The on-demand, sharing and digital sectors - often called Economy 4.0 - bring new risks and challenges for the insurance industry.
Unlike traditional manufacturers and service providers, sharing economy firms are often characterised by their ability to disrupt. New business models emerge quickly, with the likes of Uber, Deliveroo and Airbnb among some of the larger and more established examples.
“There’s an ever increasing pressure to be first,” says Harald Loeffler, partner at DAC Beachcroft. “This means there’s a rapid pace of development but, with less testing, it also means there’s greater risk exposure too.”
The rush to innovate isn’t the only characteristic of the new economy that can create challenges for the insurance industry. As well as a huge reliance on technology, these businesses are also dependent on a more fluid, gig economy workforce as well as the brand value and reputation that can build a loyal customer base.
These characteristics mean that many of the firms within Economy 4.0 have business models that present challenges for regulators and insurers alike. Duane Folkard, UK head of technology at XL Catlin, explains: “Many of these firms don’t see themselves as providers of goods or services but instead as technology companies that facilitate the delivery and exchange of certain things or act as intermediaries connecting people and companies.”
Taking this stance, he adds, means that their risk management strategies are often oriented to the risks associated with technology companies rather than the operational risks that more traditional businesses offering these services would have to consider.
While there may be additional exposures associated with these business models, insurers and regulators argue that these firms still face the same liability issuesas more traditional service providers. “The business models for many Economy 4.0 companies are implicitly, if not explicitly, predicated on the idea that they bear no responsibility for operational risks,” says Folkard. “This is one of the most challenging aspects but, while the business model may have changed, the risks are still the risks.”
As an example, take a food delivery service. The company providing the technology platform may argue that it has simply acted as an intermediary between the restaurant, a delivery driver and the consumer, but if a driver causes an accident, the courts may look at the fact that they had an incentive to dispatch the order as quickly as possible, and apportion liability on the platform and restaurant too.
Top 10 risks
- Data security and privacy
- Technology errors and omissions
- Intellectual property
- Employee safety
- Regulatory compliance
- Business interruption
- Multinational exposure
- Directors and officers liability
- Mergers and acquisitions
- Contingent business interruption
Source: Communications, Media, and Technology Risk Study 2017, Marsh
Although the platform providers may feel they can step away from this liability due to their business model, some can find themselves with contingent exposures as a result of the actions of the users of their apps.
Michael Brunero, technology and media underwriting team leader at CFC Underwriting, says it often comes down to the level of involvement the company has with the service.
As an example, he points at a platform that enables users to search for a handyman for home maintenance. “If the platform employs the handymen, or in some way endorses or approves them, then it could find itself liable for their actions. We’ve seen a case where the app company was found liable for the damage when one of the handymen on its platform spilt paint on a user’s carpet,” he explains. “Protection is stronger where there’s no vetting in place and any handyman can sign up but it is a grey area.”
Determining liability is a particularly important issue given these businesses' reliance on intangible assets such as intellectual property, data and reputation. "These intangible assets are a significant driver of value creation," says Folkard. "They need to be protected in the same way a manufacturer safeguards its factories and warehouses."
Intellectual property is a particularly big issue in this space, with the pace of development making it difficult to determine who had the original idea. "When the idea is the business, it's important to protect it," says Brunero. "Likewise, if you look similar to another business, it’s not going to be happy."
Researchers at the University of Oxford and the University of Pretoria surveyed and interviewed 456 online gig workers as part of a three-year investigation into the risks and rewards of this type of work.
said online gig work was important or very important to their household income
felt easily replaceable
rarely or never communicate face-to-face with other people who use platforms
don’t know the name of the person who hired them
experienced pain as a result of their work
aren’t involved in any sort of union or worker association
Source: The risks and rewards of online gig work at the global margins, Oxford Internet Institute, University of Oxford
Folkard also sees intellectual property as an issue for these firms. "The topic of intellectual property rights and patent is a tangled thicket, especially when a company seeks exclusive control over something intangible," he explains. "Nonetheless, the possibility that a competitor will seek to capitalise on a firm's intellectual property is one of the most significant risks they face."
This issue isn’t reserved solely for these new businesses either. The increased adoption of technology means that intangible assets make up a much larger proportion of even the more traditional businesses’ market value.
As an example, according to Ocean Tomo's Intangible Asset Market Value Study, 87% of the market value of the companies in the S&P 500 in 2015 was in intangible assets, compared with 17% back in 1975. “All companies are technology companies now, it’s just the usage of the technology that can vary,” says Loeffler. “Domino’s is now as much a technology company as it is a pizza company.”
