March 10, 2014
The 'Sharing Economy': What It Means for Insurers (Part 1 of 3)
The "sharing economy" is exploding, beginning with cars and homes. The question is: Can insurance companies make a reasonable profit off the market?
Insurers have always been at the forefront of responding to user needs. Direct marketing and online portals make it easier for consumers to understand and purchase insurance. Usage-based insurance (UBI) allows safe drivers, particularly those who drive less, to reduce their premiums. Even insurance company-sponsored coffee houses offer a unique way to gain financial service knowledge and one-on-one access to experts.
Today, a different type of opportunity exists that may help insurers not only meet changing consumer needs but gain first-mover advantage in the process. Called the “sharing economy,” this market involves renting privately or company-owned assets—generally cars or homes—primarily through an online, peer-to-peer network. While the car-sharing market in North America is exploding, few insurers have even begun to explore this market.
As people continue to seek new opportunities in this economy, and as Millennials begin to take control, it’s likely that this idea of “sharing” will not only thrive but expand. The question is: Can insurance companies make a reasonable profit from this market? If so, how will they adapt their models to meet the new consumer demands?
To begin answering these questions, we will take a look at three areas. In this article, the first part, we’ll define the sharing economy and examine some of the innovative models already in play. Then we’ll discuss the insurance challenges that sharing-economy companies are facing, and the insurance industry’s response. Finally, we’ll look at four steps insurers can take to begin evaluating the sharing economy as a viable business opportunity.
Access trumps ownership
The sharing economy offers a fast and efficient way for owners of assets and renters to connect through online services. Two main stars have emerged in the sharing economy: auto and home. Companies like RelayRides and Getaround can help a consumer rent a car for a few hours of errands or even enjoy an SUV for a weekend in the mountains. The other main sector, home rental, allows owners to rent out their homes or simply a room on a short-term basis through companies like Airbnb. As the sharing economy branches out, owners are renting out other assets such as parking spaces, tools and camping gear.
It’s all about monetizing unused capacity of an asset for owners. For renters, it’s about gaining quick and easy access to those assets without being bogged down by ownership. Access, in a sense, becomes a service that is paid for per time increment or by distance.
Much of this market is being driven by the Millennials who grew up with the ideas of sharing, renting and paying small transactional fees for access to things such as music and movies. This generation has been slow to move out of their parents’ houses, and many delay getting their driver’s license for a few years. They simply don’t value ownership the way previous generations have. That means sales are down for this generation, especially on large items such as cars.
As the sharing economy becomes more popular, large companies are jumping into the mix. For example, Avis paid $500 million for Zipcar to gain access to the peer-to-peer market. Daimler’s Car2Go charges 38 cents per minute including fuel, insurance and parking. And GM invested in RelayRides to allow peer-to-peer rentals of OnStar-enabled cars.
There’s a reason consumers and corporations are embracing this model. Forbes predicts that the global sharing economy will grow by 25 percent this year, reaching more than $3.5 billion. Frost & Sullivan estimates that the North American car-sharing economy alone will reach $3.3 billion by 2016, with 9 million members participating. And once self-driving cars come into play, decreasing the risk inherent in different driving behaviors, the car-sharing model could explode.
Next week, we'll explore the interactions between sharing-economy advocates and insurance companies.