Insuring collaborative consumption:

It’s not a fad. It’s an unstoppable and sustainable force. Now generating around US$15 billion in global annual revenue according to a recent PwC report, the ubiquitous sharing economy has experienced explosive expansion in the wake of the financial crisis and revolutionised a number of industries, with no indication of decelerating in the short or long term.

Driven largely by a fundamental shift amongst consumers from private ownership to shared usage and access, the sharing economy emphasises the collective – ‘collaborative consumption’ providing economic (and societal) benefits through the shared consumption of goods and services. The rapidly developing segments in the sharing economy – car sharing and peer-to-peer (P2P) travel accommodation – have leveraged unprecedented advances in technology to match cultural trends and the evolving needs and demands of their customers successfully (and profitably).

Inherent in the commercial activities of sharing companies, however, are a wave of risks, which potentially leave their customers vulnerable on the question of coverage, not least because of a lack of products from larger insurers which are fit for purpose and appropriate to the risk being underwritten. Armed with innovative and cost efficient solutions and hard cash from VC firms (who, since 2010 have funnelled an astonishing US$2 billion into the insurance tech industry), startup P2P insurance firms and insurance intermediaries in the telematics space are now bridging the gaps between personal and commercial coverage left by traditional policies, and radically disrupting our industry. Perhaps unwittingly, they are also shifting the paradigm back to a fundamental mutuality of loss-sharing reminiscent of the historic origins of the Lloyd’s market.

Part of a wider series on the sharing economy, this article:

• considers the insurability of selected risks presented by the sharing economy, using an example from car sharing
• explores certain innovative products (and the new breed of competition championing them) that have emerged to insure against such risks.

A basic transaction within the sharing economy can generate a myriad of legal complexities, raising difficult questions around liability and coverage, as illustrated by the below example. A driver for a car sharing platform strikes a family, killing a young boy. The driver was not carrying a passenger at the time. He was, however, logged into the smartphone app, meaning that prospective customers could still summon a ride. As such, there is an argument that he was still deriving a commercial benefit from the app at the time of the tragedy.

Given that commercial ride sharing is a common exclusion in traditional motor policies, the driver’s own personal policy would almost certainly not cover losses arising from tortious claims brought against him. From the insurer’s perspective, the driver was operating a business from the point he accessed the app, regardless of whether or not passengers were also in the vehicle. Moreover, it is possible that the driver’s personal policy would be invalidated in any event, had he failed to disclose to his insurer that his vehicle was simultaneously being used for commercial ride sharing.

As a matter of UK insurance law, the driver would have been required to have some form of commercial private hire vehicle insurance, which may have been offered through an agreement with the platform. However, traditional policies of this type have historically only provided coverage from the point the insured driver accepts a ride, not when the insured is merely ‘logged in’ and looking for business. The driver is therefore potentially left personally exposed to uninsured losses during this period and injured parties would be exposed accordingly.

The digital intermediary itself is also in a vulnerable position under its own commercial policy. The above example is not entirely dissimilar to an incident in the US, where the victim’s family brought a wrongful death lawsuit, naming not only the driver but also the sharing company as defendants. Depending on the terms of its own commercial policy, the sharing company could also potentially be left to pay-out for losses as a result of a failure to screen drivers on its platform.

Such gaps in coverage have led to a surge in new startup P2P insurance firms and the unveiling of innovative products (including from a handful of larger insurers), in particular ‘top-up’, ‘pay-as-you-go’ and ‘pay-per-mile’ policies, that would have provided greater protection to our driver in respect of the additional risks to which he was exposed from his participation in the platform. There are also tangible opportunities beyond personal lines of business, in particular for the platforms themselves, who have started to build exclusive relationships with larger insurers for their own commercial lines.

Personal and commercial lines offered by traditional insurers are simply not underwritten or priced to cover the risks associated with car-sharing and P2P accommodation, where people are swapping between personal and commercial use of personal assets. The algorithms applied in standard pricing models are calculated on the basis of assumptions of the insured driver or homeowner, not the risk profiles of passengers and guests or even the combined personal-commercial risk profile of the insured himself. P2P insurance and microinsurance, however, are challenging the traditional models and seeking to interact with consumers more effectively to collect risk data, tailor products and price competitively.

One such UK-based P2P motor insurer seeks to reduce the cost of insurance by sharing insurance needs within a group of other drivers, usually family members and friends, enabling the cohort to co-manage its own pool of money and claims. The premium is calculated on the basis of the regular criteria and goes towards the group’s insurance fees and the group’s pool. Claims are paid out from the pool throughout the year, with the group’s insurance fees providing the buffer, should the pool run out of funds. Money is distributed to the group’s members at the end of the year in the absence of claims. Interestingly, this structure reflects a modern yet natural extension of the original concept from time immemorial – groups of individuals coming together to insure another individual, underpinned by a focus on personal responsibility and a readiness to trust and share losses – and all without the need for large intermediaries.

Similar platforms have proliferated in Canada, Germany, New Zealand and the US. Due to launch later this year, US platform Lemonade is backed heavily by VC firms Aleph and Sequoia Capital. Given the underlying equity structure of some of these startups and the current soft market, it will be interesting to see how their emergence will impact insurance M&A activity in the next three years.

There has also been a rise in microinsurance products which are more attuned to the behaviours of their customers. Based in the US, Metromile offers a usage-based product, centred on a ‘pay-per-mile’ insurance model. Supported by an app and a tracking device installed in the vehicle, Metromile charges its customers a monthly base rate and an additional amount based on the miles actually driven. Recently, the insurance intermediary has integrated with Uber to offer Uber drivers its product, where the platforms interact with one another to automatically detect the beginning and end of a journey, thereby distinguishing between personal miles (covered by Metromile) and commercial miles (covered by Uber’s own commercial policy) driven. The product is tailored broadly enough to cover specific risks in the period whilst an Uber driver is looking for a ride and would have been particularly useful to our driver in the above scenario. There are also some sharing companies that have aligned with a number of established insurers to fill coverage gaps by creating partnerships, like the BlaBlaCar/AXA and Lyft/MetLife relationships announced last year.

Whilst it presents its own unique set of risks, P2P accommodation has also seen a rise in similar top-up policies, including from Belong Safe, a UK fintech platform founded last year. Such on-demand, ‘pay-as-you-go’ policies are gaining popularity amongst the AirBnB community, where a growing number of hosts are finding their traditional home insurance policies being invalidated for failing to disclose that their homes are being used for profit, leaving them to pick up the losses in the event of damage to their homes or where a guest injures himself during a stay.

Clearly, there is enormous yet unexploited potential within the sharing economy for insurers and intermediaries alike to reshape our industry. This will, however, require a new approach to meet the dynamic needs and changing behaviours of a millennial generation which shares and manages risks in new and innovative ways. Whilst a cohort of new alternative providers are quickly emerging in response to these demands, traditional insurers face a stark choice on how to react and adapt their internal processes and underwriting models to embrace these changes. A small number of major players have engaged, but others who remain blinkered to the new opportunities risk being left behind.