The technology itself is another key area of concern for Economy 4.0 firms, especially as it is so integral to their business model. These firms’ reliance on an app to make money creates a real pinch point, says Jack Lyons, partner at JLT Specialty, using a ride-hailing platform as an example. If its app fails and its users are unable to arrange rides, there’s a risk that it could face claims from drivers for loss of earnings. “It depends on the contractual arrangement between the platform and its drivers,” he explains. “I imagine there are strict contractual controls in place but they would still have the ability to sue outside of contracts. The legal costs associated with a class action for gross negligence could be huge.”
The other risk associated with this reliance on technology is data breach. As a market, these platforms have billions of users’ personal details, often including credit card information. A data breach could leave them open to significant regulatory costs.
Furthermore, whether it’s a data breach or a problem with the app, there are serious reputational consequences to consider. With brand such an important part of these businesses’ value, any damage to it could be catastrophic. “People often have a very emotional connection to these businesses,” says Loeffler. “If data’s stolen, then it can be incredibly difficult to resolve.”
There are also risks associated with the workforces behind many of these businesses. As part of the gig economy, those providing services are often classed as self-employed rather than workers.
Stephen Tester, partner at CMS, says this can create issues: “The problem is this business model doesn’t sit well with the overarching requirement for people to be protected. Employment rights can be difficult to deliver with such a fragmented model.”
The desire to protect these individuals’ rights has led to a number of court cases, most notably between Uber and some of its drivers. Back in 2016, a London employment tribunal ruled that drivers should be classed as workers, giving them rights to holiday pay, paid rest breaks and the national minimum wage. And, while Uber lost its appeal against this ruling, the classification of these workers is still up in the air as it now plans to take its case to the Supreme Court.
It’s not just these rights that are in the balance. There are also concerns about the health and safety of those in the gig economy. As they often work remotely, monitoring their health and workload can be difficult, potentially increasing the risk of accidents and long-term illness.
The rise of the intangible asset
Components of S&P 500 market value
Source: Intangible Asset Market Value Study, Ocean Tomo
Breaking out of the traditional business model also means that regulatory risks increase as the regulators seek to ensure adequate protection is in place. Folkard says that as well as ensuring consumers have clear recourse if they are harmed in any way, the regulators are also concerned these firms may have an unfair advantage over competitors.
He explains: “By presenting themselves as technology companies or intermediaries, Economy 4.0 businesses may have an unfair competitive advantage over other firms that are ultimately providing the same goods or services.”
To illustrate this, he points to a restaurant’s delivery service. While it may need to have a separate licence to deliver food to customers, it can get round these requirements by working through a third-party that uses independent contractors to pick up and deliver orders.
As this can also sidestep consumer protections, as well as making licensing requirements superfluous, it’s an area where the regulators are active. For example, the European Court of Justice recently ruled that Uber was a transport company rather than a digital service. This could see it having to abide by the same regulations as other transport companies.
Tester expects to see this trend continue. “These new firms make for a vibrant economy, with the opportunity for plenty of disruption, but you have to lay on top of this some form of regulation,” he explains. “Those who regulate want these firms to be regulated.”
Given the range of risks these businesses face, appropriate errors and omissions insurance is a must. “Cover needs to be as broad as possible and reflect the global nature of these businesses,” says Brunero. “If a firm is hit with a large liability claim, it could put it out of business if it doesn’t have the right insurance.”
But while cover is available, Tester says takeup is frustratingly slow. A number of factors may help this to change, including supply chain pressure and the introduction of the General Data Protection Regulation. “When these firms start to see large regulatory fines and shareholder action, they’ll realise they need to protect themselves,” he adds.
The insurance industry also has an important role to play in encouraging greater takeup. By understanding the needs of these businesses, Loeffler says insurers will succeed. “These businesses want personalisation, so policies need to offer a greater degree of flexibility to match the very diverse company and risk profiles in this space,” he says. “They also expect cover to be 100% aligned to their needs, they’ll question what’s included in their cover.”
Although this may seem something of a step change, he also believes it may be relatively simple, especially as some insurers are also becoming part of Economy 4.0. “We’re seeing much more versatility, with insurers adopting technology that enables them to write cover on a much more immediate basis,” he says. “Those that get it right will enjoy the same sort of dominance seen by some of the new emerging technology firms.”
Zurich disappointed in new #discountrate. David Nichols, Ch Claims Officer: "The failure to change the discount rate to a balanced level will only serve to increase the cost and, therefore, affordability of certain types of insurance - especially for higher risk customers." pic.twitter.com/ac1CfBzfxX— Zurich Insurance UK (@ZurichInsUK) July 15, 2019
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