June 6, 2016 by Angela Stelmakowich
The sharing economy is not a new concept, but because it moves so quickly today, the insurance industry must innovate to catch up and reap the benefits, David Nelis, national CoE leader – casualty for Aon Risk Services, suggested last week during a seminar in downtown Toronto.
“Here we have a new industry that didn’t exist five years ago,” Nelis told attendees of the seminar, hosted by ARC Group Canada, Unintended Consequences: Who is at risk in a world where technology is ahead of regulation?
“So there’s a chance for these insurers to get in and create products and be the first one on the ground. And there will be a huge first-mover advantage to the companies that do that well. Some have already started and are thinking ahead; others are dragging their feet or not understanding it at all,” he said.
Nelis pointed out that “Canada is a very attractive place for global insurers to get involved. The rate of returns here are substantially higher than the rest of the world. So we have an influx of new insurers bringing in new capital and they all want to grow.”
Still, innovation will prove key. “On the one hand, we have an industry that is highly innovative. They relay on cutting-edge technology and it’s a very, very fast-moving industry; on the other hand, we have a centuries-old insurance industry,” Nelis said.
“The guys who develop apps are more Google people and they operate in minutes. They’re already thinking of the next thing that’s going to come along. The insurance industry works, if we’re generous, in months. But, really, it’s years,” he said. “The industry has to catch up.”
Whether it is putting “head in beds” or “bums in seats,” Nelis said, software providers are driving the sharing economy. “Two of the top three hospitality providers in the world don’t own a bed,” he reported.
“That’s a big pie. A lot of people want a part of it and there’ll be more coming,” Nelis predicted, adding the appeal for homeowners is they can get a piece and, for guests, they have access to a cheaper alternative.
The same goes for ride sharing. “There’s a lot of money involved. That’s going to drive interest. It’s not going away, more people will copy this model and it will continue to thrive, in my opinion,” Nelis said.
The sharing economy allows for “better utilization of an asset,” such as a home or car, he said. It allows individuals to “derive some income from that asset.”
Of course, there could be consequences, Nelis pointed out. “More use can lead to misuse of the asset,” he told attendees, and “it does create additional exposure to risk of loss.”
Insurers likely already have insured who are using their personal assets for business, Nelis said. For example, for a homeowner allowing use of the home or rooms, “where does the risk lie in there,” he asked.
“The change is probably slightly more hazardous potentially than in a normal residential house, but it’s probably less than an actual hotel.”
This is similar with a car, with the car being used likely not as at risk as a taxi, but more so than a vehicle used for purely personal use.
“So there is some middle ground and that has to be discovered,” Nelis noted. Also for insurers is the non-disclosure, is an asset is being used for business, but is not declared, and an incident occurs resulting in damage.
Nelis said he sees three main areas: new exposures that exist from the sharing economy; new products that need to be developed to address this; and pricing of products (based on funding the losses that will come from it).
However, his view is that with regard to renting out homes or sharing rides, these are not new exposures. Citing existing businesses like bed and breakfasts or the practice of carpooling, Nelis said the actual exposure to loss exists today.
Also with regard to coverage, “the actual coverage exists, so now it’s a pricing exercise,” Nelis suggested. “There is a connection to be made, no question, taking the existing products and looking at how this exposure relates to it. But it’s not developing anything new; it’s just taking what we currently have and making sure it applies,” he told attendees.
Pricing may likely be the most difficult piece of the puzzle, but with apps comes a huge amount of valuable data, Nelis said. Initially, the data could be tough to analyze, he noted, “but the first companies that move on it and then get access to that data will be able to refine the pricing ahead of the other competition.”
For users, they “need to understand the bigger picture, that it’s not money for nothing. You are changing how you’re living. You are changing how you’re using your asset and there are prices to it,” Nelis said.
He also encouraged users to take advantage of the products,” understanding that there will be an additional cost on their insurance. “But once you embrace that, there probably is a benefit to you still,” he noted.
“The insurance industry needs to catch up. It needs to catch up with where the current sharing economy is and be ready for the next one, because it is coming,” Nelis told attendees.
It is critically important to embrace the data. “Don’t just assume based on what has been done in the past,” he advised. Because this is a different use of assets, insurers “must make use of that data to accurately fund for it,” he said.
“Sharing is not new. How individuals connect and share is new and it will continue to change. The insurance industry and the regulators need to keep up,” Nelis added.
More coverage of ARC Group Canada’s annual seminar