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Captives

Closing Gaps in the Gig Economy

Captives are creating more flexible and cost-effective options for the rapidly evolving shared economy sector.
By: | July 27, 2017 • 6 min read

The sharing economy is booming right now.

Expected to top $335 billion by 2025 according to PwC, the gig economy, as it’s otherwise known, already touches most of our lives — from hailing a ride on Uber or Lyft to finding a place to stay on Airbnb.

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Essentially, it’s an economic system whereby assets or services are shared between private individuals via the Internet, making it relatively easy to set up and with little overhead.

But the often globally networked nature of the sharing economy presents challenges, along with a workforce comprised heavily of independent contractors exposed to a host of risks on a daily basis. Add to that a lack of loss history and increasing regulatory scrutiny, and it’s often too expensive or hard for these companies to find cover.

However, an alternative solution has now emerged for those companies willing to take on their own risks. Through owning a captive, companies can retain more of their risk and craft manuscripted coverage language specific tailored to their exposures, as well as gain direct access to reinsurers willing to underwrite those risks.

Lyft and Uber, the ride sharing services, were among the first to take the plunge, setting up captives in Hawaii, and now more are hopping on the bandwagon.

Sharing Economy Risks

Melissa Neis, vice president at Parr Insurance Brokerage, said the sharing economy is difficult to insure because it is a relatively new area lacking sufficient loss history.

“It can be tricky because there’s a lack of actuarial data to support a long-term risk analysis, so it’s hard for insurers to understand what kind of pricing will support the exposures concerned,” she said.  “Also, as technology continues to advance and companies’ platforms and business models are constantly evolving, their exposures can also significantly change, meaning that their policy language has to be recrafted, making them difficult to underwrite.”

Sean Rider, executive vice president and managing director, consulting and development, Willis Towers Watson

Monica Everett, vice president, sales, York Alternative Risk at York Risk Services Group, said that what makes these companies even harder to assess is their ever-changing, often global workforce and the risks they face, with many independent contractors working for them who are not classified as employees and so are not covered under workers’ compensation.

“Where does the risk for a company start and stop?” she said. “Then there is the issue of U.S. Courts granting settlements to independent contractors for injuries sustained in the course of their assignment.

“This often means that companies must insure independent contractors regardless of how the companies classify them. In addition, an independent contractor’s job can be as risky as that of a full-time employee.

“Depending on the circumstances, companies may have limited control over the safety of these workers, which adds to the complexity of the risk.”

Ward Ching, managing director at Aon Global Risk Consulting, added that the business models of companies in the gig economy don’t often fit the class codes and mold of traditional companies with insurable risks such as workers’ compensation and general liability, making it harder for underwriters to assess their exposures.

“The terminology is changing, the exposures are changing and the speed of change is just amazing,” he said. “Their policies and procedures, and whole approach to risk is changing on an almost quarterly or more frequent basis making it hard for traditional insurers to keep up.”

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Sean Rider, executive vice president and managing director, consulting and development at Willis Towers Watson, said that another reason these risks are so difficult to assess is they often cross over between different types of insurance including property/casualty, accident and health, and personal lines.

“Because they often transcend the silos between commercial and personal activities, traditional carriers struggle with crafting coverage that meets their stakeholders’ needs,” he said. “Added to that, the confluence of the multiple aspects of the coverage and the relatively new exposures as well as the lack of a holistic marketplace make them a prime candidate for captive utilization.”

Tina Summers, senior vice president, Marsh Captive Solutions, added that the uncertain regulatory environment for sharing economy companies has also caused concern among insurers.

“This has resulted in a limited number of markets willing to write the risk, limited availability of capacity and high premium pricing,” she said. “Over the past few months, we have seen some new entrants to the market with appetite for sharing economy risk; however, we expect coverage and pricing flexibility to remain reasons for companies in this space to look at captives.”

Ideal Solution for Unique Risks

For those companies willing to take on their own risks, Summers said that captives are a viable solution, enabling them to finance coverage for these risks in a more cost effective way.

“Funding of retained risk in a captive may provide leverage when negotiating with commercial insurance markets,” she said. “It may also improve unit economics due to the flexibility a captive allows.”

Captives also enable these firms to craft their own manuscripted coverage language and to determine their own pricing, said Thad Hall, partner, business development at Y-Risk, a managing general underwriter specializing in the sharing economy. Y-Risk is currently in the process of setting up its rent-a-captive facility.

“Because they often transcend the silos between commercial and personal activities, traditional carriers struggle with crafting coverage that meets their stakeholders’ needs.” — Sean Rider, executive vice president and managing director, consulting and development, Willis Towers Watson

There are additional benefits for companies to consider, said Hall.

