channel especially given higher insurance premium rates for EVs.
Insuring EVs tends to be more expensive primarily because their actual cash value is higher than that of non-electric vehicles. In 2022, the average actual cash value of EVs that are five years old or less was 1.8 times higher than that of conventional vehicles. The average premium per car under personal motor insurance for EVs in Korea was KRW 890,000 in 2022, 1.26 times higher than KRW 707,000 for gas-powered vehicles. In particular, the premium for the own damage coverage was much higher for EVs due to the high actual cash value and replacement costs.
The cost of repairing or replacing parts of EVs is typically higher compared to non-electric vehicles. In 2022, repair costs under the own damage car insurance coverage averaged KRW 2.7 million for EVs, 1.4 times higher than internal combustion engine vehicles. Even a minor accident that damages the battery pack of an EV may require the entire battery to be replaced. It costs KRW 15 - 20 million on average to replace a damaged high-voltage battery in an EV. Although the price of an EV battery pack has been declining lately, it still represents a large portion of the car price. Other parts of EVs such as electronic control devices and sensors cost more and take longer to be repaired compared to non-electric cars. It is for these reasons that the amount of claims under the own damage coverage is generally higher for EVs than their conventional counterparts.
In the case of fire or explosion, both EVs and gas-powered vehicles pose fire and explosion risks. In the event of a collision, EV batteries have the potential to ignite or explode, while an internal combustion engine vehicle's gas tank also holds the risk of catching fire or exploding. In fact, the loss frequency of EVs was lower compared to non-electric cars. From 2018 to 2022, there were 29 incidents of own damage losses for EVs arising from fire or explosion, indicating that 0.78 out of 10,000 EVs got involved in a fire or explosion accident. The rate was higher at 0.9 for conventional cars.
However, EVs can be exposed to a higher risk of accidents compared to non-electric cars due to their fuel efficiency and longer average driving distances, according to the Korea Insurance Development Institute. A study conducted by AXA also says that EVs are involved in more traffic accidents than conventional petrol and diesel cars because of the driving behavior of the individuals operating these vehicles. The primary factor contributing to the accidents is the rapid and abrupt acceleration of EVs, which often catches drivers off guard, particularly those who are inexperienced with such vehicles. Another notable characteristic of EVs is their quiet operation. Specifically, the engine is almost silent when starting, which can lead to serious collisions in an urban environment where many pedestrians cross roads using their hearing without looking properly.
How Insurers Respond to Market Changes
Insurers have faced challenges in providing EV drivers with adequate insurance coverage at reasonable prices due to the relatively new and rapidly evolving nature of EV technology. Insufficient underwriting data and experience have been particular obstacles for insurers. In spite of these challenges, the rise of EVs also presents new business opportunities for the insurance industry. In line with supervisory guides, insurers in Korea have developed and released motor insurance riders that allow EV drivers to expand or adjust their car insurance coverage. They include covers for battery replacement, extra repair costs for EVs, and longer-distance towing services in the event of an EV breakdown or malfunction, and risks that may occur while charging EVs such as fire, explosion, and electrocution.
It is important for the insurance industry to develop and establish underwriting expertise in alignment with how the mobility sector evolves. In particular, insurers need to prepare for the government’s plan to introduce a battery subscription service for EVs, which allows double registrations for an EV and its battery pack. In other words, when the battery subscription scheme is implemented, the owner of an EV may be different from the battery pack owner, with carmakers or financial service firms running battery rental services for drivers. As the current law on car registration does not allow two separate registrations for an EV, the government is seeking to revise the relevant law to distinguish the owner of an EV from the owner of its battery. In response to this change, insurers may have to take a new approach to pricing and providing appropriate motor insurance coverage, with the ownership of an EV being specified and the scope of the insured and coverage being defined more clearly in the insurance policy.