Insurance: the next frontier for community platforms

Marketplaces are multiplying rapidly and have become a genuine fixture of modern life. For instance, Airbnb, Uber, and BlaBlaCar need no introduction.
This new sharing economy has grown enormously over the past five years. Peer-to-peer platforms generated €4 billion according to a 2016 report by PwC.

Insurance is therefore becoming an important topic for peer-to-peer marketplaces, which will need to address it very quickly in order to build greater trust with their users.
Here is an overview of insurance and the sharing economy — a field where the rules are still being written.

Building trust

Worst-case scenarios are not without precedent in the sharing economy. For a smaller platform, any incident and the resulting loss of trust would be difficult to recover from.
There have already been high-profile cases of property owners returning to find their home in complete disarray after using Airbnb, or Uber drivers behaving inappropriately. In this context, many potential users express reservations and concerns about safety in the sharing economy.
A PwC study in 2015 found that, among individuals who had tried the sharing economy in the USA, 57% said they were "intrigued by sharing economy companies but also worried about them".
In the United Kingdom, 75% of sharing economy users consider it important to have a degree of insurance when using such services.
Unsurprisingly, the founder of a ride-sharing company cited in the PwC report explains that putting insurance in place is "the biggest challenge" of the sharing economy.

In general, individuals do not understand the risks involved on a community platform. Users are often underinsured, or not insured at all. Standard insurance policies generally do not cater for occasional sharing activities. Furthermore, sharing economy marketplaces struggle to obtain insurance for themselves and their users because they have no "insurable interest" — meaning, for example, that they hold no inventory that can be insured.

In the early days of sharing economies, adequate insurance simply did not exist. Platforms relied solely on trust between users.
While trust remains crucial, the sharing economy has introduced a new range of risks that require new and innovative insurance solutions.
Some sharing platforms therefore offer guarantees or insurance contracts. Yet the gap in this area remains very much present.
Users have little contractual protection and, in general, depend largely on the goodwill of the platform. The duties of a platform in terms of user protection are poorly defined.

As an entrepreneur, it is therefore essential to first think about your responsibilities and risks. You need to think creatively about the most appropriate solutions for yourself and for end users. Being proactive and offering an insurance contract is crucial for your reputation and can open the door to new revenue streams.
Generally speaking, the insurance market evolves in response to demand and tailors itself accordingly (smartphone insurance, "smart contracts", and so on). And entrepreneurs benefit from these innovations.

The number of companies offering insurance in the sharing economy is growing. For example, the car insurance company Admiral makes it one of its priorities and is developing its portfolio in this area.
This dynamic context is also paving the way for disruptive start-ups such as Safeshare, Slice, and Trov. Debbie Wosskow, who chairs Sharing Economy UK, believes that "thinking about insurance for tomorrow's start-ups will bring the next wave of technological innovation".

Insurance and the sharing economy: the challenges ahead

With traditional insurance, you know what is being insured, who will benefit, and why. As a result, risk profiles and contract types recur over the long term. But this no longer holds when we talk about the sharing economy, where individuals act as micro-entrepreneurs and alternate between personal and commercial use. Insurance in the context of a sharing economy therefore requires an almost unique, case-by-case contract.

Sharing companies are also waking up to the risks and learning to mitigate them. For example, an incident in 2011, known as "Ransackgate", left its mark on Airbnb. A woman who used Airbnb to rent out her flat returned to find it vandalised. Guests had burned several of her possessions and stolen her birth certificate, social security numbers, and credit cards from a safe. This event led Airbnb to create its Host Guarantee (now up to €800,000), offered free of charge in a large number of countries.

These bad experiences at Airbnb and other platforms are examples of foreseeable and known risks. However, the spectrum of risks in the sharing economy is far broader.
One can only imagine the possible problems with companies such as Care.com (a service offering childcare and elder care) or Drizly (an online alcohol sales website).
Childcare raises a great many possible problems, ranging from background checks to children's allergies. In the same vein, Drizly could be used by minors who need only use a smartphone verified as belonging to an adult to get what they want.

