Energizing the Future: How Residual Value Insurance Is Powering the Electric Vehicle Leasing Market

As the world moves toward more sustainable modes of transportation, electric vehicles (EVs) stand out as a pivotal part of the solution. The key to accelerating this transition lies not only in manufacturing more EVs but also in finding ways to make them more accessible to the masses.

One promising pathway is through leasing. With the passage of the Inflation Reduction Act and associated provisions that grant some EV lessees a $7,500 tax credit¹, the U.S. market is poised for significant growth in EV leasing. As of March 2023, 34% of EV sales were through leasing — an increase of 18% from the year prior.²

However, there are uncertainties and risks for lessors, largely driven by the challenge of accurately predicting the residual value of EVs.

Residual Value: The Predicted Worth of an Asset

At the heart of any leasing operation lies the concept of residual value — the predicted worth of an asset (in this case, an EV) at the end of the lease period. With traditional internal combustion engine vehicles, forecasting this value is relatively straightforward, thanks to a wealth of historical data. However, with EVs, the rapidly evolving technology, fluctuating government incentives, and changing consumer preferences make it challenging to predict residual values accurately.

According to in-house research at Group 1001, worldwide, there is a misalignment between what lessors charge lessees and actual EV depreciation due to a lack of data on EV residual values. This causes lessors to charge higher prices to cover their potential downside risk.

Tools to Help the Situation

To address the challenge of predicting residual values accurately, an organization should look for a carrier with a focus on specialty insurance products that has the bandwidth to properly analyze a company’s needs and offer financial solutions as well.

A carrier that offers residual value insurance can serve as a risk management tool to facilitate the growth of not only the EV leasing market but also enable the overall adoption of EVs as well to help mitigate the impacts of climate change.

Why? Because residual value insurance provides accounting coverage, increased loan-to-value ratio, and asset value coverage.

This will help protect against the risk of EVs (or other like assets) depreciating more than anticipated, reducing financial uncertainty for the lessor.

The end game: To encourage lessors to offer more leasing contracts for EVs, and make EV leasing more affordable to the consumer.

How? Keep in mind the fact that EV residual value directly impacts the lease payment amount — the higher the residual value on the back end, the lower the monthly payments.

By mitigating the risk of substantial EV value depreciation throughout the lease for the lessor, the right insurance partner can enable lessors to offer more competitive and accessible lease rates to consumers.

Making EVs more accessible can help displace traditional, emission-heavy vehicles. Facilitating the growth of EV leasing helps promote EV adoption and contributes to reducing carbon emissions, which directly supports the United States’ sustainability goals. Moreover, the increased prevalence of leased EVs also fuels the secondary market for used EVs, making them accessible to a broader range of consumers — further amplifying the environmental benefits.

Innovative insurance solutions like residual value insurance can be powerful catalysts for positive environmental change. For more information on residual value insurance and how to facilitate the growth of EV leasing, contact RVI Group, a Group 1001 insurer, that is committed to supporting the EV ecosystem in the U.S. and beyond, one EV lease at a time.

1 IRS “Credits for New Clean Vehicles Purchased in 2023 or After,” June 22, 2023.

2 Investor’s Business Daily “EV Tax Credits: All The 2023, 2024 Cars And Trucks That Get $7,500,” July 25, 2023.

Jason Atkins is the Director of Innovation Strategy on the G1001 Innovations Team at Group1001