Understanding risk has been my life’s work. Over the past 36 years, I have spent time in all varieties of insurance: reinsurance, personal and commercial lines, accident, health, and more. I’ve seen all sides of the business, as a CEO, CFO, Director, and investor.
Recently, however, I’ve tracked with interest the emergence of the collaborative economy. The efficiencies that marketplaces like Lyft, Uber, TaskRabbit, Getaround, Quirky, Relay Rides, and Kickstarter bring are impossible to debate. They each fix inefficient markets. But I must say, they also introduce one of the most fascinating insurance challenges I have ever seen.
Many of these marketplaces revolve around high-risk assets (cars, apartments, boats), so naturally the field of insurance has become a focal point, and a number of articles have been written on the topic. Most recently, Richard Nieva comprehensively laid out the issue in Pando Daily, with a headline that declared, “The insurance industry is what could really hurt the sharing economy.”
While it’s encouraging to see the insurance question tackled head-on, there are still a number of issues holding back market efficiencies. Insurance carriers and sharing economy platforms don’t speak the same language. Insurance executives are being challenged with entirely new business models. Personal assets (home, car, boat) are now being utilized or shared by third parties. Simplistically, this increases utilization and consequently the probability of loss to an insurer. Thus the insurers believe that these new exposures or risks are not covered by conventional homeowners, boat, tenant, and personal automobile policies, as they were not constructed to be utilized other than by the policyholder and their immediate family. Meanwhile, startup CEOs are not trained to negotiate complex policies, so they don’t know how to go about the procurement process. As an industry expert, I want to lay out a few principles that the startups should consider.
Insurance is not a “check the box” exercise. While a headline might proclaim the existence of a million dollar policy, that does not necessarily mean a consumer will be covered in the event of an incident. As they say, the devil is in the details. And yet, we have not seen any marketplace share the full details of coverages and exclusions. Unfortunately, we will start to see the fine print clearly if something goes wrong.
Purchasing insurance can limit economic risk, but in truly managing risk, buying a policy should be just one approach. The first step in protecting your business and users is identifying all the risks, perils, and exposures. Once those are mapped, you have three options of how to handle each. I will use collaborative economy examples for illustrative purposes, but I am not suggesting that each of the platforms have or have not already put these practices in place.
Risk avoidance – Help us help you. The most obvious way to avoid a loss is to limit the chances of a risk being realized. Depending on the nature of the market, risk mitigation processes like background checks, education materials, and active feedback loops increase the integrity of the user base, and improve insurance pricing. These strategies may be at odds with a product manager’s desire to minimize the friction in user signups, but both the market and the end users will realize the long-term benefits.
RelayRides Example: For car-sharing platforms, risks can be averted through proper risk analysis on both sides of the transaction. For the renters, RelayRides should complete background and driving record checks, provide education materials on safe driving, and quickly boot users when they show reckless behavior. Clearing the safety of the vehicles is equally important, and this could include GPS-validated photographs of cars, verification of valid and current registration, and copies of recent inspection.
Risk retention – Some risks may be palatable. If analysis shows that the downside is predictable and affordable, it may make sense to hold onto the risk. In these cases, self-insurance or “customer guarantees” are most appropriate.
TaskRabbit Example: Among the risks for task-oriented marketplaces, like TaskRabbit, there is the potential for goods being stolen during delivery. For this particular potential risk, TaskRabbit should consider its loss history and financial resources. Management may determine that the loss is affordable and rare enough to retain and absorb in its own profit and loss.
Risk transfer – When realization of a risk could be too catastrophic for a market to handle, that is when it makes most sense to move risks onto others, typically through contracts or insurance policies.
Airbnb Example: With any home-sharing service, the risk of bad actors exists, and at some point a home will be damaged. Airbnb has unfortunately experienced this first hand with a couple of trashed homes. In relation to their Host Guarantee, Airbnb must use processes to determine how much insurance should be purchased in excess of the retention to insure that no one case of damage or series of occurrences can threaten the viability of the company as a going concern.
We are in the early stages of collaborative market insurance, and the law of large numbers does not yet apply. You are wise to implement all three of the above strategies. Each startup is fighting on its own to educate carriers about usage. As the ecosystems grow, every underwriting strategy directed at it will move towards being commoditized, as has happened with traditional auto insurance. This is a good thing, because consumers will get the benefit of prices dropping. But in the meantime, both sides need to focus on bridging the communication chasm.