This type of liability is real for many entrepreneurs, and the insurance market has not yet produced a solution. The default approach of insurers is to accumulate data; the more the better. Shelby Clark from peers.org describes his experience launching RelayRides: "When we were trying to launch the company, an insurance company told us: 'We really want to write this policy, but we need more data on it. Come back after 6 months of usage and we'll be happy to take a look' […] How are we supposed to gather data if we can't launch without insurance?"

In an industry that has been very slow to offer adequate protections, the only real option for start-ups has been to launch and hope for the best, while waiting for enough data for a suitable insurance solution to emerge.

Traditional insurance and InsurTech

Users are more connected than ever, across multiple devices. And nearly 80% of insurance customers want personalised insurance. On the one hand, users dislike the online payment process, which they find too complex, and expect a simpler service. On the other hand, a growing proportion of users were born after the year 2000. This generation is not interested in general insurance policies that may cover risks that are not relevant to them. They want insurance products offering a modular base, which would allow them to insure only the risks they actually face.

This gave rise to the term InsurTech, standing for Insurance and Technology. InsurTech can therefore be defined as the result of extensive use of technology in the insurance sector, leading to the emergence of new and innovative products and services.
InsurTech is often considered part of FinTech (= Financial Services and Technology). Indeed, the two concepts share the same ideas of transformation and a collaborative spirit.

Disruptive start-ups have broken down some of the barriers to entry by focusing on user experience — an area with which the insurance sector traditionally struggles.

InsurTech uses technology to collect large amounts of user data without going through intermediaries. As the UK's Financial Conduct Authority (FCA) explains, technology represents a major opportunity "to transform the way users interact with insurance, enabling companies to develop new products, streamline online payment processes, and optimise sales." It also allows insurers to price risks more precisely.

The white paper "Insurance 2.0: Insuring the Sharing Economy and Sharing the Insurance Economy", produced for the American Casualty Actuarial Society, concludes: "We believe that this community trend will continue and reach its zenith as genuine peer-to-peer insurance, or risk sharing between individuals, with constantly updated regulations and insurers that will either adapt or disappear."

In the start-up world, InsurTech is currently one of the most dynamic and exciting sectors. According to the KPMG study, InsurTech attracted $2.5 billion in venture capital in 2015, a considerable rise compared with the previous four years. According to Gartner, 64% of the world's top 25 insurers have already invested in an InsurTech start-up.
Furthermore, approximately 72% of insurers are planning, or have already established, new partnerships to capitalise on the opportunities of the sharing economy.

The InsurTech ecosystem

The InsurTech ecosystem comprises several types of players:

• Start-ups are the most disruptive actors in the insurance market. They generate new business models using peer-to-peer insurance or platforms aimed at improving the user experience.
• Technology giants such as Facebook, Google, and Apple are entering the insurance market. Their large volumes of personal data allow them to offer more personalised insurance plans.
• Traditional insurers are rethinking their strategy in this new competitive landscape, using four approaches: collaboration (Axa and BlaBlaCar in Europe, Lyft and MetLife in America, Zurich and Uber in Asia), partnership (Axa and Alibaba), venture capital (Munich Re reinvested in Slice Labs), and start-up incubation (Allianz launched the Allianz X InsurTech incubator).

The sharing economy and insurance regulation

Barriers and opportunities

Legislation governing many sharing activities is ambiguous. Problems persist regarding taxation, regulatory compliance, and the contractual relationship between consumers, users, and the platforms that facilitate their exchanges.
As a result, it is difficult to know which player is responsible and therefore requires appropriate protection. This is further complicated by jurisdictional challenges: platforms are generally based in a single country, but their services to consumers and providers are spread across multiple countries. There is a lack of harmonisation between jurisdictions and regulatory frameworks, making compliance costly and time-consuming, and restricting market growth despite genuine demand being present.

Many insurers lack the geographical capabilities to cover these cross-border risks. These platforms raise issues with commercial liability insurance policies, which may thus be inappropriate for covering the risks associated with using said platforms. Hence the desire to create insurance policies tailored to each user in each jurisdiction.
Consequently, traditional insurers generally have little appetite for bearing the cost and complexity required to provide appropriate insurance solutions to sharing platforms.

However, the insurance industry has a real advantage when it comes to addressing these challenges. From a strictly technical standpoint, many collaborative activities are straightforward to insure in the sense that the industry has been insuring these types of risks for many years. The biggest challenge lies in developing effective and appropriate digital distribution models for a collaborative economy.

