1 Insurance in the Sharing Economy Paul Y. Mang, Avarie Capital William M. Wilt, Assured Research Many observers of the P&C industry have noted that we are entering into an exciting, but uncertain period of innovation and new business models that may change the competitive landscape. Mobile technologies, big data analytics, and usage- based insurance have all received significant industry press attention. However, there is a less well- recognized trend that also has the potential to disrupt the P&C industry in unexpected ways the sharing of private assets, such as automobiles, as facilitated by a growing number of innovative, technologically- savvy groups. The fact that a story on The rise of the sharing economy is featured on the recent cover of The Economist suggests the trend will not be ignored for much longer. In this paper, we will explore Peer- to- Peer (P2P) carsharing 1 and the implications of this trend on the insurance sector. What is the sharing economy? Before getting into automobile ownership and risk management associated with this new phenomenon, we should start with a bit of context. The sharing economy is born out of social trends that have gone by a variety of labels, such as crowdsourcing, micro- finance and collaborative consumption. Of course, sharing has always existed in one form or another. Families have always shared resources; agricultural communities have banded together to raise a barn and share expensive tools; and groups of friends have helped each other move their belongings from one post- college apartment to another. Today, however, social networks and new communication technologies have allowed work to be managed through, and physical assets to be shared among, larger groups of individuals. This type of asset sharing involves the re- emergence of community, states Rachel Botsman, co- author of What's Mine Is Yours: The Rise of Collaborative Consumption (2011); this works because people 1 P2P models are characterized by individuals joining a network and making available their private automobiles for short term rental. There are other non peer- to- peer companies that involve sharing of cars as well Zipcars is the most well known example. The insurance issues related to non peer- to- peer carsharing are better understood and not the focus of this paper.
2 can trust each other. In fact, a recent Time magazine article identified this new sense of joint ownership and consumption as one of the top ten ideas to change the world. 2 Carsharing is just one of the potential applications of this budding social trend for group or community activity. It is evident that a small but emerging segment of the population is willing to share their personal cars in interesting new ways. This sharing goes beyond lending the keys to a friend or family member for a quick trip. Car owners are willing to rent out the idle capacity of their cars to strangers. For some, it is a practical way to earn enough extra money to justify having the infrequently used car. For others, it is a social statement that pooling assets is a better way to live. Whatever the motive, peer- to- peer carsharing is effectively separating formal ownership of assets from access to assets. Jeremy Rifkin, the American economist and trend guru, went so far as to call the concept of collaborative consumption or the sharing economy the third industrial revolution. Carsharing is an umbrella term that encompasses two distinct models. Traditional carsharing involves an organization such as Zipcar that owns cars and facilitates the rental of those cars for short periods, oftentimes just a few hours. This constitutes sharing of an asset in the sense that an individual who might otherwise buy a car for occasional use chooses instead to forgo ownership in favor of belong to a community of Zipsters (to continue with our Zipcar example). These individuals are willing to endure the inconvenience of renting a car to avoid the costs associated with asset ownership. Most, or at least many, Zipsters also value the green element of sharing a car with others. Traditional carsharing models differ from car rental models (e.g., Hertz, Avis) in two ways: (i) the all- in pricing includes gas and insurance costs, and (ii) an initial membership creates an up- front fixed cost for the participants. Peer- to- Peer carsharing (P2P) is also predicated on short- term use of cars, but in this business model, a carsharing company uses on- line technology to connect privately- owned vehicles of network participants to members of the service. Car owners set the hourly (or in some cases daily) rates and have the flexibility to decide who can rent their vehicles. Renters will pay roughly $8-10 per hour for use of a car (rates vary by make, model, and year) and roughly 60% of the fee will be kept by the car- owner with 40% collected by the P2P company. Membership is organized so that there is some vetting to ensure a level of safety and reliability on both sides, but the key enforcement tool is the ubiquitous user feedback mechanism of other social networks; owners and renters rate each other after each transaction. Members (both car owners and potential renters) use the rating tool to decide whether to strike a deal. Occasional renters find value in this P2P option. The cars are not at a distant airport lot or hotel parking structure, but rather, these networks create a pool of available cars right in the neighborhood. The all- in cost and convenience make it ideal for the occasional trip to IKEA or the grocery store. Some renters do have cars, but need something different for a special occasion perhaps rent one of the dozen or so high- tech Tesla s for a special event or a 4x4 for the weekend ski trip. 2 Walsh, B. (2011, March 17). Today s Smart Choice: Don t Own. Share. Time Magazine. 2
