With phenomenal growth over recent years, sharing economy start-ups have become an important part of the modern business ecosystem. Digital technology has reduced transaction costs, making sharing of assets cheaper, easier and possible on a much larger scale. The start-ups engaged in this field have low operational costs because they do not have the inventory expenses associated with traditional businesses. For instance, Uber does not own its cars, and Airbnb does not own rental units. The ownership of assets and hence the related risks are borne by the independent contractors associated with the start-ups, often individuals rather than firms. Mixing personal and commercial use was not foreseen in traditional personal lines insurance policies, such as private passenger auto or homeowners, which created a gap in the market.
Car or home sharing is based on trust. Generating that trust is the platform’s responsibility, supported with background checks, online reviews and ratings. Liability and reputational risks arise when that trust is broken or misplaced. In particular, liability in the sharing economy is complex and potentially challenging to allocate between the different parties involved. Insurance can be an important tool to enhance the trust: it should be seen more as an expense to create an intangible asset, similar to marketing or advertising. New covers supporting these business models are becoming available. In few cases, legal requirements accelerated this trend. For example, San Francisco's "Airbnb law" requires hosts who rent their property on a home-sharing platform to provide liability insurance. For example, Airbnb began offering host protection insurance in 2014. In general, the evolving solutions for the sharing economy constitute a new mix of property, liability, reputational and cyber risks.
Another significant example of how insurance might evolve due to technology disruption is the evolution of transportation network companies (TNCs) like Uber and Lyft in the US. Many of the drivers who work for TNCs do not have a livery driver’s license, and their cars are neither registered nor insured as commercial vehicles. There are three distinct periods where a personal auto policy offers no coverage to TNC drivers, according to a National Association of Insurance Commissioners (NAIC) March 2015 white paper:
* Period 1: when the TNC driver logs into the TNC application but is not matched with a passenger;
* Period 2: when the TNC driver has made, and accepted, a match with a prospective passenger but that passenger is not yet in the vehicle;
* Period 3: when the TNC driver has picked up the passenger and the passenger is in the vehicle.Generally the drivers' standard personal auto policies will not provide coverage for ride-sharing.
This is where a commercial policy for the driver of the TNC is necessary. Several TNCs in the US provide cover for their drivers for third-party liability and uninsured motorist coverage with limits of USD 1 million per incident during periods 2 and 3. This ensures that customers and third parties are protected should an accident occur during a ride arranged by the TNC. The policy also covers third-party liability claims during period 1, but at much lower limits. The TNC policy is designed to dove-tail with the independent drivers' personal auto policies so that the latter do not need to obtain expensive commercial policies themselves. The coverage is higher than the minimum required in most US states for taxi operators and helps the TNCs to establish a reputation of safety.
The impact of the successful disruptors Uber and Airbnb is not limited to their own industry. By setting their own trend in the startup industry, it opened up a new direction for business models in the sharing economy. They demonstrated that it is possible for a business to generate growth and profit without making significant investments in the related assets. Instead of locking up capital in order to purchase physical assets, these businesses have achieved growth by focusing on connecting (existing) supply and demand in the market. We can expect to see the concepts of the sharing economy proliferate in many more areas. The insurance challenges of commercial use of a private assets within the framework of the traditional product offering of personal and commercial policies will also follow. This protection gap constitutes a new frontier of developing new innovative solutions and providing much needed coverage to the sharing economy.
For more information on how technology and other structural changes have changed the risk landscape of our economy and how risk transfer solutions are adapting, see sigma 5/2017