As explained, the insurance market landscape for peer-to-peer platforms brings new challenges that require thinking differently. It is a landscape rich with opportunities that can enable innovation from entrepreneurs and bring definite added value from a user perspective.
There are a few considerations to bear in mind:

• Some entrepreneurs may wish to provide their own insurance solutions directly to their users — either by including them in platform charges or charging for them separately. However, to sell insurance in Europe, one must be authorised to do so — either as an authorised intermediary or by representing an insurance company covering all markets. The requirements for such authorisation vary from market to market but are generally significant and monitored by the Financial Conduct Authority (FCA). In practical terms, it is not inexpensive for a business to obtain such authorisation.
• For sharing platforms, the lack of an "insurable interest" in respect of the property, goods, or services on offer makes obtaining insurance difficult. However, these platforms can fund insurance covering their legal liability for damage and injury that their users might suffer. It is also possible to extend this liability insurance to end consumers.
• In certain markets, platforms may be authorised to act as intermediaries, advising or directing users to an authorised agent or insurer. In this context, the contract would be between the individual and the insurance company, not with the platform concerned.

Regulation in America

In the USA, regulators have been more proactive than the insurance industry, and than European regulators, in addressing the insurance issues of the sharing economy. Dave Jones, California's Insurance Commissioner, has actively ensured that the sharing economy industry takes on appropriate responsibilities. The insurance market has responded with relevant products.

In September 2013, the CPUC (California Public Utilities Commission) enacted a new law naming ride-sharing companies "Transportation Network Companies (TNCs)". This law requires every driver in California to carry commercial liability insurance offering $1 million in coverage.
At that point, however, there was no indication of when personal coverage should be replaced by commercial coverage. This ambiguity became apparent on 31 December 2013, when an Uber driver named Muzaffer killed six-year-old Sophia Liu in San Francisco. The driver was carrying no passenger and was not responding to a passenger request, but the Uber app was active in his vehicle. Both Uber and the driver's insurer denied all liability. The CPUC was mandated to find an insurance solution, leading to three defined periods:

• Period 1: The driver switches on the app and waits for a passenger.
• Period 2: A passenger is found; the driver goes to collect them.
• Period 3: The passenger is in the vehicle; this period ends when the passenger exits the vehicle.

Since July 2015, the law requires ride-sharing companies of this type to provide coverage during Period 1, to cover cases such as that of Sophia Liu. In January 2015, the Commissioner approved new legislation regarding endorsements to this insurance. Accordingly, UberX drivers whose vehicles are insured by Metromile are covered in the same way during Period 1.

On the home-sharing regulation front, a law was passed in San Francisco in October 2014. Coming into effect in February 2015, it legalises the rental of one's property for fewer than 90 days. This law requires home-sharing platforms to collect hotel taxes on behalf of hosts and to provide liability insurance covering at least $500k.

Similarly, New York legislators revisited the potential grey areas highlighted by Airbnb's Host Guarantee launched in 2012. This guarantee provides limited coverage of up to $1 million but only covers damage deliberately caused by a guest. Moreover, it applies in excess of any primary insurance policy, and only after the damage caused by the guest has been observed and attempts to repair it have failed. Damage must also be reported within 14 days.
In November 2014, Airbnb announced the introduction of a Host Protection Insurance, effective from 15 January 2015. This insurance automatically provides $1 million of liability coverage for hosts in the USA, in excess of their primary insurance policy.

Regulation in the European Union

In June 2016, the European Commission published "A European Agenda for the Collaborative Economy" — a publication that strongly supports the sharing economy sector.
It is interesting to note that the Commission distinguishes between 2 types of platform. On the one hand, digital platforms whose activities are primarily "technical, automatic, and passive". On the other hand, companies like Uber and Airbnb, which offer accommodation services but also functions such as rating, payment, insurance, or identity verification.
In such cases, the Commission affirms that the responsibility of digital platforms should be greater. However, no recommendations or guidance have been issued on how each country should regulate this sector.