3 Car owners are now able to monetize an asset that, in some cases, is very underutilized. In a few major cities today, there is a growing group of micro- entrepreneurs that are leveraging P2P carsharing networks to create viable new commercial enterprises. One factor driving the interest in sharing is the environmental impact of participating. Sam Zaid, the founder of Getaround, noted in an interview that the number one way to reduce carbon emissions is carsharing we just have to take vehicles off the road. We are wasting fuel and time by sitting in traffic and driving around looking for parking. Municipalities and other governments are paying attention; they are starting to see how carsharing can really help. While more studies are needed to quantify this impact, University of California at Berkeley researcher Susan Shaheen and her colleagues found car ownership among participants in carsharing networks fell by 50%. 3 The Old World insurance model and the New World of sharing These new P2P sharing models present both a challenge and an opportunity to insurance carriers. As more automobiles are shared, logic dictates that The Avis/Zipcar Case Study In case the concept of carsharing seems far- fetched, consider that Avis recently agreed to pay a 49% premium to the shareholders of Zipcar to buy the company at a price tag of about $500 million. Zipcar, founded in 2000, was the dominant, traditional carsharing company in North America. The CEO of Avis was quoted as saying I ve been somewhat dismissive of car sharing in the past. However, after ponying up for the company s technology and brand, he noted we are committed to retaining the elements of the Zipcar brand and culture that have allowed Zipcar to achieve such rapid growth and success. there are fewer cars to insure a shrinking pie. However, an innovative carrier may get an upper hand in this new segment and grow at the expense of its competitors. In fact, one scenario that would be negative for all incumbents in the insurance industry is that an unmanaged trend could invite a new breed of competitors, possibly transforming the sector altogether. To be clear, the P2P carsharing phenomenon is still in its infancy. While there are more than 30 companies 4 facilitating the sharing of automobiles, there are only tens of thousands of current P2P members (i.e., potential drivers). Interestingly, the millenials 5 driving the evolution of this entrepreneurial process of creating networks to share assets face a decidedly old world problem: how to cost- effectively meet society s and regulators demands for adequate insurance protection. While trust and community building are what enabled 3 Shaheen, S.A., et. al. Personal Vehicle Sharing Services in North America. Research in Transportation Business & Management (2012), doi /j.rtbm Ibid. 5 Millenials is a somewhat loosely defined term most often used to describe those born after Generation X, or subsequent to 1981 until roughly In this piece, we define millenials as being aged 35 and younger. 3
4 these networks/companies to start, it seems mainstream acceptability will hinge on how the insurance industry responds to the new risks posed by the sharing concept. Personal lines insurers, in particular, face an interesting strategic dilemma. They need individually to make a decision about this external trend, but collectively their actions will impact the development of the emerging market. There are two broad strategic postures senior executives at carriers can adopt; do they: Ignore the trend of asset- sharing, elect not to innovate on policy coverage matters, and simply hope the trends don t gather momentum? This wait- and- see option, if taken by most carriers, may create enough of a barrier to adoption and profitability that P2P remains largely a niche segment. While the opportunity to grow through innovation sounds promising, it is not clear today if there is a profitable way to serve this segment. Furthermore, carriers may perceive that it is not in their interest to accelerate the trend that reduces overall personal auto insurance exposure. Or, work directly with these technological entrepreneurs and find mutually compatible, and affordable, insurance solutions that will address the needs of this consumer segment? Auto insurance is a competitive sector; carriers cannot afford to ignore true profitable growth opportunities. If executives believe at least one competitor might act to solve the risk issues for this millennial customer group, the niche segment may turn into a viable business platform for the future. Getting ahead of this trend may have positive marketing and market share implications for any innovator. The second- and third- order effects of this asset- sharing phenomenon, beyond P2P, are not clear; who can know now if carsharing can develop into the foundation for future profitable growth opportunities? Shelby Clark, who founded RelayRides in 2010 in Boston, said in an interview: There could be an opportunity for insurance carriers to provide a different type of insurance for car sharers. It would probably involve having users pay only for what they need, and could involve products for both car owners and renters. 4
