Home > economics, rant, statistics > Sharing insurance costs with the sharing economy

Sharing insurance costs with the sharing economy

May 11, 2015

One consequence of the “sharing economy” that hasn’t been widely discussed, at least as far as I’ve seen, is how the externalities are being absorbed. Specifically, insurance costs.

Maybe because it’s an ongoing process, but for both Uber and AirBnB, the companies tell individuals who drive that their primary car insurance should be in use, and they tell individual home- or apartment-dwellers that their renters insurance should apply.

In other words, if something goes wrong, the wishful thinking goes, the private, individual insurance plans should kick in.

When people have tried to verify this, however, they responses have been mixed and mostly negative. The insurance companies obviously don’t want to cover a huge number of people for circumstances they didn’t expect when they offered the coverage.

So, if an Uber driver gets into an accident while ferrying a passenger, it’s not clear whether their primary insurance will cover it. It’s even less clear if the driver is using the Uber app and is on their way to get a passenger. Similarly, if an AirBnB guest falls because of a broken staircase, it’s not clear who is supposed to pay for the damages to the person or the staircase. What if the guest burns down the house?

So far I don’t think it’s been fully decided, but I think one of two things could happen.

In the first scenario, the insurance companies will really refuse to cover such things. To do this they will have to have a squad of investigators who somehow make sure the customer in question was or was not hosting a guest or driving a customer. That would involve suspicion and some amount of harassment, which customers don’t like.

In the second scenario, which I think is more likely given the above, the insurance companies will quietly pay for the damages accrued by Uber and AirBnB usage. They won’t advertise this, and if asked, they will discourage any customer from doing stuff like that, but they also won’t actually refuse to pay the costs, which they will simply transfer to the larger pool of customers. It doesn’t really matter to them at all, in fact, as long as they are not the only insurance company with this problem.

That will mean that the quants who figure out the costs of insurance will see their numbers change over time, depending on how much more the insurance is being called into action. I expect this to happen a lot more for Uber drivers, because if you are an Uber driver 40 hours a week, that means you’re always in your car. So our insurance costs will go up in proportion to how many people become Uber drivers. I expect this to happen somewhat more for AirBnB renters, because the house or apartment is in constant use; if it’s being rented by rowdy partiers, all the more. Our renters insurance will go up in proportion to how many people are AirBnB renters.

That reminds me of a story my dad used to like telling, whereby a friend of his rented out his Cambridge house to a Harvard professor, and when he came back it was totally trashed, including what looked like a bonfire pit in the living room. The professor in question was Timothy Leary.

Anyhoo, my overall conclusion is that the new “sharing economy” businesses really will end up sharing something with the rest of us soon, namely the cost of insurance. We will all be paying more for car insurance and home- or renters-insurance if my guess is accurate. Thanks, guys.

Categories: economics, rant, statistics
  1. May 11, 2015 at 8:29 am

    Usually when you fill out an insurance application you must state whether or not you use a vehicle (or a household) for any commercial purposes — if you fail to do so, the insurance co. would be within their right to refuse certain coverage, but you may be right that they will “quietly” pay such claims to avoid bad PR. Either way, rates will head up, because one thing ins. companies WON’T do, is lose money (or even settle for smaller profits).

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    • May 12, 2015 at 12:36 am

      Maybe for small claims, but for larger claims if they investigated and discover the car/house was being used commercially, so the insured has committed a fraud, they may easily decide to use this to avoid paying. Medical insurance companies have certainly allowed themselves to appear very heartless by using technicalities to avoid paying for treatments of very ill people in the past, as have the insurers of people whose homes have been destroyed in natural disasters (in Australia flood victims often discover they aren’t covered at the worst possible time) – hard to see why other kinds of insurance companies wouldn’t refuse to pay out to people basically caught in a lie.

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  2. May 11, 2015 at 8:33 am

    If you think insurance companies are much concerned with not harassing policy holders, I congratulate you on the quality of your health coverage.

    In any case, the basic investigation needn’t concern the policy holder at all. For AirBnB cases involving personal injury, they contact the injured ‘guest’, not their policy holder, and ask if they were there through AirBnB. There are some obvious triggers for investigation also, such as being from another city. Damage to property is going to have a police or fire department report with the guest’s name and address.

    For Uber I could see insurance companies in the right circumstances (urban area, demographics of driver) setting up an automatic query to Uber to see if they are involved.

    The thing is, by filling a claim you have already shown yourself to be the kind of client insurance companies don’t like: They are in the business of collecting premiums, not the business of paying claims.

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    • May 12, 2015 at 12:08 am

      I kind of suspect that for injured guests/ passengers it will be even easier – they will surely have sent a letter of claim to the Uber driver/ AirBnB host, detailing the costs they want to recover, and the insurance company would want this letter of claim to verify the claim amount. As the guest/ passenger has nothing to hide, you’d expect them to state the nature of the relationship in the claim letter, not least because it aids them in establishing the driver/host’s duty of care.