In this context, the European Union may lack the appropriate legal tools to protect users. Consumer protection regulations apply only to B2C relationships, not to peer-to-peer ones. To help create a safe environment for users, the consumer association BEUC states that "platforms need to have insurance in place, or provide adequate insurance policies where necessary". The Commission will monitor the development of this nascent sector, collect statistical data and indicators, and support the exchange of best practices. The EU has not ruled out the possibility of bringing forward new legislative proposals if regulatory gaps persist.

InsurTech still faces legal ambiguity — particularly when one takes into account new entrants to the market who find themselves disrupting a highly regulated sector. The EU's efforts to regulate financial markets have, however, opened the door to new opportunities. InsurTech must take into account numerous regulations, primarily related to online matters such as data protection and online consumer protection. Determining the precise nature of the intermediary (insurance company, insurance broker, marketplace, aggregator, etc.) is of particular interest for InsurTech given its obvious impact on the applicable regulatory framework.

This ambiguous landscape could well change. Gabriel Bernardino, presiding over EIOPA (the European Insurance and Occupational Pensions Authority), said at a recent conference: "The change coming from the digital era is different: […] it is not incremental but disruptive. The entire insurance value chain will be impacted […] big data and telematics, web comparison tools, and automated advisory tools will impact the consumer interface. The growing amount of personal data available and the power of data analytics will inevitably change insurance models […]"

From 2017, EIOPA will organise a series of roundtables to understand the challenges of InsurTech. EIOPA will use the discussions from these roundtables to try to develop a regulatory framework in Europe that will "promote the highest standards of consumer protection without stifling innovation".

The United Kingdom: insurance and the sharing economy through leadership

In 2014, the UK's BIS (Department for Business, Innovation and Skills) commissioned a groundbreaking report on the sharing economy entitled "Unlocking the Sharing Economy: An Independent Review". The report declares that "insurance is crucial to make the sharing economy work for everyone". This encouraged member states and the Commission to explore EU cooperation with the insurance industry to ensure that providers of collaborative services have access to insurance and to clarify the question of liability.

The report adds that, in terms of insurance, sharing economy businesses represent a market in their own right. In other words, they should pool their resources to create a trade body to negotiate their coverage. While collaborative platforms are keen on the idea of offering bespoke insurance products, their engagement with insurers or brokers remains rare. This is why the UK government approached the BIBA (British Insurance Brokers' Association) to find brokers who could design new solutions. Their website now lists BIBA brokers who have put forward products specific to the sharing economy.

Another pioneering development: the trade body Sharing Economy UK was established in 2015. The first quality label, named the "TrustSeal", was launched a year later. It was created to enhance consumer trust in collaborative platforms. This label will be awarded to companies that meet eight specific criteria, including the provision of insurance and guarantees to users.

Debbie Wosskow, founder of Sharing Economy UK, declared: "Insurance plays a fundamental role in the sharing economy in the sense that it allows consumers to feel safe and protected when using relatively new services. By working with BIBA, we have taken significant steps to ensure that the sector collaborates with sharing companies of all types, and we will continue in this direction."

The importance of insurance for the sharing economy

To conclude, trust is a fundamental pillar of the sharing economy. And it is clear that this trust must be reinforced by additional levels of insurance. Indeed, for many, insurance represents the next frontier of the sharing economy. This aspect will be paramount in reaching a larger number of reluctant but potential users who still believe that peer-to-peer sharing carries too many risks.

The sharing economy and insurance create opportunities for both the insurance industry and entrepreneurs. An exciting ecosystem of traditional insurers, technology companies, and InsurTech start-ups has emerged, ready to provide innovative solutions to the market.

Entrepreneurs must think about their risks and responsibilities and offer the most appropriate solutions for their users. They have an opportunity to gain a competitive advantage, improve their reputation, and generate new revenue streams.
At the same time, the insurance industry is progressing towards a bespoke, on-demand approach, which can be a perfect opportunity for entrepreneurs.

While ambiguity and complexity continue to prevail in regulation, regulators in America have been more proactive than the EU in terms of coverage adapted to the sharing economy.
But one thing is certain: this type of economy is a flourishing market and will continue to expand in the years ahead. Finding appropriate insurance contracts is paramount for today's and tomorrow's entrepreneurs and start-ups.

(Source: Marketplace Academy)