New energy vehicle industry

Part 1

Mark Maroon:

Hey, everyone. Welcome to Climate Check. This is Mark Maroon, Vice President and Head of Portfolio Management and Reinsurance for American Modern, a Munich Re company. Today, I'm joined by Li Zi Jia, Head of Innovation for Munich Re China, and the Managing Director for SiTao, a Munich Re subsidiary company. Jia, thank you so much for joining me today.

Li Zi Jia:

Thank you for inviting me. It's a great opportunity to discuss about the topic. I'm very excited.

Mark Maroon:

Yeah, so can you maybe just go ahead and introduce yourself a little bit and tell us a little bit about your role at Munich Re?

Li Zi Jia:

Sure, sure. My name is Li Zi Jia, as Mark has just now introduced. I'm heading up this unit. It's a separate entity called Smart Thinking Consulting in Beijing. So it's a fully owned subsidiary of Munich Re and this unit was set up for the purpose of exploring new business models and explore new revenue streams for Munich Re in Chinese market. And the definition of new business model and new revenue stream has been very broad.

So what we have been focusing on is more important question. We focusing on the development of the new industries. We focusing on figure out what's new needs when it comes to insurance and risk management solutions in the fast development industries in the China market. And we start to create and define new models for these new industries as the new energy vehicle is one of the most important industries and topics recovery at the moment.

Mark Maroon:

Can you maybe just go ahead and describe pretty quickly what a new energy vehicle is, and then maybe we can get into how China's adoption of new energy vehicles compare to the rest of the world.

Li Zi Jia:

NEV by definition is the new energy vehicles. Hence by definition it covers all broader type of the new power sources compared to the internal combustion engine power source. So includes batteries, includes hydrogen powers, includes all different type of the power source. But here today we're talking about electrical vehicles. China is potentially the biggest market globally when it comes to the EV. So the market statistics shows that out of 10 new energy vehicles sold globally, six of them sold in China. That's actually the fact.

If we are looking to some statistics, by end of last year the existing market of China, when it comes to new energy vehicle, is already more than 30 million vehicles running out there. So the penetration rate is somewhere around 25-ish percent plus and minus, and the growth rate is also very fast. And there are a couple of reasons behind that.

Yeah, so first of all, the Chinese government really sees new energy vehicle is important industry for them to invest in and it also represents the future. That's why from government policy point of view, it really invested a lot. The secondly, for the some key components of the new energy vehicle like batteries, like some of those things, China has become very important contributor in the global supply chain and also from the market perspective point of view, China only adopt the culture of automobility in recent 20 years' time.

That's why emotionally I can say for myself, we don't really have much of the attachment for the internal combustion engine vehicles. We are more running for efficiency, we're more running for family use. Hence if you look at the internal combustion engine vehicles and looks fancier, more cost effective electrical vehicle, it's a natural choice when the clients lean towards this side rather than the other side. So from all different perspective, China is on the fast lane when it comes to new energy vehicle development. It manufactures a lot of new energy vehicles, also adopts a lot of new energy vehicles as well.

Mark Maroon:

Do you think the insurance industry in general is ready for this shift into these new energy vehicles? Obviously, we've been doing traditional auto forever seemingly, but do you think that we have a good enough handle on the new types of risks that are going to be emerging in this new market segment?

Li Zi Jia:

To be able to support a new energy vehicles we have to start to building infrastructures. A lot of discussions these days are really coming around to build up the charging power networks in the community, in the residential areas, in the office areas. But all these becomes an assets you have to build protections around. And bear in mind, these are the smaller high voltage charging powers. So certainly we look at these. It's not just a small pillars you put on the side of the road. So it has its own values most importantly, but also it has certain risk factors because it's a high voltage electric, electrical components with batteries being it. So certainly the liability part becomes also very important.

So apart from that, most of the new engine vehicles are built much smarter compared to the internal combustion engine vehicles. So they are more connected, they are more smarter, they have more sensors. They connect with the manufacturers for software update or what they call over the air update. They have more capable or autonomous driving capabilities. But also we are talking about the stuff like cyber productions because these vehicles are connected. So if it's getting hacked, if someone locks your vehicles while you're driving, it's going to be super dangerous. So all these components has been become increasingly urged from a market perspective point of view.

Also back to the vehicle itself. In general, the new energy vehicle is way more heavier compared to the internal combustion engine vehicles because they run on the pile of batteries. So the heavy your vehicle goes when it hits something, the more damage it creates. So this is something we have to really bear in mind when it comes to looking into the new energy vehicle's pricing. The second perspective is that if I'm telling you I just bought a vehicle, which the zero hundred kilometers acceleration is less than 3.5 seconds, what kind of vehicle we are talking about?

