Insuring the sharing economy

It sometimes feels as if the sharing economy, which is how companies that facilitate peer-to-peer transactions via an online platform/smartphone app are referred to, emerged virtually overnight.

The sharing economy is also projected to continue expanding and disrupting many established industries. PwC estimates, for instance, that total transactions in the sharing economy in Europe alone will increase from EUR 28 billion in 2016 to EUR 570 billion by 2025.

What triggered its emergence and subsequent dramatic growth?

The key success factors for sharing economy companies include scalability and critical mass; the business models only work when there are ample numbers of potential participants on both sides of the exchange.

Enter Steve Jobs. Although smartphones are now ubiquitous, it’s easy to forget that the iPhone with its iOS mobile operating system, which can be used by third-party developers, was introduced just eleven years ago, in 2007.

Smartphones and mobile apps – along with cloud computing, geo-tracking and advances in software engineering – enabled sharing economy platforms to develop critical mass by more readily and inexpensively connecting consumers with people looking to monetize their assets, capabilities or time. The growth trajectory for ridesharing companies, for instance, closely mirrors the adoption curve for smartphones.

The range of products and services available through peer-to-peer exchanges continues to grow. For example, platforms offering shared workspaces, storage, delivery and logistics have attracted nearly USD 2 billion in venture capital funding since 2013.

Merely a platform

Nonetheless, even as these new business models upend traditional relationships between suppliers and consumers, the risks remain; accidents and property damage happen, errors occur, valuable materials are stolen or misappropriated, and so on.

And as traditional ways of doing business become more fluid, new risks and uncertainties are emerging. In particular, many sharing economy companies currently assert that whatever happens in the course of a peer-to-peer transaction is between the participants and all they are doing is supplying the platform.

The terms-of-use agreement for one peer-to-peer exchange, for example, notes explicitly that it is, “merely a platform ….” It then goes on to renounce liability for any “claims, demands and damages.” Buyer and seller beware.

While rating systems are intended to create an incentive for people on both sides of a transaction to be honest, considerate and careful – that is, minimize the risks – they don’t serve to entirely mitigate the assortment of risks users and providers face. We all know that, unfortunately, things sometimes go wrong.

As a result, this stance – “merely a platform” – could be impeding further growth in some sectors of the sharing economy. There is growing evidence indicating that many potential users and providers are reluctant to engage in peer-to-peer exchanges given the possible uncertainties and risks.

In other words, protecting participants on both sides of a peer-to-peer exchange could represent an additional key success factor for sharing economy companies going forward.

Insuring the sharing economy

One of the challenges – or, depending on your perspective, opportunities – in protecting the sharing economy is that traditional insurance models don’t readily fit these new business models.

Personal lines policies, for instance, don’t cover assets used for commercial purposes, and a separate commercial lines cover is a costly and onerous requirement for someone who, for example, simply wants to offer some of his/her goods through an online platform.

Another challenge in covering peer-to-peer exchanges is a lack of data. As an underwriter, I rely on historical data to accurately and fairly price a particular risk. And there isn’t a lot of data currently on the risk profile of different peer-to-peer exchanges.

These challenges are particularly acute with applications for sharing possessions, like the new German company Fainin; it provides a platform which is intended to help people to lend and borrow a wide variety of products including cameras, outdoor and sports equipment, electronic devices, tools, and so on.

Possession-sharing platforms are based on the fact that there are many, many items someone will use only occasionally. Or as someone once noted: A lot of people own power drills; in most cases, they will be used for just 15 minutes in their entire lifetimes.

While trust is essential in a community of people sharing possessions – and reinforced by the rating system – members still want reassurances that they will be protected.

That’s where we come in. AXA XL has created tailored solutions that enable sharing economy companies like Fainin to arrange group insurance covering both lenders and borrowers as an explicit part of the customer value proposition.

The policy we tailored for Fainin covers bodily injury and property damages, up to a fixed limit. The coverage applies automatically for transactions conducted via Fainin’s platform.

Our shared aim with this solution is to enhance the customer experience by mitigating the risks individuals face when sharing and lending their possessions. It is a “sleep easy” coverage that is integrated seamlessly; users of the platform don’t have to take any additional actions to be protected up to the amount, and on the terms we provide for all users.

Our experiences with Fainin reinforce our view that peer-to-peer exchanges must be prepared to provide unequivocal answers to the concerns many people have about borrowing or lending something via such a platform: when/where am I protected; what am I protected against; and how much protection do I have? Our collaboration with Fainin has enabled us to develop solutions that answer these questions and allow lenders and borrowers to join this community knowing they will be covered in the event something goes wrong.

Mukadder Erdoenmez
Head International Casualty Europe/ Middle East & Africa/ Latin America at XL Catlin, now part of AXA XL, a division of AXA