In 2014, more than 8 million people took over 140 million rides using Uber, a global ridesharing service that does not own a single cab. In the same year, peer-to-peer hotelier Airbnb made over 37 million bookings without owning a single room.
These companies and others like them operate in what is known as the “sharing economy,” a concept that allows consumers to rent or share underutilized or surplus resources for an agreed-upon price. It is a shift that is transforming existing businesses and sectors – especially travel and hospitality – and generating new business models.
Looking over the horizon, the sharing economy appears poised to disrupt additional industries, including finance and insurance.
The Evolution of Sharing
The concept of the sharing economy surfaced roughly 15 years ago. Since then, it has grown at a staggering pace. Valued at just $26 billion in 2013, the market is projected to reach $335 billion by 2025. Furthermore, 17 “sharing” companies are individually valued at one billion dollars or more, thanks to their early success and speed of disruption.
So far, the impact has been felt primarily in the transportation, hospitality and temporary-work (hired help) industries:
Transportation. This area focuses on services such as car rentals, the conveyance of people and goods, and the rental of parking spaces – allowing individuals to monetize idle capacity by offering it for use to other consumers. Since its advent, transportation sharing has gained popularity, not only by providing more transit options, but also by enabling shorter wait times, ease of use and, in many cases, lower prices. Today, Uber and Lyft dominate this market in adoption, revenue and market capitalization.
Home and office space sharing. Idle property capacity applies to unused private assets, such as an extra room, an entire residence, a vacation home or even extra office space. Home and office space sharing allows people to profit from excess space by offering it to customers for a few hours, days or weeks. The dominant players in this segment are Airbnb and HomeAway.
Workforce on demand. The self-employed U.S. workforce is estimated to number about 53 million, which equates to approximately 34% of the entire U.S. workforce. Consequently, many companies and individuals engage these part- or full-time freelancers when building a website, installing equipment, assembling furniture, or for services such as housecleaning, for example. On-demand workforce services are led by companies such as Upwork and TaskRabbit.
The concept of a sharing economy gained momentum as consumer attitudes shifted from wanting to own, to being more willing to share and participate in a collaborative environment. The massive adoption of digital technologies spurred more growth – creating a disruptive force that redefined how goods and services could be sold and consumed.
Dissecting Changes in the Societal Mindset
Numerous factors have facilitated the phenomenal growth of the shared economy. Five in particular stand out:
A willingness to share assets and services.
Cash-strapped consumers, especially millennials, increasingly prefer access over ownership to avoid the associated overhead. That’s not surprising, given the upfront capital investments needed to purchase things like homes and cars, or lease prime office space. The sharing economy provides an alternative for players (businesses and consumers) to monetize under-utilized assets. According to research by Nielsen Media, 68% of global consumers are willing to share or rent their personal possessions in shared communities for a fee, whereas two-thirds are likely to use the products and services from others in such a community.
A willingness to trust one’s peers.
Recommendations and reviews by peer groups and prior users are key factors in the sharing economy, and the contemporary form of customer referrals and word-of-mouth endorsements. Average ratings, number of ratings and user feedback play a significant role in customers’ decisions regarding the purchase and consumption of assets and services. Furthermore, the proliferation of Internet connections, mobile devices, collaboration tools and the rise of social media have increased connectivity among peer groups willing and eager to share feedback.
The search for additional sources of flexible income.
Economic uncertainty, global financial issues and lower interest rates have raised concerns about the increasingly high cost of living and the decreasing returns from traditional investments. Furthermore, nearly 17% of youth in the U.S. are unemployed, and others are swimming in debt from student loans. These circumstances have led many in the younger generation to look for alternate sources of income and more flexibility through freelancing. The option of alternative income is appealing – even for those who belong to Generation X (people aged 35-49), who appear willing to participate in the sharing economy.
Greater access to capital.
Investors and venture capital firms have flocked to fund companies in the sharing economy. The market’s well publicized growth potential, the unfair advantage of organizations that can effectively manage costs to match buyers with sellers, plus the minimal capital investments required to launch these companies and become cash-flow positive are strong attractions. With the right pricing strategy, these businesses have the potential to generate strong profits. As a result, the industry is experiencing exponential growth in investments (see Figure 1 below).
Widespread technology adoption.
The impact of social media and the ubiquity of smartphones cannot be overstated. Smartphone penetration rates have reached 60% of the mobile installed base in the developed world, with 51% in Europe and 70% in North America. With the increase in smartphone take-up, mobile data traffic is expected to grow tenfold. This means that people can now offer, locate, and access goods and services with a quick swipe or tap. As a result, startups in the sharing economy depend heavily on mobile apps.
More Choices, Affordable Prices
The sharing economy offers greater choice, typically at prices that are lower than traditional options. It only helps that companies such as Airbnb and Uber employ machine intelligence to determine and fine-tune hourly demand and changes in market conditions – a science that allows them to offer more dynamic pricing.
In the case of ridesharing, customers can choose different types of vehicles – an option traditional cab companies do not typically provide. Also, companies in the sharing economy typically offer greater security (such as the ability to track the car or see the driver’s profile). A recent survey revealed that cost-effectiveness (22%), better service (21%), convenience (11%), and reliability (11%) are the key reasons consumers choose Uber. Similarly, big hotel chains are often unable to compete on price because of higher overheads and operating costs, whereas home and office-space sharing companies have minimal operating expenditures.
In the last millennium, brands were built on institutional trust. Companies created products or services, used advertising and marketing to influence consumer perceptions, and employed appropriate distribution channels to reach them. But now, with the growth of social media, peer networking, and sharing companies such as Uber and Airbnb, consumers are gradually overcoming their fear of interacting and directly exchanging goods and services with strangers.
Digital tools and modern social norms make it easier for virtually anyone to become an entrepreneur by offering underutilized resources – cars, an apartment, spare time or other personal assets – to people who need them, thereby increasing total supply. When this happens, options increase too, and prices decrease.
But as with all economies and market efficiencies, opportunity still exists. In part two of this series, we’ll examine how property and casualty insurers can leverage the sharing economy.
To learn more, read our full report on The Sharing Economy: Implications for P&C Insurers or visit our Insurance business unit.