In the internal combustive engine area, we're talking about a racing vehicle. A racing car. Is something of close to maybe 200,000 USD kind of range of price. But when it comes to new energy vehicle stage, this just normal, most of the new energy vehicle can do that. So when we look at the pricing of the new engine vehicle, you don't price it like a 1.2T internal combustion engine vehicle. You have to really price it like it's a super racing car.

Mark Maroon:

That makes sense. I mean, I'm reminded of my high school physics days, right? Force equals mass times acceleration.

Li Zi Jia:

Yeah.

Mark Maroon:

EVs heavier, faster off the starting line. So absolutely you can start to see some of the trends towards much more severe incidents when something does happen.

Li Zi Jia:

Definitely. And I think one of the other discussions that happens in the market is really about, because the vehicle is getting smarter, a lot of more autonomous driving functions has been built into this newer generation of vehicle. Then the discussion is around if the accident is there, who's liable for that? Is that the driver or is that the autonomous driving systems has done something over there?

I mean, in generic point of view, statistic shows that the vehicles with better autonomous driving function has less chance of accident compared to the ones that without. However, here we are not talking about statistics, we're talking about the liability part, who's owning this particular responsibility? Because it creates a very different view when it comes to how we price our product because technically we don't price for autonomous driving malfunction because this is not what motor insurance was traditionally priced for. So this is also something that market has been discussing how we define who's liable when accident happens.

Mark Maroon:

Right, and that was one of the things I wanted to touch on was just to get your opinion on the potential different types of coverages that are going to be offered to cover the segment. To your point, I mean, you have a lot of behavioral changes that are happening right now in addition to a lot of the manufacturing changes when it comes to the development of these hybrid and electric vehicles. So I was just curious to get your take on that.

Li Zi Jia:

Just now, in terms of, of course the motor insurance has to be there. The market requires for a product like performance warranty for the batteries. There are also extended warranty products are covered. Let me start from these products, which is more familiar to many offers. These are on the surface similar product. We'll drill deep down to each of them. They are different products. The manufacturers sees insurance as one of the way risk management products, one of way for them to continuously engage with our [inaudible 00:09:06] client. Hence we can see a lot of better integrations when it comes to insurance product with the manufacturer services.

So we do see many of the practices where when the sensor detects the vehicle is damaged or have malfunction, they will automatically route and alert the driver to drive this car back to the service center, nearest service center where of course the reparation will happen, where basically the costs were covered by insurance. So it's a kind of natural flow.

When it comes to extended warranty of course, because we're dealing with different parts with different lifecycle. Of course, all these products have to be priced and we worked out. Here, we have certain niche scenarios we have to look into as well. Just now I've mentioned about that the vehicles automatically direct the driver back to the service center. One of the typical challenges that we, I think the manufacturers face these days is that because all these new energy vehicle manufacturers are running heavily on capital, and really few of them are very profitable at this moment.

So they are really running short on their stock of parts. So the problem they're going to face is that yes, the vehicle will be sent back to the repair centers, service centers for reparation and services, but because of the parts are low on stock in the most times, the user have to wait for very long before the vehicle will be fixed. Eventually fixed back to the best stage. That's why the stuff like the product or service, like the courtesy car service become super, super important because you don't want your clients drive the car there and walk out by their foot.

Mark Maroon:

There are some insurance coverages that cover things like business interruption, contingent business interruption, things along those lines. Do you see something similar maybe playing out on the NEV side as well?

Li Zi Jia:

We do see requests coming in on that because new energy vehicle also becomes a important trend when it comes to light with the truck. So the truck's less than five tons in the market because at current circumstances, running on electrical is much cheaper compared to running on fossil. So these are the basic economies behind why new energy vehicle light with the truck are taking over the market very rapidly.

This has been the phenomenons we observe in China. It has been the situation we've observed in different part of the world as well. So bearing in mind we're talking about not heavy trucks, those mini trucks, minivans runs in the city doing last 10 miles of deliveries of your parcel, of your meal, of the grocery stores. They're running on batteries, they're running on short supply chain of the parts. That's why stuff like business interruption becomes important requests when it comes to operating a new energy truck, fleets. Become very important for them because if the part is short, if the battery is not performing, if the mileage of the battery is not up to what is expected, so basically you will become disruption of the fleet operations.

If the fleet does not operate fully in a functional stage, loss of revenues, disruptive of businesses, hence the BI cover is naturally booming out from that industry. And this has been a challenge for us because there's no data for us to build on. We really have to work with all these operators on a very operational level so that we'll be able to understand this risk.