5 The emergence of new transportation options Before we dig deeper into the intersection of the sharing economy and the world of property and casualty insurance, let s examine the models in more detail. Traditional carsharing versus P2P models Traditional carsharing does not present any unique insurance issues for the P&C industry. A company such as Zipcar owns and insures its own cars. While there is always a lack of transparency on the consumers side about how personal insurance policies interface with the policy of a rental carrier (ask any insurance professional for an explanation and you will immediately know the nature of the ambiguity), at least the issues presented by this form of carsharing are not new. Moreover, we expect a lower cost of insurance was one of the many expense synergies driving the 49% premium paid by Avis in the recent acquisition of Zipcars. Why is insurance so different in P2P as compared to traditional car sharing? It is because ownership of the asset, a car in this case, remains with the personal renter. Most readers will have come across the commercial use exclusion at some point in their insurance career. Paraphrasing from the policies of several major personal lines carriers, the language seems unambiguous: There is no coverage for an insured for damages arising out of the use of a vehicle while it is rented, or leased to others, or when it is being used to carry persons for a charge. Prominent articles focused on the collaborative consumption trend have acknowledged the challenges posed by this part- time commercial exclusion, prompting one erstwhile proponent to ask: I m not about to willingly defy my insurance company. Are you? 6 People occasionally allow friends, relatives, or even trusted neighbors to use their car for a short trip. Insurers acknowledge this reality and do not exclude that use. However, covering the liabilities caused by a third party who acquired use of the policyholder s car for a fee is a different situation this violates the basic principles of underwriting. The total revenues in the P2P carsharing system could approach $9-10 billion per annum by Most P2P companies take a 40% commission from the rental, leading to P2P revenues of around $3.5 to $4 billion in a few years. That s not inconsequential! 6 Lieber, R. (2012, March 16). Share a Car, Risk Your Insurance. The New York Times. 5
6 Millenials are different Do insurance carriers need to have a plan to address P2P? We understand if readers of the baby boom generation are skeptical. For boomers, the idea of sharing things that are as personal as a car and one s own home, and re- thinking consumption all together, is almost foreign. But P2P carsharing should make P&C executives stand up and take notice. First, a few facts: The 200+ million cars in the US sit idle for 90% of their useable capacity 7 Younger people are noticeably less likely to have a driver s license than their cohorts did just ten years ago. In 1983, 87.3% of 19- year olds had a drivers license; in 2010, that same percentage dropped to 69.5% 8 The millennials do not have the same buying patterns for new car purchases. Last year, only 27% of new cars, according to industry analyst, were purchased by year olds. In 1985, that same age cohort purchased 38% of new cars that year. 9 There are a myriad of other statistics, many from the world of real- estate, that can be used to illustrate that young people simply don t value ownership of assets in the same way that prior generations did. Perhaps that will change as their needs evolve and the inevitable cycle of life takes hold. However, insurers have never dealt with a generation that grew up with the internet and value access to assets more important than ownership of assets. Insurers ignore these societal trends at their own peril. Ezra Goldman, the founder of a new carsharing model called Upshift in San Francisco, states that the biggest barrier in the peer- to- peer carsharing sector is trust and fear that s why insurance is key. Goldman s conclusion is that, this type of carsharing cannot be separated from the insurance issues. Who are the P2P players? Three P2P carshare networks have emerged as leaders: Getaround, RelayRides and Wheelz. As of 2012, only RelayRides has established a national presence (albeit in larger cities and other areas of high population densities). These companies were financed by venture capitalists and oftentimes angel investors prominent in the technology start- up scene. Interestingly, Zipcar had invested $13.7 million in Wheelz in 2012, providing Avis with a toehold in this P2P segment of the carsharing market. GM led a $3 million round of funding for RelayRides. 7 Hamilton, A. (2012, February, 7). Will Car- sharing Newtorks Change the Way We Travel? Time Magazine. 8 Sivak, M. and Schoettle, B. Update: Percentage of Young Drivers with a Driver s License Continues to Drop. Traffic Injury Prevention, 2012, Vol 14, Issue 4. 9 Survey from CNW Market Research. 6
