The Sharing Economy: Regulatory implications for the insurance industry

Introduction

The technology-enabled sharing economy is an increasingly significant social and economic phenomenon. Increasing numbers share their homes (Airbnb), hire cars (Uber) and offer labour services (Freelancer), and people are also now sharing boats, tools, gardens, pets and clothes.

This article explores the regulatory ramifications of the sharing economy for the insurance industry. It is not intended to be an exhaustive research nor does it constitute Lloyd’s official position on the regulatory implications of the development of this new economy. Instead, we hope it provides readers with an overview of a key emerging regulatory risk that insurers will want to monitor closely as the technology develops further.

What is the Sharing Economy?

Increasingly, consumers value experiences over ownership. Three out of four millennials would rather spend money on a destination experience or event rather than owning it. Two in three Australians use the sharing economy¹ e.g. Uber, Airbnb, eBay and more). Millennials live in a financially precarious world, and it is estimated in Canada, for example, that by 2025 this generation will make up 75% of spending in the Canadian economy.

This shift from a resource economy to a knowledge-based economy is fast changing and, as innovation is a moving target, a successful regulatory strategy will require flexible and responsive regulations in order to keep up with the pace of technological innovation.

Though there is no single agreed definition, the sharing economy model refers to the business model that involves individuals sharing their resources with strangers, often enabled by a third party’s digital platform. This differs from traditional methods, such as running a B&B or owning a timeshare, as technology has reduced transaction costs, making it cheaper and easier to share assets than ever—and therefore possible on a much larger scale. The big change is the availability of more data about people and things, which allows physical assets to be disaggregated and consumed as services.

Regulatory challenges²

As with most disruptive business models, the rapid acceleration in popularity of sharing economy companies has overwhelmed governments’ ability to regulate based on traditional regulatory mechanisms. Traditionally, the insurance industry has organised itself around commercial products and personal products, which for the sharing economy is inconvenient as it offers products in both camps.

Imposing older regulatory regimes on to the sharing economy may not meet the primary regulatory objectives of efficiently maintaining a level playing field for all industry stakeholders to compete, or effectively safeguarding consumer and supplier welfare. The danger in applying the traditional regulatory model is that it is inflexible to the rapid change that sharing economy companies frequently undergo.

Appropriate regulation for sharing economy ventures is vital to ensure that both consumer and insured are protected in the event that something goes wrong. High-profile cases have emerged with the result that insurance products have been created or tailored to address such issues. For example, in 2011 a woman rented her San Francisco home only to become a victim of vandalism and theft. In light of the severity of the situation, Airbnb evaluated its insurance options and introduced “Host Guarantee” which provides host property damage protection for up to USD1,000,000. This coverage is written through a Lloyd’s participating insurer with Airbnb quoting Lloyd’s as “one of the world’s most reputable insurance organisations.”³

What regulation should do

In order to keep pace with the dynamic environment, insurers and regulators must work together to ensure the economy is supported and that consumer protection is of utmost importance. The guiding principles should be for regulation to support insurers to innovate from within: it needs to match the products which consumers want and to be simple, transparent and clear. The government in Seoul has declared it ‘the sharing city’ and outlined detailed plans to support and promote start-ups with an initial allocation of USD 240,000 funding⁴. The city has world-class IT and civic infrastructure: it offers free WiFi service in all outdoor spaces and has the highest smartphone penetration rate in the world at over 67%⁵. Using this infrastructure, in addition to strong public-private partnerships, the Sharing City project is working to connect its tech-enabled citizenry to sharing services and each other.

The UK government is announcing numerous commitments in the sharing economy area to encourage investment and innovation. The Spring Budget for 2017 announced an initial allocation of GBP 270m for the Industrial Strategy Challenge Fund (ISCF). This will support the development of transformational technologies, including artificial intelligence. Digital infrastructure is also being invested in, with 5G technology and full fibre investment as part of the strategy.

Whilst recognising the dichotomy between traditional product offerings and disruptive sharing economy models, regulation must ensure that it still enables and encourages growth of commercial activity; regulation should not rid businesses of their competitive advantages and make them into a version of what already exists in the traditional marketplace.

There is an opportunity to reduce overall regulation or to streamline the current regulation to be technology agnostic. In Ontario, Canada, they are looking into the “red tape challenge” in asking all industries to offer a wish list of what they would change, such as amending the Insurance Act and corresponding regulations so that all insurance transactions and communications can be performed electronically, thereby keeping pace with technology and apps, and significantly reducing the need for a paper slip.

