The Paris Agreement calls upon countries to undertake efforts to limit global warming to 1.5 degrees Celsius. To achieve any measure of success, much work needs to be done by 2030 and electric vehicle (EV) production and uptake are key indicators of progress.
To put things into perspective, transportation emissions currently account for about 15% of greenhouse gas emissions. While great progress has been made to improve the efficiency and adoption of EVs, we will need 220 million more such vehicles on the road globally by 2030 to reach global climate goals, according to the International Energy Agency (IEA)1.
Anticipating the soaring demand for EVs, investment in battery manufacturing has increased with a growing number of companies expanding their EV production facilities. The resulting risks need to be examined and managed.
As EV production increases, manufacturers need to carefully manage new risks, specifically those associated with lithium-ion (Li-ion) battery technologies. As most underwriters remain cautious over battery-related risks, implementing appropriate risk management solutions has become essential to building effective insurance programs that cover key risks such as fire and product recall.
Ichiro Seino, Regional Automotive Industry Leader, and Dick Mak, Regional EV/Battery Industry Leader, share their insights on how EV manufacturers can better manage their risk exposures, both in terms of mitigating likelihood and severity of risks, as well as from an insurance perspective:
A: For EV manufacturers, fire risk is comparatively higher in the Li-ion battery production life cycle as it requires much higher heat while also involving liquid components.
Additionally, a defect in a Li-ion battery’s internal cells, mechanical failure or damage, or overvoltage during manufacturing, may lead to a thermal runaway — a vicious cycle where excessive heat leads to rapidly rising temperatures and gas build-up. In the worst case, a rupture of the battery cell would result in an explosion.
The risk of thermal runaway increases as Li-ion battery ages, alongside factors such as the number of charge and discharge cycles, depth of discharge, charging and discharging rates, state of charge, and operating temperature.
A: Traditional detection methods typically indicate a battery failure only after smoke is generated. A newer technology — off-gas monitoring — can indicate a problem up to 30 minutes before a smoke detector is activated, which could mean the difference between a manageable event and a catastrophic loss.
Beyond optimising physical protection systems in EV production, manufacturers should consider partnering with consultants specialising in Li-ion battery fire management and suppression to effectively train employees on preventing, identifying, and responding to potential threats.
A: EV manufacturers should also note key risks such as product recall and property damage resulting from fires, as well as the risks of storing and transporting EVs.
Should a product recall occur due to battery issues in an EV, the financial cost of the recall is typically subrogated to the battery supplier rather than the EV manufacturer. What is less avoidable is the impact on the manufacturer’s reputation and sales; partnering with an advisor with planning expertise and quick access to a recall communications team can potentially help minimise the impact on sales in the event of a product recall and even build customer loyalty.
For storage and transportation risks, a fire from a single battery can spread to other EVs if the batteries are stored, charged, or transported near one another. It is also important to note that different battery types react differently to fire. Firefighters might decide to contain a fire by leaving it to burn itself out, which could mean the loss of an entire fleet or facility.
A: At the minimum, battery systems should be housed in non-combustible, locked cabinets, rooms, or other enclosures to prevent access by unauthorised personnel. It is also good practice to separate enclosures from other portions or facilities using a minimum of a one-hour fire barrier. Manufacturers can also consider observation enclosures such as lab hoods.
Manufacturers should ensure that their standard operating procedures provide guidance for the proper handling and usage of batteries, and conduct periodic thermography to verify batteries, battery connections, and chargers. Batteries, chargers, and electrical alarm and fire detection systems should also be routinely inspected and tested with documentation adhering to industry standards and manufacturer instructions.
Other important protocols to implement include: Using chargers designed for specific battery systems as prescribed; refraining from charging batteries when the facility is unoccupied if your detection systems are not robust; always keeping charging stations in good condition and free from fire hazards.
A: While EV manufacturers can take steps to mitigate battery-related risks, there remains a certain degree of risk exposure that cannot be mitigated or are too costly to mitigate. In these instances, insurance at the appropriate level can address these gaps in a manner that is cost-efficient (i.e. optimising the total cost of risk). The essential coverages for an insurance policy include the following:
It is important to note, however, that competitively priced and robust insurance coverage for any risk will only become available if underwriters are comfortable with the uncertainty associated with that particular risk.
A: At present, insurance capacity for EV manufacturers remains limited. One way to increase insurers’ comfort levels, with the help of experienced advisors, is by demonstrating how well risk management is embedded in design and operational processes. By reducing the probability of EV production delays or shutdowns following a loss, and by eliminating the need for costly retrofits after a loss has occurred, the EV manufacturer can put itself in a better position to secure cost-efficient insurance coverage while at the same time preventing losses from the outset.
1 - IEA (2021), Global EV Outlook 2021, IEA, Paris https://www.iea.org/reports/global-ev-outlook-2021.
Regional EV/Battery Industry leader, Asia