7 The P2P corner of the carsharing segment is small, however, with an estimated number of members that may rise into the tens of thousands. This compares to the broader carsharing industry, which is reported have just under 1 million members and some 15,000 owned cars in North America. 10 Whatever the P2P number is presently doesn t much matter; it is tiny compared to the approximately 200 million licensed drivers and cars in the United States. Figure 1: Leading P2P Car Sharing Companies Getaround RelayRides Wheelz Year founded: Geographic footprint: San Francisco and the surrounding Bay Area; Portland, OR; Austin, TX; Chicago, IL; and in limited areas of San Diego, CA. Select cities in several states. San Francisco, Los Angeles and other cities predominantly in CA. Insurance provided: Up to a maximum limit of $1 million; $500 deductible; Provider: Berkshire Hathaway Owners are covered with a $1 million liability insurance; For Renters, RelayRides adds $300,000 of liability coverage on top of whatever existing policy they may already have; $500 deductible; Provider: A Rated. Insurance coverage consists of a combined single limit of $1 million per accident - all third- party bodily injuries or property damage costs relating to the accident are covered in the aggregate up to $1 million. Source: Company websites Looking ahead, consulting firm Frost & Sullivan estimates that by 2016, some 4.4 million North Americans will be involved in some sort of carsharing network. 11 If we assume those renters pay an average of $10 per hour for 4 hours of renting per week, the total revenues in the P2P carsharing system could approach $9-10 billion per annum by Most P2P companies take a 40% commission from the rental, leading to P2P revenues of around $3.5 to $4 billion in a few years. That s not inconsequential! Taking the back- of- the- envelope math one step further, we estimate that today, approximately 20% of the rental fees are put toward the cost of insurance. This implies roughly $2 billion of insurance premiums are at stake. The fact that this number is so high points to a problem for the emerging P2P industry the current insurance solutions are complex for their participants and are too expensive. 10 Shaheen, S.A. and Cohen, A. Innovative Mobility Carsharing Outlook. University of California, Berkeley, Hamilton, A. (2012, February, 7). Will Car- sharing Newtorks Change the Way We Travel? Time Magazine. 7
8 The insurance challenges impact the P2P community in two ways. First, a recent Businessweek article highlights how difficult (and expensive) it is for sharing network operators to provide even basic coverage to their members. 12 It is not surprising when asked to identify the top barriers to widespread adoption of P2P carsharing, the overwhelming majority of these networks cited the cost of securing insurance coverage. 13 Second, given the stance of some personal lines carriers today, car owners face ambiguity when they consider joining a network to rent out their cars the uncertainty about how insurance companies will deal with carsharing is at least a perceived barrier. 14 We believe the current insurance situation is not sustainable for P2P growth. It seems clear that the trajectory of this trend is very dependent on how risk will be managed in the future. State legislators are entering the fray Three states (CA, OR, WA) have passed laws addressing some of the insurance issues caused by P2P carsharing. Conversations with executives in the P2P industry suggest that no other states are on the cusp of passing similar laws. California s legislation passed in 2010, clarified that: A personal automobile cannot be classified as a commercial auto so long as the revenues from participation in a P2P program do not exceed the annual costs associated with owning and operating the car. The insurance carrier of a renter in a P2P carsharing program is not liable for damages caused while the car is being used in a P2P program. Instead, the P2P company must provide valid insurance inuring to the benefit of the renter and owner while the car is being used as part of its program. The personal insurer of the auto cannot, importantly, cancel the coverage of its policyholder simply because of their participation in the P2P program. We wonder whether attainment of the revenue projections described in the earlier sections are realistic unless several major states (NY, IL, and MA chief among them) pass laws that facilitate participation in P2P sharing, or take away the worry of defying my insurance carrier in response to the question posed by the earlier cited article. 12 Buhayar, N. (2012, August 22). Home- and Car- Sharing Sites Struggle to Get Insurance. Businessweek. 13 Shaheen, S.A., et. al. Personal Vehicle Sharing Services in North America. Research in Transportation Business & Management (2012), doi /j.rtbm Lieber, R. (2012, March 16). Share a Car, Risk Your Insurance. The New York Times. 8
