Insurance pitfalls and opportunities in the sharing economy
With the rise of the so-called "sharing economy" comes a rise in risks to participants of all kinds, and to the companies that provide platforms for such "sharing." Over the last few years, the insurance risks evident in the activities of those participating in sharing economies have started to come to light. While regulators in many states are still struggling to catch up with the realities of these platforms and services, more companies are popping up and are being adopted by users around the world. It is important to understand the pitfalls, as well as the potential for growth and opportunities, surrounding this growing "sharing economy."
The so-called "sharing economy" began to appear in early 2000's, as social technologies enabled the emergence of new business models that capitalized on collaborative consumption. eBay and Craigslist were early examples, even pre-dating the term, that allowed users to find each other in an attempt to make good on the old proverb, "one man's trash is another man's treasure." Today, the term "sharing economy" covers a wide range of digital platforms and offline activities, from ride-sharing companies (with activities in over 50 countries), to smaller initiatives such as tool libraries that are part of local public libraries. While there is no uniform definition for the "sharing economy," it appears to consist of four broad categories: (1) redistribution of goods; (2) increased usage of durable assets; (3) exchange of services; and (4) sharing of productive assets. eBay and Craigslist are examples of the first category. The second category includes car rental services such as Zipcar, bicycle rental or sharing companies, and ride services (such as Uber, Lyft and Sidecar). The second category also includes lodging sharing companies such as Airbnb and Couchsurfing. The third category includes companies such as Task Rabbit, which allow users to sell services while connecting with other users in need of those services. The fourth category includes services such as communal offices or educational platforms that focus on sharing information in order to promote production rather than consumption. In this IREG Update issue, we will focus primarily on ride services or ride-sharing.
Ride services such as Lyft, UberX (the ride-sharing arm of Uber) and Sidecar connect online platform users with drivers available near the user at any given time. Drivers for these platforms do not have to be the traditional "professional driver." Rather, drivers can use their own personal vehicles to provide rides for a fee during times of their choosing. These platforms, specializing in connecting drivers and riders for the transportation of passengers for profit in personal vehicles, have become known in the insurance industry as transportation network companies (TNCs).
The main risks affecting TNC participants are coverage gaps, which were spotlighted by the unfortunate death of a five year old girl in a collision with an UberX driver on December 31, 2013 in San Francisco. The activities of TNC drivers have been split into three periods of time by regulators, including California Insurance Commissioner Dave Jones:
Period 1: "Pre-Match" — The driver is logged on to the application, but has not yet been matched with a rider.
Period 2: "Match Accepted – Passenger Pickup" — The driver has been matched with a rider on the application and is en route to pick up the passenger.
Period 3: "Passenger Occupying Vehicle" — The driver has picked up the passenger and is driving the passenger to the agreed upon destination.
Coverage gaps arise because TNC drivers use personal cars that are generally covered by personal automobile insurance. However, personal automobile insurance policies exclude commercial activities, such as transporting passengers for a fee. Therefore, many TNC drivers operate without realizing that their personal automobile insurance policies will not cover them while they are engaged in this commercial activity. While large TNCs provide some commercial auto coverage, the amount provided is different from coverage provided by traditional taxi and other livery companies because it does not cover the TNC driver during all three periods mentioned above. Usually a TNC company's commercial coverage is not triggered until Period 2 or even Period 3, leaving a significant gap in coverage during Period 1, when the driver's personal automobile carrier would argue that commercial activity has begun and therefore exclude coverage.
The National Association of Insurance Commissioners (NAIC) recently released the TNC Insurance Compromise Model Bill, which reflected a collaboration between multiple insurers and UberX. Under the Model Bill, there is a minimum amount of coverage required in Period 1, which increases at Periods 2 and 3. Unlike other state models, there is no presumption of or presumption against coverage for TNC related activities. The Model Bill also does not have a requirement for maintaining comprehensive or collision coverage. The NAIC also adopted a TNC White Paper on March 31, 2015, which summarizes the issues surrounding TNC insurance regulations and, as Exhibit A, the steps various states and municipalities have taken to address and regulate these activities.
A copy of the TNC Insurance Compromise Model Bill can be found here.
A copy of the NAIC's TNC White Paper can be found here.
Insurance underwriters are notoriously hesitant to underwrite new types of risks without years of data to back up their actuarial estimations. However, TNC driver coverage also presents a growth opportunity for insurers. Coverage endorsement can be developed to help TNC drivers close the insurance gap. Moreover, these issues have created a need for a hybrid insurance product, which would be purchased by TNC drivers, serving as a personal automobile insurance policy when the driver is using the vehicle for personal use, but with more commercial coverage during the ride service periods. Some insurers have already begun developing and offering such hybrid products. Being a part of this solution would give the insurance companies a seat at the table as these regulations are being developed, allowing companies to be proactive, rather than reactive, in this growing market.
Online ride services have been around since the late 2000s and show no signs of slowing down. It is important for companies to understand the legal and regulatory landscape that these companies are operating under to make sure that these programs are compliant, and for insurers to make sure that they are protected from claims they have intended to exclude. However, despite the possible pitfalls, there are many opportunities for companies to be first-movers in this emerging insurance market. As regulators continue to sort out how best to deal with this emerging market, companies can play a role in shaping these regulations as participants, rather than simply reacting.
Look for future IREG Update issues to address insurance challenges and opportunities related to other categories within the "sharing economy."
Noteworthy links from the past two weeks
- NY Superintendent Ben Lawsky announced he is leaving his department in June, and speculation about his successor intensified [The New York Times]
- Superintendent Lawsky discussed his agency's focus on individual accountability in its investigations [CNBC]
Property & Casualty
- Florida became the fourth state to ban "price optimization" techniques," and the industry worried about the breadth of the definition [Palm Beach Post]
- Florida passed a drone privacy law that will affect insurers that use drones to inspect properties [Law360]
- The New York Times applauded efforts to "reform" the title insurance industry [The New York Times]
Life & Health
- FSOC said that annuities with guaranteed living benefits pose risks for the financial system [Insurance News Net]
- Drafters of the ACA admitted that the four words being scrutinized by the Supreme Court were a drafting error [The New York Times]
- Missouri fined Aetna $4.3 million for failing to provide autism coverage [Missouri Department of Insurance]
- The Centers for Medicare and Medicaid Services proposed new rules for managed care organizations [Law360]