      Potentially, it won’t be the premiums that go up, but the level of proof that insurance companies demand before settling – they will require more paperwork in order to catch out the Uber drivers/ AirBnB hosts.

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  3. griznog
    May 11, 2015 at 12:04 pm

    It’s only socialism if the wealthy and corporations are taxed to cover the welfare of the masses. If the same thing is accomplished through markets from which corporations and the wealthy can skim profits from the masses, then it’s capitalism.

    I grow weary of this game as I grow older. It’s not fun anymore.

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  4. May 11, 2015 at 4:03 pm

    For car insurance, there is a simple solution which wouldn’t feel like harassment to me. Cars have odometers. Ask for the mileage when the driver renews each year, and put that into the insurance formula. Market it as “rewarding our eco-conscious customers for reducing their driving”. If a claim is ever brought, check that the actual odometer is reasonably close to the last report, and begin an investigation if it isn’t. Since most people won’t deliberately lie, and most cars never get in a crash, that isn’t too expensive for the insurer.

    High mileage isn’t identical to commercial use of the vehicle, but it is probably closer to what the insurers care about anyway.

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  5. noneya
    May 11, 2015 at 4:34 pm

    Uber has started addressing these issues more than a year ago: http://blog.uber.com/uberXridesharinginsurance

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  6. May 12, 2015 at 12:02 am

    It does seem likely that insurance companies would refuse to pay out for medical costs of injured Uber passengers or AirBnB guests, simply because it will be simple for them to discover that that is what they were. In many such cases the passenger or guest will be claiming against the Uber driver or AirBnB host, so the relationship will be in the open.

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  7. May 12, 2015 at 3:52 am

    A thought unrelated to your analysis: Isn’t insurance the original “sharing economy”? Insurance companies should rebrand themselves as “uber for risk”.

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  8. DD
    May 12, 2015 at 8:31 am

    Hope! If you think that these imposed costs are problematic, maybe one day you will also realize why other people choose to vote for lower taxes and less social programs spending.

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  9. captain obvious
    May 16, 2015 at 2:07 am

    For AirBnb, the potential for risk-spreading to other policyholders is no different than what Craigslist did to the rental market 15 years earlier. (Did you consider the latter as “negative externalities”?)

    For Uber this is a non-issue. It applies to a small fraction of policies that insurers can reliably identify by comparing the make/model/vintage/color of the car to the very short list of Uber-eligible vehicles. And if Uber were to demand verification from the insurance company that a driver is insured, that would immediately tell the insurer which policies are for cars joining the Uber fleet.

    In the abstract this has nothing to do with any “sharing economy”. It is simply the economy, being spread to everything once an Internet is available. The separation between private and commercial activity tends to disappear as everything that can be traded, is. The insurance companies’ distinction between ordinary and commercial use is getting to be out of date.

    Nothing nefarious in that. Uber and AirBnb and Craigslist are increasing the value of (some) cars and real estate for everyone who owns them whether or not they use the service, by reducing the cost of using it as a revenue stream. So a bit higher costs in the insurance for such things is sensible even for the ones who don’t take the revenue generating option.

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    • May 16, 2015 at 6:53 am

      Yeah, no. It’s not enough for the insurance companies to know whether a car is being used as an Uber car, which by the way they don’t. It’s really about whether a given claim should or should not be covered, which involves work. My point is simply that certain “Uber” claims will end up being covered by individual insurance policies, which will make individual insurance policies more expensive in the medium term. I still think that’s true. Some websites even have discussions among Uber drivers about what to do in case of an accident, namely turn off your app and wait for a while before reporting it so the insurance kicks in.

      Of course, this doesn’t work if the passenger was hurt. So the really big, really expensive claims won’t sneak through. In fact I’m worried about what would happen to the Uber driver in those cases.

      On Sat, May 16, 2015 at 2:07 AM, mathbabe wrote:

      >

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  10. Laocoon
    May 18, 2015 at 12:06 pm

    Participation in commercial businesses like Uber or AirBnB on any kind of scale completely changes the risk profile to the insurer. Even if they pay the occasional claim now, this can’t possibly last. At best, the insurers will revise their products to include the additional risks. Personally, I wouldn’t want, or recommend to others, to take on the additional liability involved with these sharing services.

    How much more of the risks are going to be unbundled by these “entrepreneurial companies” and shoved onto individuals? When are people going to wake up and realize that they are being further victimized? Look at the patterns in unbundling – higher copays, more user fees, school vouchers, families paying for school supplies that used to be supplied by the schools, funding one’s own pension, home office reimbursements cut by companies, 401k matches cut, I could go on all day, even without mentioning the chicken farmer scandal raised by John Oliver on last night’s show.

    We’re being looted all over the place. (And you should be shocked that these comments are coming from me. I’m one of the most establishment-type people ever.) Wake up, America.

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  1. June 3, 2015 at 7:53 am
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