9 The opportunities and risks for insurance carriers Coming full circle, we can now ask again what an insurance executive should do if faced with the decision to invest money and resources understanding, and potentially participating in, the carsharing phenomenon. The gating questions There are a number of items on the agenda for P&C executives growth challenges, new technologies, customer service, regulatory changes, distribution dynamics, loss trends, international opportunities, and cost pressures are examples of critical topics senior leadership teams are facing. How should this P2P phenomenon be addressed? We suggest senior teams should address the sharing economy opportunity by focusing on the following gating questions. How big can peer- to- peer carsharing get? Ninety million drivers under age 35 represent nearly one- third of the driving population. If our ballpark estimates are correct, some $9-10 billion of P2P revenue could lead to the equivalent of up to $2 billion in premiums in a few years. That is real money, and doesn t begin to address other aspects of collaborative consumption such as homes or large machinery. Individual carriers will need to develop a perspective on how large the opportunity might be. What will be the risk experience of this group? At this point, P&C executives may be prematurely concluding that the risks of P2P rentals will be greater than comparable personal lines. The industry needs analysis on the early experience in P2P to fully understand the risks involved. We understand that a coalition of sharing economy participants are thinking through how to collect and analyze the data. In the future, the analysis will reveal the risk experience; the question for every carrier will be how it will act in light of the ambiguity today. Collaborative Insurance The Friendsurance Case Study In Germany, a new model of personal lines insurance is gaining some traction in the marketplace. Friendsurance - Alecto GmbH is an online peer- to- peer insurance carrier that combines social networks with traditional insurance products. In their marketing materials, Friendsurance notes their personal insurance networks will reduce individuals premiums by up to 50%. This new collaborative model of insurance which seems to combine the risk benefits of micro- lending with the latest developments in online social networks could evolve to address the insurance needs of the younger demographic in this country. P2P operators place great emphasis on the sense of community (e.g., shared goals of environmentalism) and the ubiquity of user and renter rating systems that will run off the irresponsible. All of these assumptions will need to be empirically tested, but given the nature of demographic and other cultural changes, some insurers may be motivated to explore this dynamic. 9
10 Can a new, disruptive insurance model emerge to deal with carsharing? Executives should consider whether the lack of engagement by incumbent P&C carriers would cause the P2P companies to create their own insurance solutions, potentially inviting new forms of competition to the insurance marketplace. It is always difficult to identify threats from new business models, but carriers should invest enough attention to potential innovations to understand the competitive landscape. See the Friendsurance case study for one example of a new model that may emerge in the market. Is this an opportunity for a first mover to gain an innovation advantage? Jumping at every fleeting new idea can be counterproductive. Carriers will need to assess the costs of engaging with P2P operators and their members as a first mover. The direct costs to be responsive to this trend should be manageable analytical work on P2P members, policy innovation and ultimately rate filings. Senior management attention is the more scarce resource for most incumbent carriers. The potential upside for carriers is innovation. Each leadership team should assess how the carsharing opportunity might create the context to push the innovation culture of its organization. The new insurance ideas that come from rigorously thinking through issues in carsharing may be unexpected carsharing may drive important developments in the use of telematics/ubi technologies; innovators may end up creating new risk products to address the needs of people who use a combination of private cars, taxis, public transportation and emerging rideshare 15 schemes; or insurers my find interesting ways to connect to millenials and define the next important affinity group for product distribution and service. Focusing on core operations while stepping into the New World A wait- and- see decision and the continued focus on advertising effectiveness, operational efficiency, and perhaps UBI pricing pilots may not be unreasonable. If our revenue