The Sharing Economy and Its Impact on the Insurance Industry

The Sharing Economy and Its Impact on the Insurance Industry

The sharing economy experienced rapid growth driven by the pandemic. Learn more about the unique challenges these businesses present and their impact on the insurance industry.
Andrew Zarkowsky
Andrew Zarkowsky, Head of AI Underwriting, The Hartford
Bernie Horovitz
Bernie Horovitz, CEO of Y-Risk, LLC

What Is the Sharing Economy?

The sharing economy looks to optimize underutilized assets. New businesses are being created to use technology in a marketplace setting to match supply and demand for a product or service. Companies use a platform to connect those that have extra time or assets with the person looking for the service.
Examples of classes of business within the sharing economy are:
  • Alternative mobility, like ride and car sharing
  • Micro-mobility, such as mopeds, scooters and bikes
  • On-demand delivery for all sorts of items like food, medicine or groceries
  • Space and asset sharing, such as homes, couches and lawnmowers
  • On-demand services and tasks that can help with things like assembling furniture, babysitting, elder care or dog walking
The sharing economy has been around for nearly a decade and is still growing at a rapid pace. The businesses operating in this economy are disrupting typical business models. They're changing the way people think about consumption. They're causing new legal liability challenges. And they're creating unique demands on the insurance industry.

The Pandemic Has Driven Growth in Many Sectors of the Sharing Economy

The sharing economy has gone from a passing fad to an enduring subsector of our economy. People have become more comfortable using platforms and apps for services or assets. One source estimates the value of the sharing economy will hit $335 billion by 2025.1
Adding to the momentum and driving further growth in this new economy is the pandemic. When states put lockdown measures in place last year, some services saw exponential increases in use. Apps like DoorDash and Postmates became essential due to restrictions on in-person shopping. Likewise, micro-mobility and car sharing boomed as customers sought alternatives to mass transit.
Other services, like space sharing, took the pandemic as an opportunity to highlight alternatives to crowded hotels. It also gave them the ability to show their safety and cleaning protocols and streamlined check-in/check-out procedures.2

Insurance Challenges

Underwriting new businesses in the sharing economy is quite challenging. The new unique risks require a different set of considerations than traditional companies. The seller-buyer relationships have morphed. The traditional model includes a company selling a product directly to a consumer. A sharing economy platform uses technology to connect buyer and consumer.
The challenge is determining the legal liability associated with serving as the matchmaker. Depending on the level of involvement in the transaction and representations made, a company's liability exposures can vary greatly.
“The underwriting of companies operating in the sharing economy require specialists who truly understand the particulars of the industry and know what to evaluate regarding the risk dynamics,” according to Bernie Horovitz, CEO of Y-Risk, LLC.
“Many of these businesses are startups. Traditional insurers typically use historical data for pricing and coverage analysis, but new companies generally don’t have that kind of information available. The other challenge is that many of these business models haven’t been tested yet in terms of the liability exposure.” Horovitz explained. “That’s why you need underwriters that specialize in analyzing the risk of these emerging businesses. The Y-Risk team has the insurance knowledge and specialized industry expertise to underwrite these kinds of exposures.”

A Look Into How Specialists Can Help Protect Businesses

Companies operating within the sharing economy platforms face unique risks. For example, users of many of these new apps have to accept the business’ terms of service or rental agreements. Often, Horovitz noted, the wording in the terms of service intend to clarify and drive the exposures to various participants. Understanding these user agreements is crucial in the overall underwriting process.
Another challenge with the sharing economy is understanding each state's industry-specific laws. For example, rideshare insurance requirements vary by state. So, the carrier needs to know what those requirements are to provide the correct coverage and service claims correctly.
Many states also have specific definitions and requirements about relationships between an employee, employer and independent contractor. These can impact a company’s business model and financial viability. It also affects how to structure insurance coverage.
“Regulations, propositions and legislation are evolving extremely fast,” Horovitz said. “Our product team works with The Hartford’s legal group to make sure we are well-informed of and complying with local and federal laws and to ultimately make sure our clients are properly covered.”

The Sharing Economy and Insurance Pricing

Traditional insurance policies are typically a one-year period with a flat premium paid. New and emerging business models benefit greatly by using a different pricing model. Start-up companies are less established and their revenue streams are unpredictable. So pricing that accurately reflects the true exposure is preferable. For the sharing economy, Horovitz said he believes usage-based insurance is superior. With this model, clients only pay in correlation to their activity volume.
“This usage-based pricing model has greatly benefited our clients during the pandemic,” Horovitz noted. “When the economy slowed during the shutdown, many of our clients’ insurance costs decreased accordingly. Usage-based insurance pricing that better correlates with a businesses’ activities is the future not just for the sharing economy but will evolve to standard businesses over time.”

Using Technology To Connect the Sharing Economy to Insurers

A key element to a usage-based premium model is connecting the sharing economy company to the insurer with passive technology. This can happen manually, but there are benefits to using technology, such as:
  • Human error is virtually eliminated
  • Monthly time requirements are not required any longer
  • Data gets sent over in the expected and most useful format
Many insurers do this with commercial auto coverage. Telematics devices monitor a driver’s location, behavior and habits in the car. The data is then reported up to the sharing economy platform. It's combined with trip information and shared with the insurer to accurately price coverage.
Horovitz said he thinks connected devices can open the door to more precise costs for customers for other types of coverage, like general liability.
“General liability policies are most likely priced using static exposure bases, such as square footage of a building,” Horovitz explained. “But wouldn’t it be more accurate if you use sensors that measure movement, traffic and perhaps footsteps in the store? Our future could actually be a pricing model to charge per step.”
This model is something the technology industry is moving towards, according to Andrew Zarkowsky, Technology Industry Practice Lead at The Hartford.
"More and more insureds are thinking about how they do their business and not necessarily their revenue," he said.
Zarkowsky used a website development company as an example. When looking for general liability insurance or other coverages, like cyber insurance, it may make more sense to use the number of unique visitors to the site versus the business’ revenue when determining costs.
Another example is a software service provider. The company charges its users a rate to use their programs. When it comes to insurance costs, that type of business is essentially paying per user, Zarkowsky said.
“If they decide to increase the costs for customers to use their software, they don’t have more insurance risk,” he noted. “But if they sign up 1,000 more users, there’s potentially more risk.”
This type of data isn’t just helpful to insurers. Businesses can also benefit with access to real-time data dashboards, where they can see how their company is performing. They can examine claim trends to help identify opportunities for risk management.
“It’s a two-way street, there’s total transparency,” Horovitz said. “I think that’s the future of insurance.”
About Y-Risk
Y-Risk, which was founded in 2015, is a business unit of The Hartford. Y-Risk is focused on Insuring Tomorrow’s Economy. As specialists on the sharing and on-demand economy, Y-Risk provides insurance solutions that agents can tailor to protect and meet the needs of these new businesses and help them grow.
1 Economic Research, “How COVID-19 Has Shaken the Sharing Economy? An Analysis Using Google Trends Data”
2 Lockton, “COVID-19 Reshapes the Sharing Economy”
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