Mark Maroon:

Wow, that's really fascinating. Let's pause here, but I'm going to ask you to pick up this conversation in our next episode with a deeper dive into the role that data analytics plays here. So listeners, please tune in for part two of my conversation with Li Zi Jia and go to munichre.com/climate for more information on this topic.

Part 2: 

Mark Maroon:

Welcome to Climate Check. This is Mark Maroon, Vice President and Head of Portfolio Management and Reinsurance for American Modern, a Munich Re company.

Mark Maroon:

Today, I'm continuing my conversation with Zi Jai Li, Head of Innovation for Munich Re China and the Managing Director for SiTao, a Munich Re subsidiary company. Zi Jai in our last episode, you were telling us about the special risk considerations associated with China's booming new energy vehicle or NEV market. So I was wondering if you could talk a little bit about the role of data analytics and understanding the risk landscape of the NEV segment. I got to imagine it's hard to get reliable data on a segment that's seen such recent and rapid growth.

Zi Jai Li:

So, when we look at how the new engine vehicle is built. Data is a core resource and core components of how the new generations of manufacturers when they look into manufacturing their vehicles. And also one of the key differences we find out, I'm not saying this is the only difference, but one of the key differences is that the new energy vehicle usually built differently. One of the key example, apart from all these frameworks, infrastructures as well as how engine was powered, is that most of the new engine vehicle has been designed in ways that it carries more than 200 sensors around the vehicle. So, all these sensors becomes data points. It detects what's going on surrounding the vehicle. It detects how the drivers drives vehicle and sometimes also detects what happens on the seats. For various reasons, for safeties, some is for user experiences, some is for other reasons.

Zi Jai Li:

So, all this data becomes an important source for the analysis. And what we find out is that due to all these data enrichment of super rich data, we'll be able to purely from risk point of view, have a very different perspectives in terms of how the vehicle is used, how the vehicle is driven. And with all this data, we will be able to build a very different model when it comes to linked behaviors with risk. Of course, people might ask about, "Hey, isn't that another version of UBI product or is another version of telematics-driven product?" From the broader concept point of view, yes, this statement is right. However, we have to acknowledge the fact that the amount of data that is provided from 200 sensors compared to amount of data I'm going to get from the OBD box, very different level. So we will actually be able to link the behavior with the risk. Instead of just the break turning or this kind of more of simplistic kind of datas.

Zi Jai Li:

So this really becomes a super important source for our further analysis. Let me just give you one example of some of difference we've done before and we've been working with one of the leading new energy vehicle manufacturers in China. We help them to look in their data and help them to use their data to really look into how the driving behavior and affect the risk. What we found out is one of the more relevant behaviors when it comes to driving, which has strong link to the risk, is how long your hands are away from the control wheel. So it has a very strong relevance over there when it comes to behaviors versus risk. But of course, nowadays we have this data because they have sensors on the control wheel on the more conventional vehicles, they don't have it. But my point is that all these data sources give us the opportunities to revisit our risk from slightly different perspectives.

Zi Jai Li:

That's purely from the driving behavior point of view. The other perspective we have to acknowledge that is because the new engine vehicle has been built differently. It's also means where it's been built differently, the supply chain, the reparations, the services for the new engine vehicles also operate differently compared to the more mature internal combustion engine vehicle value chain. So from that point of view, we do see a tremendous change when it comes to how the parts has been manufactured, has been shipped, has been priced. And how it's going to help basically the drivers on the times when need, when it comes to federations, when it comes to services, when it comes to the accidents. So purely from the core part of the NEV's insurance point of view, we do see these are the few core components that we have to consider when it comes to the data source.

Zi Jai Li:

The other perspective we have to consider is also because of the change of the structure, the change of data. The what we call the morbidity, non-mortal product, has also going through a tremendous change because all these enrichment data, all these sensors on the vehicle help us to understand how the machine was grounding, how the vehicles driven, the quantity and the status of the parts has been going on during the whole life cycle. So always on that product like extended warranty has been... Will have to be revisited regularly when it comes to new data source in a new product, like battery performances for the batteries becomes a very urgent need when the market is looking for it. So all these will be very different horizons when it comes to how data will be linked to the product developments and also pricing.

Mark Maroon:

So do you think the insurance industry is in a good position to understand all of this data?

Zi Jai Li:

Yes and no. I mean there's always... On these kind of innovative topics, there's never a firm answer, but it's yes and no. From no point of view. Let me still cover reductive part then the positive part. From the no perspective, I think insurance industries, including primary insurance and reinsurance, we haven't get into the solid understanding of the vast amount of datas that new energy vehicle has generated and haven't built up a very solid and mature understanding of how the new ecosystem works when the new energy vehicle has been manufactured, distributed and used in a different way. Of course, we have to acknowledge the fact that new energy vehicle industry isn't really mature, very matured yet. So they are still in a development stage. They are newer generation, newer technology push out every day. That's why I think on that... I think we are not very much ready.