“Several insurers had a tough time after the recession and pulled back on coverage or pulled out altogether, but being in a captive enables companies to avoid these types of cycles.”

Captives also offer the advantage of a policy that doesn’t need to be constantly underwritten every year, said Jillian Slyfield, managing director at Aon Risk Solutions.

“You can tweak it every quarter or as required and make the changes needed to enable the company to grow and grow quickly.”

Everett added that captives are a good fit for the culture and entrepreneurial spirit of sharing economy companies, while giving greater control to the parent company and offering a significant risk/reward based incentive too.

“The parent company can control how claims are handled and their premiums are developed utilizing an actuarially developed loss pick which, if given enough history, should predict future losses accurately,” she said.

She added that captives also allow companies to insure the risks they previously carried on their balance sheets as policy exclusions on standard policies such as wage and hour coverage and cyber risks.

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Rider concluded that a captive’s key selling point is allowing these companies to aggregate multiple risks across different portfolios, while enabling them to buy reinsurance from markets that have a track record of providing capacity across P&C, A&H and personal lines.

“Captives create the opportunity to consolidate a company’s diverse cross section of risks in one place and to then build a reinsurance structure that can accommodate that unique risk portfolio,” he said. “This enables them to craft an insurance program that connects with their stakeholders’ needs and to create an optimal risk transfer solution.” &

Alex Wright is a U.K.-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Insurtech

Kiss Your Annual Renewal Goodbye; On-Demand Insurance Challenges the Traditional Policy

Gig workers' unique insurance needs drive delivery of on-demand coverage.
By: | September 14, 2018 • 6 min read

The gig economy is growing. Nearly six million Americans, or 3.8 percent of the U.S. workforce, now have “contingent” work arrangements, with a further 10.6 million in categories such as independent contractors, on-call workers or temporary help agency staff and for-contract firms, often with well-known names such as Uber, Lyft and Airbnb.

Scott Walchek, founding chairman and CEO, Trōv

The number of Americans owning a drone is also increasing — one recent survey suggested as much as one in 12 of the population — sparking vigorous debate on how regulation should apply to where and when the devices operate.

Add to this other 21st century societal changes, such as consumers’ appetite for other electronic gadgets and the advent of autonomous vehicles. It’s clear that the cover offered by the annually renewable traditional insurance policy is often not fit for purpose. Helped by the sophistication of insurance technology, the response has been an expanding range of ‘on-demand’ covers.

The term ‘on-demand’ is open to various interpretations. For Scott Walchek, founding chairman and CEO of pioneering on-demand insurance platform Trōv, it’s about “giving people agency over the items they own and enabling them to turn on insurance cover whenever they want for whatever they want — often for just a single item.”

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“On-demand represents a whole new behavior and attitude towards insurance, which for years has very much been a case of ‘get it and forget it,’ ” said Walchek.

Trōv’s mobile app enables users to insure just a single item, such as a laptop, whenever they wish and to also select the period of cover required. When ready to buy insurance, they then snap a picture of the sales receipt or product code of the item they want covered.

Welcoming Trōv: A New On-Demand Arrival

While Walchek, who set up Trōv in 2012, stressed it’s a technology company and not an insurance company, it has attracted industry giants such as AXA and Munich Re as partners. Trōv began the U.S. roll-out of its on-demand personal property products this summer by launching in Arizona, having already established itself in Australia and the United Kingdom.

“Australia and the UK were great testing grounds, thanks to their single regulatory authorities,” said Walchek. “Trōv is already approved in 45 states, and we expect to complete the process in all by November.

“On-demand products have a particular appeal to millennials who love the idea of having control via their smart devices and have embraced the concept of an unbundling of experiences: 75 percent of our users are in the 18 to 35 age group.” – Scott Walchek, founding chairman and CEO, Trōv

“On-demand products have a particular appeal to millennials who love the idea of having control via their smart devices and have embraced the concept of an unbundling of experiences: 75 percent of our users are in the 18 to 35 age group,” he added.

“But a mass of tectonic societal shifts is also impacting older generations — on-demand cover fits the new ways in which they work, particularly the ‘untethered’ who aren’t always in the same workplace or using the same device. So we see on-demand going into societal lifestyle changes.”

Wooing Baby Boomers

In addition to its backing for Trōv, across the Atlantic, AXA has partnered with Insurtech start-up By Miles, launching a pay-as-you-go car insurance policy in the UK. The product is promoted as low-cost car insurance for drivers who travel no more than 140 miles per week, or 7,000 miles annually.

