With emerging technology causing a shift in consumer engagement, companies are being forced to revise their strategies to stay relevant to a younger consumer base raised on the internet. The recent boom in the on-demand economy demonstrates these trends best, and many new companies are profiting from it. This economy, commonly called peer-to-peer, is composed of companies that leverage online services or marketplaces, bringing people and businesses together to deal with each other directly, cutting out more costly and time-consuming intermediaries.
New firms come from an array of industries, ranging from food delivery and transportation to childcare and medical services. Uber’s on-call car service and Airbnb’s lodging rentals may be best known, yet new entrants are emerging all the time. The scope of services continues to expand, even entering fields that were previously deemed too risky for an online model. Companies like Care.com, a service where busy parents can find vetted childcare, or Drizzly, which offers alcohol delivery directly to consumer’s homes, are breaking the mold of traditional brick and mortar stores and testing the limits of liability exposures. Given the demand and the limited barriers to entry, this segment’s growth is poised to continue.
The peer-to-peer market is still in its infancy, but it is growing rapidly. Many companies are experiencing more than the usual growing pains and facing unforeseen risks as they arise. This creates challenges for firms trying to effectively manage and mitigate risk exposure. Their rising popularity and usage is not only generating animosity from the established competitors they are upending, it is also attracting the attention of regulators.
Uber is a prime example. Furious about the way they believe Uber drivers are poaching business, taxi drivers the world over have taken to the streets, even resorting to violence in some cases to demonstrate their displeasure. Their complaints are not just about the popularity of this new service but, more importantly, Uber’s ability to bypass costly regulatory and insurance requirements. Because Uber’s corporate model involves drivers using both corporate and personal vehicles—an area that is not yet regulated—these requirements do not technically apply.
There are risks associated with this new terrain. While Uber offers its drivers some access to insurance, given the drivers’ “contractor” status, when and if this coverage is in effect is a grey area. The key trigger for activating the Uber insurance policy is whether a passenger is in the car. If there is no passenger, Uber drivers rely largely on their own personal insurance, which can vary greatly from state to state and driver to driver. A notable example of the issues that can arise occurred when a driver in San Francisco struck and killed a six-year-old girl while logging into his Uber app. Uber’s stance was that, since there was no passenger in the car, the driver was not under Uber’s employ at the time, so the company was not liable. Competitor Lyft has encountered similar questions of legal liability.
These incidents encouraged regulators to call for more stringent insurance requirements for on-demand car hire firms. Now, insurance carriers have also become increasingly concerned with these types of marketplaces, raising the specter that vicarious liability is here to stay in the peer-to-peer economy.
Airbnb has also garnered the ire of several cities claiming that its home sharing practices violate state housing and hotel laws. Likewise, users have taken issue with the company for damages incurred during a tenant’s stay. Most insurance companies take a vague stance on these types of exposures, often not providing coverage when a home is being used for a commercial enterprise.
These examples showcase only a fraction of the risks faced by these types of companies, and how complex properly mitigating exposures can be. The experiences of Uber and Airbnb highlight the more linear and known types of risks. One can only imagine the potential issues that may arise with companies like Care.com or Drizzly. Childcare raises a litany of potential issues: From background checks to a child’s allergies, many facets of information need to be taken into consideration to avoid catastrophic problems. Similarly, Drizzly conjures up images of underage teens buying alcohol by the truckload while using a vetted adult’s smartphone. These types of liability exposures can give pause to even the most liberal of insurance underwriters.
While the peer-to-peer market is growing, there are many headwinds that could derail this powerful economic force. Regulatory requirements will become more rigorous as the segment matures. Additionally, insurers’ wariness of the sub-contractor structure and the high liability risk makes these businesses particularly vulnerable. One lawsuit could wipe out a company before it gets off the ground.
With limited access to insurance markets, these firms need to find alternative risk transfer vehicles. The peer-to-peer marketplace represents a multi-billion dollar space—Uber alone has been valued at $40 billion with seemingly unlimited room for growth. Small- to mid-sized enterprises like these are key drivers for growth and job creation, making it even more important to find a solution that allows them to continue to prosper while also protecting the public.
Much like the innovators that dreamed up these sharing economy platforms, insurance and risk professionals need to move beyond traditional risk underwriting and embrace new methodologies if they wish to participate in this booming market. New methods of risk pooling and other innovative solutions that leverage the economies of scale these firms represent will help to insulate carriers from losses.
This evolving and growing market will require close collaboration among carriers, government and business to foster innovation and ensure access to viable insurance coverage and proactive risk management. These types of disruptive businesses are only getting started and, given their rising popularity, will most likely upend or displace those firms that refuse to adapt and grow alongside them.
