A user of an accommodation rental site decides to rent out her New York apartment for a week to a young couple. During their stay, she receives numerous emails from the couple describing how thrilled they are with the apartment and the wonderful time they are having during their stay.
One week later, the owner comes home to find her apartment completely ransacked and several expensive and sentimental items stolen. Walls have been cut through to access safes containing valuables, passports and social security information.
When attempts are made to contact the couple, it emerges they had created a fake profile that they abandoned soon afterwards, making them impossible to track down.
When the apartment owner contacts her home insurance company she finds she is not covered for the loss, due to the fact her property was being used for commercial, profit-making purposes, and not for personal use as stated in the policy.
When she contacts the accommodation rental site, the company also tells her they are unable to help – leaving the owner to foot the bill.
This experience sounds like a horror story, but it is in fact the real life experience of one Airbnb user in 2011.
The tale highlights one of the biggest challenges of the sharing economy. When things go wrong, who pays out?
The long and short of the situation is, in a world where people are increasingly using technology to share their personal assets for financial gain, fit-for-purpose insurance solutions are few and far between.
In the 2011 Airbnb case, the company worked with the Lloyd’s market to offer a host guarantee providing £600,000 of cover for damage caused by guests.
This was later extended to the Host Protection Insurance programme, which provides primary liability coverage for up to $1mn per occurrence in the event of third-party claims of bodily injury or property damage.
The coverage, written through Apollo’s Lloyd’s syndicate, is also subject to a $1mn cap per listing location and certain conditions, limitations and exclusions.
So is the insurance industry missing out on a lucrative opportunity to provide an insurance solution for the sharing economy?
By definition, the sharing or collaborative economy is a socioeconomic ecosystem built around the sharing of human and physical resources, often enhanced by the use of technology.
Economists believe the sharing economy is set to boom in the next 10 years. The concept of sharing resources has already created 17 billion dollar companies worldwide – although sharing economy purists would argue that the largest company, the $50bn Uber, is a technology-enabled on-demand minicab service, rather than a textbook sharing economy company.
Nevertheless, users are already becoming more receptive to the use of sharing economy companies.
According to a survey from sharing economy forum Crowd Companies and cloud computing provider Vision Critical, 51 percent of more than 50,000 US respondents said they had used technology to access sharing services in the past 12 months. This is a significant step up from 39 percent the previous year.
The research suggests more than 110 million North Americans are now part of the sharing economy. Participation has grown by 25 percent in the past year: for every four people who were sharing a year ago, the sharing economy has attracted one new recruit.
PricewaterhouseCoopers (PwC) estimates that the five main sharing economy sectors – peer-to-peer lending, online staffing, peer-to-peer accommodation, car sharing and music and video streaming – currently generate $15bn in global revenues.
By 2025, these same five sharing economy sectors could generate a potential revenue opportunity worth $335bn. PwC estimates the UK’s slice of the pie could be worth around $15bn alone in 2025.
But the insurance industry is yet to rise to the challenge of this rapid growth. Experts tell Insider Quarterly only a handful of carriers have developed insurance covers for sharing economy companies, and this is a very much on a case-by-case basis rather than in a concerted effort to address this gap.
Hiscox, Catlin, Apollo and managing general agent CFC are examples of companies that have sought to tackle the risk. The British Insurance Brokers’ Association has also pledged to help tackle the insurance gap head on – although the list does not extend much further.
Alex Steinart is CEO of SafeShare Insurance, a broker launched this year specifically for the needs of the sharing economy. “We set the company up because there is no obvious route for the business to come into – there aren’t a lot of underwriting products out there,” he says.
“We saw an opportunity to develop bespoke solutions for various types of sharing economy businesses with certain Lloyd’s syndicates.”
Two forms of insurance coverage have emerged for sharing economy companies. The first is a type of umbrella policy for the sharing economy firm; a variety of backstop facility that will pay out in the event the user’s insurance company does not.
