Sharing the risks
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The underlying assets of the booming sharing economy – cars, houses, people – will all still need insurance coverage. However, as consumption and employment habits change, so insurance requirements will change – and it is here that insurers are playing catch-up with their customers.
As pointed out by a number of companies readily identified as 'sharing', the sharing economy is only partially sharing. It really marks a new level in the disintermediation (or re-intermediation) of supply and demand and the commercial use of what were previously considered exclusively private assets. That disintermediation is not always undertaken on a strictly financial basis. Supply may meet demand over some form of barter; or it may genuinely involve an act of altruism.
However one regards the concept of the sharing economy, there can be no doubt as to the exponential growth achievements of the sector and its economic impact. It is a fact quoted to the point of tedium, but is still incredible: car sharing app Uber, despite having no physical inventory, has a US market valuation of USD 60 billion.
Covering the sharing economy
Insurance is probably not the first thing that comes to the mind of industry analysts when they discuss Airbnb and Uber. However, houses and cars both need insurance. When houses and cars that had previously been consumed exclusively for private use become at some level commercially available, it changes the nature of required insurance coverage.
All of the major car sharing platforms – Uber, BlaBlaCar, Sharoo, Lyft, SideCar - require their risk to be captured in hybrid personal-commercial exposures, where the insured alters between use of the vehicle for individual and commercial purposes. Currently, Uber offers coverage for the period when the private car is providing a service to the client or when it is underway to pick up the client. However, there is a grey area around the journey, where the potential Uber driver is touting for business. One potential solution to this gap is being suggested in California:
For an excellent account of Uber insurance issues, see Forbes, July 2015.
Although a statistically small sample, a number of high publicity cases have emerged of Airbnb users inflicting significant damage on the property they had rented. They have helped provoke Airbnb to emphasise the insurance coverage they offer over the time period in which the property is being rented. Nonetheless, Airbnb's coverage comes with a good amount of small print – terms and conditions for the determined reader are 70 pages long. For all the ink required, it is not certain that Airbnb's policies cover all the potential liabilities a renter might face.
Nonetheless, the success of Uber, Airbnb and their peers suggest that consumers are either in a state of contented ignorance over potential protection gaps; or, in keeping with the Zeitgeist, they have greater trust in their fellow human beings than insurers might feel comfortable with. Whatever the case, the insurance industry is playing catch-up with consumers when it comes to the sharing economy. Customers are demanding flexibility in their insurance coverage, either with more umbrella policies, or with easily altered policies. If there is a 'sharing' in the sharing economy, it is that consumers increasingly do not regard assets or skills as being the exclusive use of one person or one employer – and this has been the basis of past insurance practice. A number of insurers are in contact with Uber, for example, to discuss how to extend coverage.
As a side note, it is not just insurers who are playing catch-up with consumers; the law is also lagging behind. Battles between taxi drivers and local officials about the legality of Uber – Toronto, Paris, London – have been common. Motoring by-laws are relatively slim compared to property. The Attorney General of the State of New York reported that in 2014 approximately 72% of Airbnb lets in New York City violated zoning and administrative codes, and were technically illegal. These are issues insurers cannot ignore. There is also a significant tax angle. In 2014, New York City Airbnb lets generated USD 282 million of revenue, a significant proportion of which is not declared. Just as property law is extensive, so is employment law. The ability to use sharing platforms such as TaskRabbit to generate an income is another area that will be a thicket of unresolved legal and insurance issues. Clearly, though, those will not be enough to stop users signing up.
In some ways the pooling and mutualisation of risk into the first insurance companies two hundred years ago or so might be considered one of the earliest examples of the sharing economy. Most insurers demutualised, floated their stock and became the names with which we are familiar today. Ideas die less easily, however; and now, aided by easy-to-use internet platforms, mutual, peer-to-peer insurance concepts are back.
There are variants to the model, but the broad principles are thus: a group wishing insurance, who may have pre-knowledge of each other, or may be grouped via an aggregator site, pay premiums into a pool to cover the same risk. Part of these premiums go to a common fund, which typically covers minor damages. The remainder of the premium funds the purchase of a common insurance policy with a commercial insurance provider (a form of reinsurance). When there is no insurance claim, the policyholder gets his/her share refunded from the group pool or credited towards the next policy year. If the group pool runs out of funds, a special insurance comes into force.
Swiss Re and the sharing economy
All insurers have to pay a certain amount of attention to the sharing economy; although it is not yet clear that Uber and its ilk will cause an 'Uberisation' of insurance. The underlying assets – the cars, the houses, the people – that make the sharing economy will all still need insurance. Peer-to-peer insurance may cut out the middle men at a primary level; but they still require excess-of-loss commercial cover, which represents opportunity for wholesale carriers.
Nonetheless, the sharing economy has attracted huge capital inflows and cannot afford to be treated lightly. Swiss Re has a project currently active which it will monitor for the purposes of better understanding sharing economy coverage requirements.
At another level, it will involve building bridges with the emerging giants in the sharing economy. Swiss Re will run a 6 months pilot project to meet with major shared economy players, establish relationships, analyse their business models, understand their risks and identify where insurance solutions would help de-risk, protect reputation and reinforce the service offered to customers.
As a means of beginning the dialogue with the new economic players, the Swiss Re Centre for Global Dialogue held an event in November 2015 exploring issues around the sharing economy with practitioners and external experts.
Note: Roland Voggenauer-Graf von Bothmer, Motor Expert EMEA, Swiss Re and Arnaud Kopp, Casualty Treaty Underwriter, Swiss Re also provided content for this article.