Yohannes Dereje recently sold his Volkswagen ID 4 pro electric vehicle for 4.1 million Br after a year and a half use. It was imported from the Middle East for around 3.8 million Br, hoping to stave off the inflationary headwinds and make passive income. The businessman quickly learned that most buyers turn away from buying an EV after observing that it has some mileage on it.

"The car was great, but the resale value is dismal," Yohannes told Fortune. "There is little faith in the battery life."

Yohannes' experience exemplifies the dilemma. While he enjoyed the environmental benefits, the low resale value due to buyer anxieties about battery life served as a wake-up call. This concern extends to the insurance industry, reflected in significantly higher annual premiums (≈ 2.1pc) for EVs compared to traditional internal combustion engine (ICE) vehicles.

Ethiopia is rapidly embracing  EVs as part of a national push for a greener future. Imports have nearly doubled from three years prior, with 72 million dollars worth entering the country last year. Recent policy shifts underscore the government's commitment to environmental stewardship. Import tariffs plummet to near-zero levels and bans on internal combustion engines for personal use took effect last month by the Ministry of Transport & Logistics.

However, the road to widespread adoption is riddled with the cautious insurance industry that relies nearly half of its non-life business on motor insurance premiums.

Insurance industry experts such as Assegid Gebremedhin are observing complexities emerge with the widespread importation. Central to the concern is batteries, previously considered accessories in traditional motor vehicles, now play a crucial role in assessing claims and determining the causes of accidents. Assegid said that new risk dynamics have emerged, and it is premature to gather sufficient data to accurately assess the risk exposure of EVs and establish appropriate premium prices that would ensure economically viable claim payments.

He anticipates an increase in claims and underscores the need for nuanced evaluations in determining total loss for EVs, especially in cases where battery failure may lead to accidents. He notes that insurers globally classify a vehicle as a total loss if repair costs exceed 75pc of the car's insured declared value, resulting in cash payouts.

"Insurers are worried since they can't estimate the battery life which is understandable," Assegid told Fortune.

Industry players concur.

Solomon Assefa, head of Underwriting at Tsehay Insurance, looks into this through the lens of the "law of large numbers" — as the number of policyholders increases, the more the insurance company can be confident of its prediction. He said with limited data on EV repairs and claims, insurers struggle to accurately assess risks. The lack of readily available spare parts, according to Solomon, qualified mechanics, and established battery lifespans complicates the picture, with insurers resorting to higher premiums to mitigate potential losses.

"We are continuously conducting analyses," Solomon told Fortune.

While premiums for EVs may vary depending on factors such as customer discounts, vehicle purpose, and prior claims history, most insurance companies have settled on premiums ranging from as low as 1.4pc to as high as 3.5pc. The industry's net claims experienced a significant increase of 15.7pc, reaching a total of 5.7 billion Br last year. This surge pushed the net claims ratio to 61.3pc, a slight uptick from the previous year, driven in part by inflated imports and vehicle maintenance costs.

The cautious approach taken by insurers, driven by the lack of data and the unknowns surrounding EVs, created a ripple effect throughout the industry. They are imposing higher premiums to mitigate the uncertainty associated with the cost structure of EVs. A study conducted by Allied Market Research reveals that the global EV insurance market was valued at 51.4 billion dollars in 2021. It is projected to grow substantially, reaching 210.4 billion dollars by 2031, with a compound annual growth rate (CAGR) of 15.5pc during the forecast period.

Industry veterans note that low-hanging batteries and bumpy road infrastructure increase the likelihood of damage and, consequently, claim ratios. Yared Molla, CEO of Nyala Insurance, observes the vicious cycle created by these high premiums.

He said unprofitable EV policies due to expensive battery repairs discourage insurers from offering competitive rates, hindering the very market they are supposed to serve. Yared stresses the need for a supportive ecosystem – duty-free battery imports, readily available spare parts, and widespread charging stations – to realise wider adoption.

"Importers also need to provide some form of aftercare services," he said. "Many cars are sitting around waiting for battery imports."

While the call for a supportive ecosystem is championed by some insurers, brokers step in with a historical perspective. Eyuel Ewnetu recalls similar initial anxieties when new vehicle types emerged, like the Isuzu NPR trucks. He believes insurers can adapt by introducing terms and conditions to manage risk, rather than resorting solely to higher premiums. Eyuel also suggests that regulators at the central bank could play a role by establishing specific premium ranges for EVs.

Last year, the National Bank of Ethiopia introduced minimum motor insurance premiums as part of an initiative to curb "unwarranted premium undercutting". Premium rates for private vehicles were set at 1.01pc. However, the regulators are taking a hands-off approach, allowing market competition to determine EV insurance premiums.

Belay Tulu, head of the insurance directorate, acknowledges the higher global premiums due to potential battery repair costs. However, he believes the market will eventually find an equilibrium as data becomes more readily available.

"We expect the rates to be settled through competition," he told Fortune.

The industry's contribution to GDP is about one percent, with a measly penetration rate of around 0.7pc. The 18 insurance companies in the country, with a total capital of around 17 billion Br, generate most of their revenue from compulsory insurance segments, of which third-party motor insurance plays a dominant role.

Zufan Abebe, CEO of Nib Insurance, says they plan to shift from high premiums to a strategy focused on volume, anticipating a future with more competitive pricing as the EV market matures. Zufan foresees a future ecosystem of service providers catering specifically to EVs, streamlining the entire ownership experience. This optimistic outlook hinges on the development of a comprehensive ecosystem – a point echoed by Zufan and others.

"We're going to focus on volume after now," she told Fortune.

However, for this ecosystem to flourish, a crucial gap needs to be addressed – the lack of skilled mechanics to service EVs.

Ethiopia's current automotive workforce is not equipped to handle the complications of EVs. While industry insiders believe an opportunity to upskill as the market expands, the current state creates a major hurdle for potential owners. They are left wondering who will fix their car if it breaks down.

Endale Atsbaha, a garage owner, admits the current lack of training and expertise for servicing EVs. He is limited to working on the body of the car, leaving the rest.

"I leave the batteries untouched," Endale told Fortune.

This lack of qualified mechanics feeds back into the insurance industry's anxieties. The absence of readily available specialists makes it difficult to assess repair costs. This uncertainty translates into higher premiums.

Fortunately, there are reasons to be optimistic. Consultants like Omer Bomba Mohammed believe the insurance industry's cautious approach is understandable and insurance companies' timidity primarily arises from their nature as actuaries, who must exercise great caution when manipulating numbers. He sees the higher premiums as a temporary hurdle. As more data accumulates on EV repairs and maintenance needs, Omer believes insurers will adjust their pricing models.

"If anything, EVs break down less," he said.

Omar is more concerned about the lack of an accommodative space attractive enough for private sector participants to invest in the necessary infrastructure to encourage more eco-friendly growth.

According to Moges Negash, an automotive engineer, Ethiopian car ownership is traditionally viewed as an investment, a way to generate returns over time. He believes this mindset might need to adapt for EVs to be fully embraced.

"There is scarcity mindset," he told Fortune.

In the long run, he believes it could be less taxing on both car owners and insurers, comparing the nearly 200 moving parts in ICE to the five systems in EVs. Moges suggests that profit will ultimately be the motivator – as the number of EVs on the road increases, it will become more lucrative for businesses to invest in training programs for mechanics and establish specialised service centres.

"Familiarisation will be a long process," he said.

PUBLISHED ON Mar 30,2024 [ VOL 24 , NO 1248]

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