Zi Jai Li:

But on the yes part, I think we are working on that a lot. I think many... I think on that perspective, Munich Re is actually from what I've seen in the market in certain way we are leading the market a little bit because we do have different units globally talking to different participant in the value chains and trying to understand what they want and try to understand what kind of data they have and start to look into how we can use our experience and capabilities to fix it. For example, if I use my unit as example, SiTao Smart Thinking Consulting in China, we talk to new energy vehicle manufacturers a lot. What we really want to help them is that due to the ways that they have different expectations of the insurance product, they have different usage of the insurance product, how it merged with their client engagement cycle, they are willing to share the data. However, they want to share data with the market leaders like Munich Re because we can help them to create more sophisticated models and more sophisticated structures to help them push the way.

Zi Jai Li:

And the other perspectives that I think we can also look into is that because from innovative units point of view, like Smart Thinking, we also help our partners and clients, namely the manufacturers as well as some of the new engine vehicle value chain participant to really understand the new business model they're running. Because as long as you start to run the new business models, there are different type of the needs of the insurance comes up. It doesn't necessarily have to be something that never exists before. In very much scenarios, it's the different application of some of existing risks or covers or the repackaging of some of the existing covers and risks altogether. You just have to frame it differently. You just have to get package differently. Then we will be better to fit into the new business model and new business transaction scenarios. So this is what I see is very promising and Munich Re is on the right path in terms of pushing this direction move forward.

Mark Maroon:

Yeah. So how do you... Like maybe to dive into that a little bit deeper. How do you engage the different OEMs to ensure that the data needed to inform risk solutions will support the ongoing development of the NEVs?

Zi Jai Li:

The insurance traditionally are running on historical datas. That's why we have realized that with the vast amount of data that new energy vehicle manufacturers they're having. They in many scenarios, they are not very comfortable when it comes to how primary insurance company are using the historical data to run against... to run the model against the data they're having. Yes, they have... Their data is less in terms of period of time. But when it comes to the perspective, when it comes, source of data, it's run on very different spectrum. So what we can help, one of the important perspective we can help is that we provide our Munich Re's best in insurance knowhow and data analytical capabilities into that data. So many of our data works are really run to look into the vast amount of data that OEM has created from all these driving behaviors and different sensors in the vehicle and start to create the relevancy of certain data sets or data points with risks.

Zi Jai Li:

And also in a way that we also look into how technology develops in the new engine vehicle areas. So we start to putting a little bit predictive model when looking to data. Less of relying on the historical data because historical data running on internal combustion engine vehicles are less relevant of what the new energy vehicle are working on at this moment. That's why our connecting point is in a way very straightforward. The new energy vehicle manufacturers provides and manufactures all the data. They work with Munich Re from the insurance expertise, from data analytical, but also from modeling perspectives because they really want to understand how their data will be able to convert into the most tailor-made kind of insurance coverages for their models, for their drivers, for their basically ecosystems.

Zi Jai Li:

And also, they also would like us to help them to identify the good customers or slash good drivers and not so good customer or slash not so good drivers. And this is also one of the components we build our data analytical capabilities into how they engage, differentiate differently with our clients because they want to consider these are important components, hence the collaboration starts. And from business point of view, we become the re-insurer of the output of the projects. Of course, we work with primary insurance company on the policy issuance point of view from the regulatory point of view. But most importantly, NEV changes how the vehicle is used and how the vehicle is driven from the end consumer point of view. So when we look at our industry, when we look at insurance, we provide protections for the drivers. We protect protection for the vehicles. We start to realize all these change of behaviors. We start with slowly inference our view of how risk was constructed and certainly has a consequence of affecting how the end product is going to be constructed.

Zi Jai Li:

Also, on the flip side, due to the reason, the way that the vehicle is driving differently and used differently from end user point of view, the user's expectation of the motor insurance and the relevant insurance types and products has been changed as well. And one of the factors we could not ignore and less estimate over here is how the manufacturers, the new type of manufacturers, how they treat insurance, how they treat risk management solutions. Because what we find out is it also has been a tremendous change when we look at the new type of manufacturers versus the traditional type of manufacturers.

Mark Maroon:

Well, I have no doubt you're the right person to help solve some of these problems. Thank you so much for taking the time to join us today. This was an endlessly fascinating conversation. So folks, if you want to hear about other dynamic intersections between climate change solutions and the risk mitigation industry, please subscribe to our podcast and for more information. As always, head on over to munichre.com/climate. We'll see you next time.