Sharing Society: A problem shared

Members of the insurance industry can be forgiven for starting to become familiar with David Cameron’s soft furnishings, so regularly has their presence been requested at the Prime Minister’s London home.

After summits on motor claims in February 2012, the industry has had regular meetings with government since the winter floods that struck many homes over Christmas 2013.

This summer, the Prime Minister twice brought the industry back to discuss what is hoped to become a resilient part of the UK economy – a part that also happens to chime with one of Cameron’s favoured topics.

Cameron first mooted the ‘Big Society’ concept as far back as July 2010, shortly after winning the election, in which he espoused the power of local communities to run local services such as buses or childcare.

Fast‑forward just over four years and the so‑called “sharing economy” – which sees individuals loaning equipment, skills or even homes in small transactions – is estimated by PWC to be worth £500m every year in 2013, and forecast to be worth £9bn by 2025.

Some of the charge has been led in other countries, with the likes of holiday rentals firm Air BnB, which launched in California in 2008 and now operates in more than 190 countries. Meanwhile, ridesharing giant Uber launched a year later, also on the US West Coast, and now has a presence in 200 cities.

Lloyd’s managing general agent CFC specialises in mining opportunities for cover in the technology sector, and marketing director Graeme Newman says that, unlike the previous dot‑com boom, this is a wave of innovation that is likely to prove substantive.

“There’s no way this is a flash in the pan. It’s happening on an enormous scale and it is generating billions,” he says. “Air BnB alone has billions in revenue, [whereas] the first dot‑com boom was pure ‘vapour‑ware’. There were lots of businesses with no revenues, and no longevity.”

Newman says the upstarts have been able to benefit from a surge of interest in concepts like crowdsourcing, which allow individuals to collectively achieve substantial results.

“It’s effectively micro labour, and it’s been enabled by the web,” he explains. “It happens on an extraordinary scale right now.”

But what are the implications of the extraordinary scale of the sharing society for insurers?

Bluefin executive chairman Stuart Reid chaired the Downing Street talks, launched in July and resumed in September, herding a roundtable of brokers, insurers, consultants, sharing society firms and politicos through discussions that sought to establish the problems of both sides.

Reid is convinced sharing is here to stay, predominantly thanks to government enthusiasm for it.

“I have absolutely been surprised at how much [the government] has done thus far,” he says. “There is an issue where, if you rent you house out for less than 90 days, you will need planning permission – and the government has even talked about changing that.

“It is going to promote industries that promote good ideas, and this very much links in with where it sees business going.”

With such excitement though, why did the Prime Minister need to get involved? In short, it’s clear the insurance industry has not adapted to the sharing economy with as much vigour as Cameron would have liked.

Fundamental shift
British Insurance Brokers’ Association executive director Graeme Trudgill explains the sharing model represents a fundamental shift in the way insurance is arranged, causing potential headaches for insurers.

“Historically insurers have always covered the item itself, but now you might be using someone else’s things,” he says. “If I lend my neighbour a chainsaw, I need to give them instructions because if they cut themselves it could be a problem and I could be sued. That’s both liability and property.”

Trudgill adds that while Biba had been examining four classes of sharing businesses – car, property, skills and items – this has now been expanded to 17. “There are spaces, finance and utilities, leisurewear, food and media and all sorts of things,” he says. “Biba has been working with all these different sharing economy people and that’s where we’ve got to.”

Trudgill says the problem is rendered more complex by the potential for cross‑border lending. For example, an Air BnB customer might rent a property in Devon in order to escape the London rat race – or they might head to downtown Buenos Aires.

He explains: “It’s not just about UK insurance, because you’ve got things like overseas homes,  so it’s not always so straightforward. For some of it you need background checks on people and there are all sorts of complications.

“It’s also about who buys the insurance. Is it Air BnB that buys cover for everyone that uses it, or is it the person whose property is at risk who needs to buy the cover? And, if they do, is it a bespoke insurance policy or can you get an add‑on to an existing insurance policy?”

Indeed, the trembling knees of insurers may be worsened by the fact that arguably the most high‑profile sharing businesses are car‑focused.

Motor, Reid says, is “one of the most difficult nuts to crack”. He adds: “There is a fear that if you offer up cars to share you may be selected against.”

It is a fear echoed by Axa’s managing director of underwriting, David Williams: “We’re very selective about whom we insure on a motor policy. If you are bad young driver, is signing up to a car‑sharing arrangement a way of getting around massive insurance premiums? And is that the sort of risk the insurer and the person facilitating those arrangements would want to be involved with?”

Although Newman admits motor presents specific challenges, he adds that by communicating more with these businesses, insurers can come to understand that the risks are, sometimes, smaller than expected – and that great opportunities lie within.

“We talk to the providers of the platform and they’re very keen to share information and to structure an insurance product that can be sold to their individual members,” he says.

“It’s another revenue stream to them, but they need to partner with brokers that can be the regulated entity that can advise on the product, and they need insurers to step up to the plate too.”

