UAE insurers need to adopt new ways in deciding EV premiums

As the UAE’s used electric vehicle (EV) market faces a slowdown, the challenges extend far beyond just consumer hesitation.

Insurers, too, are navigating a complex terrain to price EVs. The recent decline in demand, despite dealership assurances of ‘flood-free’ vehicles, points to a deeper issue. Repair costs, perceived risks, and higher premiums are becoming barriers.

There is a broader issue at play: how we price insurance, particularly for today’s generation of EVs.

Pay-as-you-go (PAYG) models, where premiums are adjusted based on actual vehicle usage, present innovative solutions to address these pricing challenges. By capturing data such as distance driven, driving speed, and usage patterns, insurers can price policies more fairly, rewarding safe, low-mileage drivers while better managing high-risk customers.

In theory, PAYG offers a way to personalize insurance—something that should especially benefit the relatively new EV market. However, the reality has been more complicated.

Over the last decade, several insurers and startups across the UAE have made significant capital investments in PAYG models. Despite the promises, many of these initiatives have not succeeded at scale.

High on tech complexity

The technology’s complex infrastructure, high implementation costs, and consumer resistance to data sharing have presented formidable challenges. For instance, maintaining the IT systems required for data collection, transmission, and analysis - especially at the volume these models produce - is resource-intensive.

Insurers and startups must also grapple with privacy concerns as more consumers voice unease about sharing location and behavior data.

Even with these hurdles, there’s no denying the potential for PAYG to transform the way we price and manage EV insurance. EVs, with their advanced technology and data-sharing capabilities, are primed for integration with PAYG systems.

Unlike traditional vehicles, they generate rich data, from battery health to driving efficiency, which can enhance how insurers assess risk. This is crucial in the UAE market, where EV repair costs, especially for batteries and specialized parts, remain high.

Accurately gauging how an EV is driven through PAYG systems could help mitigate some of these repair risks and adjust premiums accordingly.

In addition, PAYG systems could pave the way for ‘risk-based’ pricing models that adjust in real time. Imagine a world where EV insurance is dynamic, with premiums that change based on how and when the vehicle is driven.

Insurance premiums based on how you drive

Drive less or drive safely? Your premiums drop.

Drive aggressively or frequently in high-risk areas? Your premiums rise.

This shift could bring meaningful change in reducing both overall vehicle mileage and insurance claims, promoting safer, more sustainable driving habits.

But for PAYG models to succeed, several foundational issues need addressing. First, there’s the challenge of regulatory alignment. The UAE, while a leader in digital transformation, still lacks a framework that fully supports usage-based insurance models.

Without clear guidelines, insurers and startups face uncertainty about how to manage data, privacy, and liability—especially in the event of cyberattacks or data breaches involving these systems.

Secondly, there’s the question of consumer trust. Multiple studies show that a significant proportion of drivers are wary of sharing their driving data with insurers. Overcoming this requires clear communication from the insurance industry about how this data is used, stored, and protected.

Consumers need to feel confident that PAYG models will not only reduce their premiums but also safeguard their privacy.

Lastly, PAYG models require a complete ecosystem overhaul. Insurers, repair networks, and even policymakers need to align to ensure the right infrastructure is in place. The UAE’s push for smarter cities and connected infrastructure, particularly in Dubai, creates a fertile environment for this change, but it will require long-term commitment from all stakeholders.

Despite these challenges, EVs are here to stay.

As the world continues transitioning towards cleaner energy and more sustainable mobility, EVs are a megatrend that insurers cannot afford to ignore.

Look beyond teething issues on EV insurance premiums

While the insurance challenges we see today are indeed teething issues, they are also part of a much larger shift. As EV technology advances, so too will the complexity of risks associated with insuring them. Insurers will need to grapple with evolving repair methods, the volatility of battery costs, the potential for software vulnerabilities in increasingly digital cars, and the long-term wear and tear unique to electric vehicles.

One major area of risk that insurers must address is the long-term sustainability of repair costs. While EVs are designed with fewer moving parts than traditional combustion engines, the specialized nature of their components—particularly the battery—makes repairs significantly more expensive.

Battery degradation, recycling issues, and the high cost of replacement pose serious challenges for insurers, who will have to anticipate these risks when pricing policies. Moreover, the possibility of supply chain disruptions could make sourcing replacement parts costly and time-consuming.

Another risk is related to the increased reliance on software and connectivity in EVs. Cybersecurity threats are becoming a growing concern as vehicles become more connected to external networks. Insurers must consider how they handle liabilities in the event of a cyberattack that leads to vehicle malfunctions or accidents.

This new landscape of risk, rooted in the digital nature of EVs, is one that will require insurers to develop new frameworks for coverage and liability.

Ultimately, while PAYG models in the UAE’s EV market have faced growing pains, they remain a powerful potential tool for creating a more equitable, data-driven insurance model. We see this as an opportunity to not only drive innovation but also redefine consumer trust in how insurance is priced.

The market might be slow to adapt, but the direction is clear—dynamic, usage-based pricing models could soon be the norm, not the exception. Yet, as we look ahead, the major risks associated with the EV megatrend will require insurers to remain agile, innovative, and prepared for the complexities of this rapidly evolving market.