Sharing economy: the captive solution
The sharing economy – an economic system in which assets or services are shared between private individuals, either free or for a fee, typically by means of the Internet – has presented the insurance industry with a lot of unique challenges, things that weren’t previously thought about when these companies started out.
This is according to Tina Summers, senior vice president at Marsh, who says she has seen increased interest from sharing economy companies.
But now these companies are being forced to think about alternative risk structures, due regulatory and compliance requirements in the US and also as they expand internationally, she explains.
In Europe in particular, a 2016 PwC study for the European Commission has shown that sharing economy activity across Europe has accelerated in the previous two years, with five of its key sectors generating revenues of €3.6bn and facilitating €28bn of transactions in 2015.
The UK's sharing economy in particular has grown the fastest in Europe, with transactions reaching £7.4 billion in 2015 from £3.9 billion in 2014.
“With the captive it just helps them to fund proactively versus reactively.”
Five areas identified by the report that fall within the sharing economy include collaborative finance, peer-to-peer accommodation, peer-to-peer transportation, on-demand household services and on-demand professional services.
While the exposures business within the sharing economy are facing are not relatively new, the way in which these exposures are presenting themselves are new, according to Summers.
How the exposures do differ from many traditional businesses is that in many cases, the companies do not actually own their assets, Summers says.
She suggests while it can take a traditional industry years to move onto different risk retention and mitigations structure, due to this unique nature of the sharing economy, where services are shared between private individuals and growth rates are high, the situation is different.
Hard to grasp
One of the key issues with the risks associated with the sharing economy is the lack of data, specifically loss data, according to Summers.
“The pushback that we get from underwriters - or at least I've heard from clients - is that there's not enough data to underwrite the risk, underwriters can't wrap their arms around the risk,” she says. “We need to get more comfortable with what you're doing up front to control the risk. “
From a commercial insurance perspective, she suggests that markets and underwriters feel a little wary about this risk due to this lack of data. And so, from a loss perspective, they wouldn’t have the same data available do to their underwriting model or look at actuarial studies.
Generally the response from clients, Summers says, is that they end up frustrated because premiums are much higher, and they feel that underwriters are penalizing them with pricing because of this lack of data, essentially paying a lot more for insurance than they’d like
And it’s not just pricing that is an issue, there is also finding the capacity for this type of risk.
“There's a few of the markets that write these risks in, and I will say that the larger insurance companies are putting a lot of effort into getting on board.
“I know a number of the large brokers have been really active in helping underwriters and markets come to the table. But historically the capacity for this type of risk has been very limited.”
The captive solution
Retaining more risk, access to the reinsurance market, and offering insurance to the connected but unrelated parties – such as delivery drivers – have all been identified by Marsh as benefits a captive can provide to sharing economy companies.
Sharing economy companies are quite different from traditional industries, and have the ability to gather a lot more data in a shorter amount of time, Marsh suggests.
“Instead of basically giving a bunch of money to insurance companies every year for them to pay losses, you're able to retain some of that premium,” Summer says. “But even if you think your premiums are too high to that exposure, which many of clients do, you're basically able to take a piece of that pie, put it in your own formalised risk-financing vehicle.
”And if things go to plan - which generally they do - your losses are better than the market anticipated, then you're retaining more of that set premium than just giving it away to the insurance company."
When compared to the commercial insurance market, one of main advantages of a captive is the ability provide these sharing economy companies with greater flexibility, according to Summers.
This can include being able to deliver more creative programme structures, broader coverage and overall programme economics.
“You’re basically taking a larger portion of that than the insurance companies,” she explains.
But there is also greater flexibility in terms of manuscript wording; Summers suggests that the coverage wording the captive uses can sometimes be a bit broader than what the commercial market will offer.
So as long as a captive can price the coverage, it can have broader wording than the commercial market, she says.
Summers gives an example: “You go to an insurance company and you want general liability coverage - typically the insurance company will have a policy form, and then there is some negotiation around tailoring that policy form wording to your exposure. But there's going to be limitations in what the underwriter is willing to allow.”
In terms of the broader coverage, Summers says that most organisations face those exposure anyway and so if they weren’t covering it through the captive, likely they would be paying losses off of their balance sheet.
“With the captive it just helps them to fund proactively versus reactively,” she says.
The only drawback Summers sees is the annual operating costs that a company will accrue, but she says that generally the financial benefit of the captives outweighs that cost.
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