This is the type of arrangement understood to be used for Airbnb’s Host Protection Insurance programme.
The second provides insurance on a per-transaction basis – for example, having opt-in cover solely for the 24 hours someone is staying in your flat, or the three hours they are borrowing your garden tools.
“These are products which are very much in the pipeline,” says Henry Sanderson, technology and media underwriter at CFC. “The transactional cover is the most exciting part and, to me, signals the biggest opportunity – the high-volume, low-premium business.”
These coverages are still in the development stage as they require a huge amount of investment in technology and expertise, he adds.
However, the investment is not the only thing holding insurers back in addressing these risks.
There is little historical data on these companies, and while many start-ups are recognising the importance of collecting data on their client base and business, underwriters have little concrete evidence to accurately price their product with.
“It’s hard to know the true claims picture [at the moment] because almost all sharing economy companies will want to keep this out of the news,” explains Sanderson. “But I believe that the claims are limited, due to the important aspect of trust that underpins the sharing economy.”
Similarly, the apparent under-regulation of the sector is making some underwriters jittery.
The Insurance Council of Australia (ICA) has previously called on governments to clarify the regulatory environment governing sharing economy businesses.
ICA CEO Rob Whelan said in an October statement that insurers will respond quickly to market demand once regulations have been set down.
Sanderson adds it is extremely important for these companies to take it upon themselves to have a clear on-boarding process – making sure every user is verified and has had all the necessary checks. “That makes my job as an underwriter far easier.”
However, many insurers are also not seeing the reward in return for the risk – or the investment – involved in insuring these companies. Often, the premium involved with insuring these risks is not enough for an insurer to commit.
While some sharing economy start-ups have substantial financial backing, many are “two guys working out of their bedroom”, notes Steinart. “The products need to be an appropriate price for both the insurer and the insured.”
Perhaps most strikingly, “in speaking to some markets about this, they had not heard of the sharing economy at all”, says Steinart. “There is a lack of awareness which exists in the industry.”
But it may be that insurers will be forced to fix up and look sharp on sharing economy risks.
As sharing services grow, insurers could see an increase in notifications on their general property or liability policies for events related to sharing services, warns Rhiannon Webster, a partner at law firm DAC Beachcroft.
“In many products we have looked at, it is quite obvious there is room for dispute,” she says. “For example, a standard car insurance policy would cover certain areas of car sharing, but there were areas which would have been excluded.”
There has not been a deluge of sharing-related claims disputes to date, Webster adds, but the challenge is clear – many products are not designed for sharing services. “Insurers need to ask more questions around sharing of assets to properly assess the situation.”
Naturally, bespoke insurance solutions for sharing services reduce the chance of disputes, and demand for such products is increasing steadily.
“We have definitely seen an increased demand from peer-to-peer marketplace businesses, but it has come from a wide spectrum of brokers,” Sanderson says. “I would say on average I will receive at least two enquiries a week and the conversion rate is certainly picking up.
“Brokers are still lacking a real understanding of this new business model, but interest is improving.”
In fact, the sharing economy is dependent on insurance to grow. The promise of financial indemnification in the worst-case scenario helps build on the trust factor that is the foundation of the sharing business model.
“The insurance and reinsurance market has a responsibility to offer policies to enable this growth,” says Steinart.
Once the insurance industry clears the initial hurdle, there is room for even more innovation with sharing economy risks.
“For me the next big opportunity for insurers to jump on is the business-to-business sharing economy – for example, businesses sharing manufacturing plants or services,” says Sanderson, adding there is a big employers’ liability question to be addressed in this case.
Following on from the per-transaction insurance coverages, areas for improvement include factoring in pricing fluctuations according to the quality rating of assets or services. This would work particularly well for handyman, ride-sharing or babysitting services, for example, explains Sanderson.
“This then moves onto the Internet of Things, or wearable technology,” he adds. “Then things get really interesting.”
This article was published as part of issue Winter 2015