The sharing economy is here to stay. Its impact has been felt mainly in areas such as ride-as-a-service and ridesharing; home and office space sharing; and workforce and services on demand. Players such as Uber, Airbnb and Upwork are among the businesses that have made their mark in this space.
While the growth of the sharing economy is impressive, it presents new types of business models and risks for property and casualty insurance carriers, including the use of personal property for commercial purposes; high-frequency transactions; lower premium amounts per transaction; less control over how assets are used; and significant reliance on external data for underwriting, pricing and claims.
Some insurers have shown little interest in covering these risks; in fact, a few actually cancelled policies after covered assets were offered through the sharing economy model. Yet in our view, this phenomenon offers significant revenue opportunities for P&C carriers at a time when many are struggling with flat-line growth.
Carriers willing to participate in the sharing economy must make investments to modify and upgrade their business processes, operations, and technologies. Those that choose not to take part must still make changes to their existing products and coverages, as well as their underwriting and claims processes. Either way, forward-thinking P&C carriers can profit from this important trend.
The Impact on Property & Casualty Insurers
The disruptive changes brought about by the sharing economy have caused a ripple effect for P&C carriers. This is especially evident as the line of demarcation between personal and commercial lines continues to blur in scenarios where personal assets are used for commercial purposes.
For example, assume a consumer (call him Joe) has registered his car through a ride-sharing company, and provides ride services for a few hours a day. When Joe drives his car to drop off his kids at school, it is for personal use, and his personal lines auto policy provides coverage. If he is driving a passenger who has contacted him through a ride-sharing app, then his vehicle is being used commercially, and his personal lines policy will not provide coverage in the event of an accident. The same principles apply when renting out a home or a room. Similarly, providers of on-demand services require commercial insurance coverage like workers’ compensation, commercial auto, general liability and crime.
Clearly, product owners and service providers participating in the sharing economy need the flexibility to opt in and out of insurance coverage – much like pay-as-you-go business models. Consequently, carriers must factor in the unique risks of each situation when making underwriting and pricing decisions.
As the sharing economy proliferates, insurance carriers need to think long and hard about how to align their business, operations and technology strategies with this disruptive trend and remain responsive to their customers, particularly the millennial segment, which represents a long-term growth opportunity.
Revenue Growth & Customer Retention
We believe there is considerable potential for carriers to realize premium revenue in the sharing economy, especially in segments like ridesharing, home and office space sharing, and on-demand workforce services.
Customer retention is a key issue for today’s P&C carriers (especially personal lines carriers). As more personal lines customers participate in ridesharing and home-sharing, carriers that do not offer coverage for these consumers could have trouble retaining them. Our rationale is based on the belief that customers might be unwilling to carry multiple policies – preferring a single one that covers both personal and commercial use of their vehicle or home.
What follows are areas that hold premium potential from this growing demand:
We estimate that the ridesharing segment will provide ~$2 billion in revenue to the P&C industry by 2020. According to a TSRC Berkeley report, there were 1.3 million ridesharing members in the U.S. in 2014, and that base is growing at a rate of 35% annually. We estimate the incremental cost of auto insurance for ridesharing to be about 30% of the annual cost of auto insurance. If premiums remain equivalent for the next six years, the additional premium from this segment is projected to reach $2.15 billion by 2020.
Home & office space sharing.
Approximately 30% of the one million home and office space listings by companies such as Airbnb and HomeAway are in the U.S. Each unit is charged an average short-term rental liability premium of $432 annually. Based on these estimates, the premium potential from the space-sharing market is valued at $130 million in 2015. Considering the space-sharing unit growth expected in the next five years at the overall sharing-economy market growth rate of ~24%21 (CAGR), the premium potential in 2020 is at least ~$380 million.
Workforce on-demand services.
The self-employed U.S. workforce is growing – estimated at 53 million in 2015 – roughly 34% of the entire domestic workforce. Union-group plans for freelancers, available from small-business insurance companies such as Hiscox, start at around $22.5 per month. It is projected that about one-third of these workers are full-timers. Assuming that this segment does not carry liability insurance, the premium potential here is estimated at $4.7 billion in 2015. The anticipated growth in the freelance U.S. workforce is expected to rise to 60 million by 2020. This should provide much-needed revenue growth for the small commercial business segment.
Special Considerations & Challenges
As previously noted, carriers that decide to issue policies for customers within the sharing economy will have to change their existing processes, operations and technology platforms. Even those that opt out of providing coverage for these groups will need to amend their product forms, policy language, underwriting and claims processes to ensure they are not taking undesirable risks or paying unnecessary claims.
What follows is an overview of how the sharing economy impacts P&C business processes, operations and technology:
Product design: The sharing economy has created gaping holes in insurance coverage for transacting parties. For example, a person who rents out his property will only receive coverage from his homeowners’ policy for the named insured and the people living in the household. The policy will not cover losses that arise while the home is shared. This means that the homeowner will have to take out a new policy for insurance coverage when the transactions are live, or make amendments to his current policy. Similar gaps exist in ridesharing.
Distribution: Carriers need to rethink their distribution strategy, given that traditional distribution models may not be highly effective for selling products to participants in the sharing economy. On this emerging landscape, blanket policies could be sold to consumers via an intermediary to cover all transactions, or transaction-based.
Underwriting: A unique feature of the sharing economy is that transactions are temporal, episodic and small – making it prohibitively expensive and time-consuming to manually underwrite every single risk. Hence, carriers need to be creative in identifying new parameters for underwriting, and pre-qualifying drivers and asset owners. Carriers’ underwriting systems should be capable of processing these additional data sets, which can help assess risks and enable real-time underwriting.
Pricing: As happens with the introduction of any new product, carriers may have to struggle initially to find the right rating and pricing models for the sharing economy, especially given the lack of historical loss information. Companies will need to analyze and assess exposure units and rating factors to arrive at an appropriate premium. For instance, in the transportation segment, they could consider parameters such as time of ride, distance, traffic, the number of passengers, neighborhood, and weather.
Policy servicing and billing: In the sharing economy, policy terms could span anywhere from a few minutes, to a few weeks, to months. A ridesharing driver who provides occasional rides to customers only a few times a week may need a per-day or even a per-ride policy. For carriers, this means having to reengineer their product sales and servicing processes, and adapting to short, repetitive sales cycles and multiple customer touchpoints to modify their policies for new transactions.
Claims: Carriers will need to make changes to their current claims processes, mostly at claims submission (FNOL), to ensure that accurate information is captured, determine if the claim event occurred during a sharing-economy transaction, and confirm which policy is liable to pay the claim if there are multiple plans. For example, in the case of transportation, carriers should ask questions regarding the nature of vehicle use at the time of an accident. Claim investigators will need to be more rigorous in order to unequivocally establish the policy in force at the time of the incident.
Explore the interactive graphic, (Figure 1), below for a high-level overview of the impact across business processes, operations and technology.
The sharing economy has the potential to completely disrupt the way traditional carriers operate. Yet few carriers have responded to the opportunities, as well as the demands, this market presents. We believe the time has come for carriers to start thinking, strategizing and aligning themselves with the needs of this segment – prepared to develop new products and services, redesign underwriting and pricing, and reorient their business processes and operations to accommodate the dynamics of this economy.
Fortunately, the field is still wide open, since most carriers are taking a “wait and watch” approach. Moving fast to collaborate with leading sharing-economy companies to fill the current gaps will drive success in the long run.