“Due to the growing need for these products, companies such as Marmalade — cover for learner drivers — and Cuvva — cover for part-time drivers — have also increased in popularity, and we expect to see more enter the market in the near future,” said AXA UK’s head of telematics, Katy Simpson.

Simpson confirmed that the new products’ initial appeal is to younger motorists, who are more regular users of new technology, while older drivers are warier about sharing too much personal information. However, she expects this to change as on-demand products become more prevalent.

“Looking at mileage-based insurance, such as By Miles specifically, it’s actually older generations who are most likely to save money, as the use of their vehicles tends to decline. Our job is therefore to not only create more customer-centric products but also highlight their benefits to everyone.”

Another Insurtech ready to partner with long-established names is New York-based Slice Labs, which in the UK is working with Legal & General to enter the homeshare insurance market, recently announcing that XL Catlin will use its insurance cloud services platform to create the world’s first on-demand cyber insurance solution.

“For our cyber product, we were looking for a partner on the fintech side, which dovetailed perfectly with what Slice was trying to do,” said John Coletti, head of XL Catlin’s cyber insurance team.

“The premise of selling cyber insurance to small businesses needs a platform such as that provided by Slice — we can get to customers in a discrete, seamless manner, and the partnership offers potential to open up other products.”

Slice Labs’ CEO Tim Attia added: “You can roll up on-demand cover in many different areas, ranging from contract workers to vacation rentals.

“The next leap forward will be provided by the new economy, which will create a range of new risks for on-demand insurance to respond to. McKinsey forecasts that by 2025, ecosystems will account for 30 percent of global premium revenue.

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“When you’re a start-up, you can innovate and question long-held assumptions, but you don’t have the scale that an insurer can provide,” said Attia. “Our platform works well in getting new products out to the market and is scalable.”

Slice Labs is now reviewing the emerging markets, which aren’t hampered by “old, outdated infrastructures,” and plans to test the water via a hackathon in southeast Asia.

Collaboration Vs Competition

Insurtech-insurer collaborations suggest that the industry noted the banking sector’s experience, which names the tech disruptors before deciding partnerships, made greater sense commercially.

“It’s an interesting correlation,” said Slice’s managing director for marketing, Emily Kosick.

“I believe the trend worth calling out is that the window for insurers to innovate is much shorter, thanks to the banking sector’s efforts to offer omni-channel banking, incorporating mobile devices and, more recently, intelligent assistants like Alexa for personal banking.

“Banks have bought into the value of these technology partnerships but had the benefit of consumer expectations changing slowly with them. This compares to insurers who are in an ever-increasing on-demand world where the risk is high for laggards to be left behind.”

As with fintechs in banking, Insurtechs initially focused on the retail segment, with 75 percent of business in personal lines and the remainder in the commercial segment.

“Banks have bought into the value of these technology partnerships but had the benefit of consumer expectations changing slowly with them. This compares to insurers who are in an ever-increasing on-demand world where the risk is high for laggards to be left behind.” — Emily Kosick, managing director, marketing, Slice

Those proportions may be set to change, with innovations such as digital commercial insurance brokerage Embroker’s recent launch of the first digital D&O liability insurance policy, designed for venture capital-backed tech start-ups and reinsured by Munich Re.

Embroker said coverage that formerly took weeks to obtain is now available instantly.

“We focus on three main issues in developing new digital business — what is the customer’s pain point, what is the expense ratio and does it lend itself to algorithmic underwriting?” said CEO Matt Miller. “Workers’ compensation is another obvious class of insurance that can benefit from this approach.”

Jason Griswold, co-founder and chief operating officer of Insurtech REIN, highlighted further opportunities: “I’d add a third category to personal and business lines and that’s business-to-business-to-consumer. It’s there we see the biggest opportunities for partnering with major ecosystems generating large numbers of insureds and also big volumes of data.”

For now, insurers are accommodating Insurtech disruption. Will that change?

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“Insurtechs have focused on products that regulators can understand easily and for which there is clear existing legislation, with consumer protection and insurer solvency the two issues of paramount importance,” noted Shawn Hanson, litigation partner at law firm Akin Gump.

“In time, we could see the disruptors partner with reinsurers rather than primary carriers. Another possibility is the likes of Amazon, Alphabet, Facebook and Apple, with their massive balance sheets, deciding to link up with a reinsurer,” he said.

“You can imagine one of them finding a good Insurtech and buying it, much as Amazon’s purchase of Whole Foods gave it entry into the retail sector.” &

Graham Buck is a UK-based writer and has contributed to Risk & Insurance® since 1998. He can be reached at riskletters.com.