The sharing economy poses big challenges for insurers: not only do they have to invent new products to service it, they also have to compete with start-ups offering sharing-economy alternatives to traditional insurance models.
This was the theme of a recent presentation by Daniel Breier and Kelcey Smith, respectively director and associate at law firm Norton Rose Fulbright, titled “How the sharing economy is changing insurance: two waves of disruption”.
The Oxford Dictionary defines the sharing economy as “an economic system in which assets or services are shared between private individuals, either free or for a fee, typically by means of the internet”. Breier and Smith add it is “the utilisation of unused or under-used capacity, with technology as a backbone, often managed by a digital host or platform that brings the parties together without owning the product being shared”.
The first wave of the sharing economy has been the emergence of platforms offering shared products and services to which insurers will have to adapt. This wave has already affected our lives quite dramatically, with the likes of Airbnb in the accommodation and Uber in the transportation spheres. A wide range of services is now available online, from hiring a poodle for temporary animal companionship, to providing temporary funding by way of a peer-to-peer loan.
Breier and Smith say the sharing economy has given rise to regulatory headaches and complex legal problems. They say many commentators are of the view that the biggest obstacle to the smooth functioning of the sharing economy is, in fact, insurance.
Commercial providers of products and services have a well-established set of risk-protection measures at their disposal, within a legislative framework, to protect themselves and their customers. But the picture changes completely when private individuals provide a product or service, and they may find out the hard way that their insurance policies do not cover their commercial activities.
Take liability in the case of someone who suffers injury or financial loss. What protection is there, for example, for a property owner who lets out a flat through Airbnb and whose guest has a party, causing extensive damage to the flat? Or for an Uber driver who has an accident and faces an injury claim from a passenger?
Standard personal lines policies, Breier and Smith say, are not designed for “occasional sharing” practices that involve financial gain. For example, a vehicle is not covered under a regular car policy if it is used to carry passengers who pay a fare. A commercial policy would be an expensive option for the car owner, who may drive the car for his personal use 95% of the time.
The challenge for insurers, Breier and Smith say, is to bridge the gap between personal and commercial insurance, through adapting their products or developing new ones. A large American insurer has introduced an add-on option to its traditional household contents policy that covers certain commercial activities for a low additional premium.
But insurers also face, in a second wave of disruption, peer-to-peer insurance models offered by start-ups. In other words, they face the threat of shared economy enveloping the insurance industry itself. Peer-to-peer models range from an unregulated stokvel-type arrangement where risk is shared among peers to a behaviour-modification model in which risk is transferred to an institution, Breier and Smith say (see “peer-to-peer insurance platforms”, below).
Not everything will go smoothly for the disrupters, they say. Uber, for instance, faces tighter regulation in South Africa as taxi drivers’ livelihoods are threatened, and in London its licence application was rejected, because it was alleged that Uber did not provide sufficient safety and security for passengers.
PEER-TO-PEER INSURANCE MODELS
There has been some difficulty in applying a peer-to-peer model to insurance, Daniel Breier and Kelcey Smith say, because insurance is largely about covering infrequent but large, unexpected losses, which require a large institutional balance sheet. But various models have sprung up, with differing levels of institutional involvement. Three examples are:
• Teambrella, a Russian website, offers a simple stokvel-type, unregulated risk-sharing arrangement. Participants of a group donate to a Bitcoin wallet, and claims can be paid only with the consent of the group. Each group on the app has its own rules regarding the payment of claims.
• Friendsurance, a hybrid model that originated in Berlin, requires individuals within a group to pay a regular premium. The premium is split: a portion goes to buy traditional insurance and a portion goes into a savings, or Cashback, pool. Small claims are paid from the Cashback pool, whereas larger ones are covered by the traditional insurer. Anything left in the Cashback pool at the end of the year goes back to the group members.
• Lemonade, based in New York, is built more on the traditional model and attempts to modify the behaviour of its users in order to lower claim payouts. People signing up pay 20% of their premium to Lemonade, 40% to a reinsurance company and 40% into a give-back pool. Instead of policyholders receiving surplus cash from the give-back pool, the money goes to a nominated charity or cause. The theory, backed by behavioural economist Dan Ariely, is that, because a charity is benefiting, there is no incentive for a user to cheat the system.