Newman notes examples of websites in the US that found their insurer unwilling to cover a business selling second‑hand clothes. “You would think that would be a good thing – the clothes would be worth less, so the exposure has to be lower,” Newman says. “It’s another example of an insurer not being nimble enough.

“There are lots of examples where insurers would happily cover exactly the same product through a retail store but won’t if it’s online because that’s new – or at least it was 17 years ago.”

Lacking flexibility
Flexibility is clearly an area in which the sector has been found wanting. Trudgill notes businesses such as We Are Pop Up, which connects brands with short‑term retail spaces, may want traditional insurance protection offered in an untraditional way.

“These guys set up in empty shops just for a very short time. They can buy a normal commercial insurance policy for that property – but they have to buy an annual one, and they might only be there for three weeks,” he says. “They don’t want to spend a whole annual policy, they’re looking for a short‑period solution.”

Williams says his business has adjourned to sidebar conversations with individual sharing firms and brokers in a bid to clarify exactly what is needed by all sides, explaining that this process is necessary because the sharing sector increasingly draws in firms of all sizes.

“If you think sharing society, that could be you having a flatmate through to someone having a fleet of cars they own and allowing others to add their own vehicles to the pool. Those are worlds apart,” he says.

“We’ve had lots of people asking what happens if someone wants to borrow a drill or a lawnmower or something like that. But then you get down to things that would be really small transactions – you could have someone borrowing a lawnmower for £5 but, because of the admin involved, the insurance might cost £20. That would be complete and utter nonsense.”

The role of data
Similarly, Williams says that because the sector has attracted people for moralistic as much as economic reasons, Axa has had to perform an education piece on contract clausing and certainty.

He explains: “We had a meeting with a gentleman who is heavily involved in the sharing economy but does everything on a recommendation basis. He’s now looking for serious financial backing and, [in order for us to] decide what cover he needs, we need to know what his liability would be.

“While he has got solicitors looking at it now, he didn’t previously have any contract conditions.”

Newman similarly notes that the sector holds huge opportunities for the innovative, particularly in the cases of insurers that can delve into the spreadsheets of their potential clients – making data key to this sector. In fact, Newman says some sharing business have overwhelming depths of information.

One service that provides accredited local babysitters has data “on a huge scale”, he says, while a property‑lending leader has “gold dust” for pricing risks – all of which is invaluable to insurers looking to enter the market.

Newman continues: “The data is incredible. You could get a really accurate pricing model if you dealt with the right people. And there’s no need to hike the premiums if you can get very accurate pricing models based on the incredible information they have.

“These companies capture everything being done through the app – how many interactions they’ve had, how many complaints, what they look like and how they’re structured.”

But on the other side of the coin, those smaller businesses with fewer customers and less advanced technology pose more of a challenge for insurers. “If you are a rideshare business and you haven’t got any vehicle stock and you’re scratching around with two or three members, how the hell are you going to be able to establish what the risks are?” Williams says.

“There are great people with great ideas, but to make things work you’re going to have to get critical mass through consolidation one way or another to get things off the ground.”

This is a mindset echoed by Reid, who calls for the sharing sector to come together in a different way. “If there’s one clarion call for the sharing society it is that people have to think as collectively as possible in the early days to help us get this covered,” he says.

“It is difficult for an insurance company to calculate on emerging risks because there is no data on loss history, so if there is some there then these sharing companies need to try to come together and give us what they can.”

Early involvement
Williams concedes helping a small business with contracts and digging through data sheets to be only able to charge a small premium because of the business model is an unappealing prospect to some insurers, but maintains the sector remains of interest to Axa.

“We have considered whether we should be involved, because that could well be an issue,” he admits. “But [steering clear of the sector means] you could miss out on being involved from the early stages and you don’t have that ability to influence anything.

“There have been numerous incidents where insurers have decided not to get involved in the early stages of a new sector and have then had to deal with a fait accompli that was very difficult to manage.

“While we don’t know how big this is going to be, it’s certainly growing. And if you believe even half the growth forecasts for some of these organisations, it’s going to be a really important part of the future. So as well as being able to influence, we can learn about something that would form an essential part of a portfolio going forward.”

Trudgill adds that Biba has already identified some brokers keen to dabble in parts of the new sharing world, while others are excited by the challenges. “It’s just a question of them building the products with the insurers. And they’re keen – brokers are the innovators and they want to do it, but it’s very early days.”

Finally, Newman adds that, perhaps insurers can use this as an opportunity to break the habit of a lifetime by redrawing policies rather than simply adding exclusions to existing paperwork.

“[Insurers] are always very reluctant to look at policies and refresh them.” Newman says.

“We do as an industry have a tendency to keep piling exclusions on and never going back,” Newman says, adding the some technology forms still carry exemptions for claims arising as a result of the Millennium Bug. As he says: “That’s hilarious! Come on, guys.”

This article was published in the 9 October edition of Post magazine.