The rise of the sharing economy, which includes companies like Uber and Airbnb owes much credit to the openness of the millennial, whose standards of privacy differ from those of their parents, and the propelling force that is the smartphone, which has provided a platform for owners and renters of just about anything. You could call a taxi, yes, but Uber is cheaper. And why commit to purchasing hiking gear when you can simply rent it from a stranger for a day? The sharing economy has connected those who own with those who do not want to own and it pays. Forbes estimated that in 2013, the sharing economy sent $3.5 billion flowing straight into people's wallets. PwC estimates that by 2015, global revenues from the sharing economy will be $15 billion, and by 2025, they will have reached $335 billion (PwC).
The sharing economy has also disrupted the insurance industry: redefining the concept of ownership while creating a massive gap in liability coverage that traditional policies fail to fill. This could push the insurance industry into a dangerous dance with marketing myopia, a term coined by Theodore Levitt in 1960, which warns of the doom awaiting industries that sell products rather than solutions. There have been businesses who have chosen to embrace this disruption, providing a broader array of insurance products, using high context information to personify policies, and even allowing for aggregators to commoditize the market.
Many drivers themselves are unaware of the shortfalls of traditional insurance policies for Transportation Network Companies (TNC) like Uber and Lyft. There are three exposure periods: when a driver logs into the TNC application but is not matched, when a match is accepted but the passenger is not in the vehicle, and when the passenger occupies the vehicle (Canadian Underwriter). There are gaps in traditional coverage in each of these phases; for example, a driver in a collision during period one is not covered by Uber's insurance because no transaction has happened. Since they were logged into the app and driving with commercial purposes, their personal auto-insurance may not cover it either (IA Magazine). Government organizations are well aware of this grey area, and have responded by warning citizens and discouraging Uber: the City of Calgary released a statement to citizens, and the City of Toronto went as far as to apply for an injunction to end Uber's services (The City of Calgary).
Navigating the disruption that the sharing economy has caused requires insurance companies to understand the underlying needs of their buyers. No one buys insurance because they need a policy, although it may seem so. What they need is peace of mind for the large risks they incur in their every-day life, and the sharing economy is drastically changing the context for every-day risks.
This disruption has led to innovation for many industry leaders: developing new products to meet the demands of the sharing economy by making use of high-context data to redefine the relationship between insurer and insured and by reacting to aggregators commoditizing the market.
Broadening the Array of Products
Industry-leading companies are broadening their array of insurance products to capture the growing market. Metromile has become the first insurer in California (and now in Illinois and Washington) to provide liability coverage to TNC drivers on their personal auto policies. They provide coverage to drivers when the TNC app is on, but before a match with a ride has been made (Ontario Chamber of Commerce).
The Insurance Bureau of Canada has been pushing provinces to make changes that will allow TNC drivers to get the coverage they need. This push indicates that the industry has the capacity to meet the demand for new insurance products. Intact Financial Corp is currently working with Uber to create Canada's first auto insurance policy for TNCs (The Globe and Mail). There have been new product developments for other sharing economy companies too. Lloyd's of London has provided Airbnb users with a "Host Protection Insurance" program, which protects against liability claims up to $1 million, with no premium charged to the hosts (Airbnb).
Using High-Context Data to Personalize Insurance Policies
Companies are challenging the traditional models and expanding the boundaries of their coverage and thus redefining how the insurance industry does business. In the traditional approach to insurance, companies price the risk by assessing information submitted by the consumer and third-party data with models developed by actuaries. The risk is underwritten, bound, and subject to servicing upon a claim before potentially renewing. In the new model, insurance policies will be underwritten, bound, and then undergo ongoing servicing based on individualized data before claims are even made. Usage based insurance, like Progressive's Snapshot program, personalize the consumers insurance rate based on factors like the time of day they drive, sudden changes in speed, and more. These factors are tracked by a small device in the car, that also beeps loudly when the user breaks hard to try to improve the driver's skills (IA Magazine). BNP Paribus Cardif's Habitat insurance package monitors the consumer's home, alerting them in danger of floods, smoke, etc. (Accenture). These personified models boast the advantage of reducing the chance of a claim while simultaneously providing valuable high-context consumer data to the insurers to continue improving their products.
These small, niche, and extremely personified insurance models enhance the customer experience with their insurer. They are no longer just there when a claim is made. They are there every step of the way, lowering risks for both parties. Moving forward, there can be an expected increase in collaboration across industries as insurers look to partner with established tech companies to manage and exchange data. Insurers need to act quickly though: new rivals armed with sophisticated data on consumer preferences have already entered the market. Google, for example, has obtained licenses to sell insurance in 48 US states (Silicon Beat).
Enter the Aggregators
Finally, big data analytics has also allowed companies to swing the other way and allow for commoditization rather than direct personalization. In this way, customers will start viewing their insurance policies as commodities: undifferentiated and competing solely on price. Take Walmart teaming up with AutoInsurance.com as an example. This model allows customers to compare insurance quotes from various insurers based on their ideal deductible and coverage selection (Walmart). Insurers should prepare themselves for reduced customer loyalty as aggregators lead to more competitive pricing (World Economic Forum).
The insurance industry has always needed to be agile. Lloyds of London became the place to look for marine insurance to respond to the demand for ships and cargo in the 17th century. Fire insurance came as a response to the Great Fire of London. It has protected railroads, the horseless carriage, and aircrafts, and as it follows, the sharing economy. The massive expected growth of the sharing economy has provided insurers with the opportunity to capitalize and industry leaders have. But more challenges await: with the rapid development and adoption of autonomous cars, KPMG expects the personal auto insurance industry to shrink in the United States by 60% within the next 25 years (KPMG). Once again, the insurance industry will have to adjust, create new products, and ultimately ensure safety for the new risks to come.