What insurers should do

The rise of digital technology is radically reshaping the insurance industry throughout the world. Carriers who are quick to capitalise on this transformation will secure new markets, customers and revenue streams. They will be well positioned to take advantage of further changes in the insurance industry. In Europe, AXA for example has partnered since 2015 with BlaBlaCar, the world's leading long distance carpooling service, to provide their members with a first-of-its-kind product that offers additional insurance coverage for carpooling in addition to the primary policy.⁶

It is known that most users of the sharing economy do not have the insurance coverage that they would like, and only find this out after something occurs. This presents a huge opportunity for insurers. If insurers can find a way to match the personal and commercial product split, it’s a commercial chance to offer quantified and tailored coverage – whether that is by a product add-on to traditional commercial insurance such as Grab Singapore’s new offering⁷, or a new product altogether. Grab, a ride-hailing firm, have announced that it is extending group personal accident insurance to users of its carpooling service, GrabHitch. The policy is aimed at complementing the personal motor insurance bought individually by drivers with no additional cost to users.

Interesting deals are now being brokered all over the world between sharing economy businesses and the companies that have worked out how to insure their new models. New businesses, such as Vrumi (a London-based start-up that connects professionals needing work space with householders who have rooms), have begun working with insurance start-up, SafeShare Global, to fix “the biggest practical problem” facing the expansion of the sharing economy. SafeShare are launching a new product to protect property owners from losses relating to damage and theft caused by commercial tenants from the Vrumi platform. SafeShare’s venture generates income for the traditional insurance industry as its policies are underwritten by Lloyd’s of London⁸.

Lemonade, a New York-based start-up insurer, is a new and disruptive entrant to the world of traditional insurance. Viewing the current state of the insurance industry as “frustrating and outdated”, Lemonade’s founder set out to make the process nimble. Users make claims via their smartphones (with the fastest claim ever being paid out in 3 seconds by Lemonade), and using algorithms instead of people to process claims enables the process to speed up significantly and for less money. In addition to the shared economy aspect of this new venture, Lemonade offers an innovative element to their platform compared to traditional insurers in allowing consumers to pick a charity of their choice when they sign up. At the end of each year, if supporters of the same cause don’t make too many claims, a portion of the premium paid to Lemonade is then passed on to the non-profit, as part of what Lemonade calls ‘Giveback’.

Two other notable examples of global insurers taking advantage of new product offerings are Allianz and Allstate. Munich-based Allianz, the world’s largest insurance company, has set up a unit dedicated to alternative channels like the collaborative economy where the focus has been mostly on motor insurance.⁹ Allstate, the second largest personal insurer in the United States behind State Farm, is the first major US insurer to position itself in the home-sharing sector, offering personal property protection tailored to home-sharers. Their product, “HostAdvantage”, can be added to a homeowner’s existing policy for about USD 50 a year and intends to fill some of the personal property protection gaps that may exist in a typical homeowner’s policy or in the Airbnb Host Guarantee.

To conclude

The risk, however, is that insurance providers that are slow to respond will soon find themselves overtaken by their competitors. Eventually they will struggle to compete in the digitally transformed insurance industry. As such, insurance for the sharing economy needs to be flexible and responsive to customer needs. Ultimately, there are opportunities for insurers to win market share with the right mix of innovative, personalised products – whether that is by looking to partner with new players, or by looking to those who have disruptive thoughts and applying that in the traditional insurance market.

References

¹ Bloom, Sam (2017). 2 in 3 Aussies use shared economy (Uber, eBay, Airbnb, and more). [online] Canstar. Available at: https://www.canstar.com.au/news-articles/2-3-aussies-use-shared-economy-uber-ebay-airbnb/
² NSW Business Chamber (2015). The Sharing Economy. [online]. Available at: http://www.nswbusinesschamber.com.au/NSWBCWebsite/media/Policy/Tourism/Sharing-Economy-Issues-Impacts-and-Regulatory-Responses-COMBINED-POLICY-9-11-15.pdf
³ https://www.airbnb.com/guarantee
⁴ International Insititute of Communications. Impact of the Sharing Economy. [online]. Available at: http://www.iicom.org/regions/asia-pacific/item/impact-of-the-sharing-economy-2
⁵ Johnson, Cat (2014). Sharing City Seoul: a Model for the World. [online] Shareable. Available at: http://www.shareable.net/blog/sharing-city-seoul-a-model-for-the-world
⁶ Guillaume, Cabrere (2017). How to Insure the On-Demand Economy? LinkedIn. Available at:
https://www.linkedin.com/pulse/how-insure-on-demand-economy-guillaume-cabr%C3%A8re-1
⁷ Abdullah, Zhaki (2017). Insurance plan to cover Grab’s carpool service. The Straits Times. Available at: http://www.straitstimes.com/singapore/transport/insurance-plan-to-cover-grabs-carpool-service
⁸ Burn-Callander, Rebecca (2016). How to insure your business in the sharing economy. The Telegraph. Available at: http://www.telegraph.co.uk/business/sme-home/how-to-insure-your-business/
⁹ Val, Esther (2017). Meet the insurers of the sharing economy. Sharetribe Marketplace Academy. Available at: https://www.sharetribe.com/academy/insurance-sharing-economy/