projections are realistic, ignoring a market that could reach more than a billion of auto insurance premiums is unlikely to get any current executive fired during his or her career- horizon. However, the parallels to direct- marketing of auto insurance premiums seem fitting (though perhaps we need to go back to the early 1990s to align the time horizons). That is, a few companies including Progressive and GEICO opted to build their direct- marketing capabilities, while others waited to see the trend play out before opting to buy the expertise and organization. This is arguably a complicated comparison to make, but the invest- now versus wait- and- see decision can often be the source of differences in competitive performance that are sustained over long periods of time. 15 New rideshare models involve networks of individuals with cars offering rides to passengers in exchange for a recommended donation, rather than a fee. Several networks offering these point- to- point rides have emerged in New York City. The system is enabled by smartphone applications that connect member drivers with potential passengers. The operators of these networks contend that the donation payment model allows them to avoid regulations that govern taxis and for- hire car services. The insurance implications of these ridesharing models are interesting; compared to P2P, they pose a different set of opportunities and threats to personal lines carriers. 10
11 Personal insurers are particularly at risk of losing premiums if P2P does expand in the economy. So far it has been commercial insurers that have responded with products for the sharing networks will personal lines carriers allow other forms of risk solutions (e.g., niche commercial products, captives, self- insurance) to respond to market trends without a fight? The lack of engagement by personal lines carriers is reflected in the comment by an executive of a P2P company: Carriers are surprisingly disinterested in the customer base of our network I think we need to expand our conversations beyond the risk folks and talk to some sales or marketing types. We expect the CEO of Avis once thought the carsharing trend was a fad, until it wasn t, and his company decided to pay a 49% purchase premium to get involved. One incremental step carriers can take to help address the uncertainty around carsharing is to be clearer about existing coverage; for instance, solve the problem of insureds receiving mixed messages from different sources about the risk of getting cancelled by simply participating in P2P. Given the uncertainty today, any carrier that merely communicates in a crisp way what their commercial Each leadership team should assess how the carsharing opportunity might create the context to push the innovation culture of its organization. The new insurance ideas that come from rigorously thinking through issues in carsharing may be unexpected. use exclusion means and doesn t mean, would likely gain immediate attention as green, millennial- friendly and innovative with the 35 and younger segment. This would be an interesting alternative to a new Twitter initiative or sponsorship of another college campus event. When taking the long- term view, prominent insurance executives have expressed the perspective that insurers cannot sublimit their way to relevance or exclude their way to prosperity. We agree. Given the realities of the near- term however, executives will feel the pressure to focus on operational priorities and use exclusions to protect profitability. Every competitor will decide on a strategy based on its unique circumstances; the gating questions highlighted above can be useful in developing perspectives around the key insurance issues in the sharing economy. * * * P2P as an opportunity for property and casualty carrier growth is not straightforward. Facilitating the growth of an industry that will ultimately lead to fewer customers (as measured by registered motor vehicles) is not an obvious path to building enterprise value. Still, assuming that this trend will fizzle out seems unwise. Much to the dismay of parents of 20- something year- olds who still live at home, millenials simply have a different perspective on the ownership of assets. For carriers to invest resources to further study and monitor the trends seems imminently sensible. 11
12 Paul Y. Mang is a partner at Avarie Capital, a strategic advisory and investment firm focused on the P&C industry. Avarie works with carriers, distributors, and data/analytics providers across the sector. Paul was formerly a partner at McKinsey & Company and one of the leaders in its North American Insurance Practice. William M. Wilt is the founder and president of Assured Research. Assured provides research and consulting services to insurance and investment professionals. Bill brings together Wall St., rating agency, consulting and carrier operation experience to deliver distinctive expertise to his clients. Paul Y. Mang Partner Avarie Capital William M. Wilt President Assured Research March 2013 Avarie Capital Assured 2013 Research Avarie Capital, LLC & Assured Research, LLC. All rights 12 reserved.