Sharing insurance costs with the sharing economy
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.