September 3, 2020
BEAM: So as a company, Marsh has extensive experience in creating insurance products for the sharing economy. How do you approach the category?
The first part is insurance design mode. We deal with clients that are at very different stages of the life cycle - from start-ups who are “two-man bands” literally working out of a garage and have a nifty idea, have gone some way to developing their technology, and may have significant backers, right through to companies that have real scale, brand awareness on a national or international regional perspective. However, regardless of size, the process is the same: we must understand the business. The technology is the heartbeat but the risk goes far deeper than the problem they have tried to solve. We commence with what product and/or service they're looking to provide short term. Then we consider any medium or long term additions to the particular product or the service models? Are they looking to move outside of any particular countries of origin? These are really important considerations for us, because we rarely find that traditional insurance arrangements work well for them so they often will need to have a more bespoke solution.
What is common to all of these companies is that they are wonderful at coming up with great solutions to problems and using digital platforms to solve those problems and create efficiencies, but what is often missed are more foundational business insurance requirements.
These are requirements that would be much more obvious for, say, a tradie, or a hairdresser, but in innovative new industries, such issues are often parked or ignored due to development and growth until they hit a bit of a wall.
The catalyst for that moment is often regulation at a local, national, or international level – particularly in countries like Australia which is, in general, a very heavily regulated country.
The second part is education. There are more and more international carriers out there dedicating resource and time and getting enthused about this particular space, not just micromobility, but the gig sector and sharing economy in general. But there are still big gaps of knowledge. The insurers have capacity and appetite, but there is sometimes a need to bring them up to speed on the unique requirements and risks so that the pricing will reflect the risk and the coverage is appropriate for the industry. At times, we do a lot of that educating ourselves. That’s where, as a broker, we add real value –ensuring that there is a great union between a client's needs and an insurance risk transfer, whatever that might look like.
You talk about the “foundational insurance requirements”. How different do these tend to be in the sharing economy versus more traditional sectors?
When more people think of insurance, they think of the connection between a single user and a single asset; a homeowner, for example, or a car owner. That linear relationship usually allows a very clear risk assessment of that individual user, and a risk assessment of the asset. Shared economy activities inherently have a large number of assets, but a much larger volume of customers using those assets in multiple ways, and that makes the insurance requirements much more complex. That is then further complicated if the business requires contractors or freelancers to deliver their service(i.e.drivers for car-sharing services). Then of course there are the Liability exposures – what happens if someone is injured, or property damaged during the delivery phase or use of the product and services.
How do you assess risk in micromobility specifically, and what do you look for in an operator?
The first thing we look for is to see how they differentiate themselves. It's a bit of a cliché, but it rings true from a business sense, because that's how a business acquires customers and entrenches itself into the daily life of its customers.
But it also works from a risk perspective. Underwriters look at those core business criteria; however cool and creative a company is, the numbers still have to make sense.
From a broker’s perspective, our job is to help the organisation to identify and manage risk. When we are designing a risk management program,there are two key segments to consider; business and service risks. Business exposures may include such areas as people, assets and legal liabilities. Whereas,service risks can be anything from safety procedures to the usability and functionality of the platform.
We are dealing with a segment that insurers traditionally shy away from,so in order to capture their attention, differentiation becomes even more important. Establishing a clear understanding of a company’s specific exposures and points of differentiation to the underwriter market allows us to negotiate competitive and dynamic pricing structures on behalf of the business, with the ultimate goal of aligning to their risk management program.
In addition, a companies’ ability to constantly improve their service, is an incredibly important factor in proving to insurers the level of commitment they have to reducing risk investment and learning from their challenges.
So differentiation is one of the things you look for in micromobility, but does insurance itself become a differentiator in the long term?
It is definitely a differentiator for consumers.
There have been various studies that have shown that more than 80% of people now expect insurance to be automatically incorporated as part of a product or service purchase.
So whether it be a parcel being lost, or they have an accident with a product or service, there's an expectation that there will be insurance associated with that transaction.
So imagine for one moment if that's not the case and a consumer finds out they’re not insured, and then what happens when that consumer turns to the loudhailer that is social media. Inevitably the brand damage can be substantial. These days a brand is much more easily defined by the bad experiences of its users than the good ones.
To this point, we are also seeing the gig and sharing economies acknowledging insurance as a proxy for trust – whether for a customer or a contractor. It can be part of why you use or work a service or platform. And with this, insurance has become inspired (some would say not fast enough) by the rapid digitisation of our world. Insurance isn’t going anywhere but as disruption has occurred around the world, it may take on a slightly different look and experience as it keeps up with new expectations and technologies.
How are governments and insurers thinking of the category right now? What is the outlook?
It has to be safe, and it has to be sustainable. It's about finding that commonality between the two
Whilst there is a nervousness and a little hesitation about some operators, there is a growing consensus amongst large cities that they must incorporate micromobility into their broader view of “public transport”. We think they know there is a very real opportunity to really solve what you could call the “10kms from the heart of the city” problem. This has taken on even greater relevance in the post-COVID-19 world.
And then, with regards to insurers, as safety standards start to improve, we expect you will see appetite slowly increase. Globally, it is quite a tough insurance market at the moment; over the last 15 years, insurers paid attention to any opportunity that hit their desk, but there has been a withdrawal of that attitude in recent years. We saw record losses year on year in Lloyd's in 2017 and 2018, and whilst they did turn a profit last year, goodness knows what this year looks like. For our local markets in Australia, the four major domestic insurers have really struggled to turn a consistent underwriting profit for a long time. Specialty markets have not fared much better.
The moment we get to that higher level of safety across themicromobility category, we'll get fewer claims, and the programs will become much more sustainable. As we know all too well, when you've got something that's considered a high-risk activity but with low scale, then putting sustainable deals together is almost impossible, and of course, those higher prices don’t make it any easier for micromobility operators to get off the ground. As the improvements on safety come through, as Governments and Councils start to relax regulations, and as there seems to be a greater groundswell of users, I think brokers are going to find ourselves with a unique opportunity get some scale to work with again.
But until then, Insurance will become an increasingly large barrier to entry in this category.
As we see here in Australia, with all of the class actions being taken against various companies in a range of industries, it works out that the aggregated amount of claims activity against Company Directors and Officers is often much higher than the annual premium pool. So where's the sustainability of Directors and Officers Insurance right now in Australia? Insurers are seeing those actions and concluding, rightly, that it's unsustainable. So they're carving back covers and they are increasing premiums.
That increased burden then waterfalls down to individual operators.We’re seeing that for some of the newer operators in micromobility, the minimum deductible for Liability insurance is now That's a lot of money for businesses that might have a start-up revenue of one to two million dollars in year one; one accident could potentially sink the company. And in order for an operator to be granted a permit in a city, one of the very first things they must produce is a certificate of liability insurance for $20 million. Without that, they have no chance of even entering the competition. So it's now become like the Willy Wonka golden ticket to have liability cover. And of course, you only get your liability cover if you can tick those two points about operating a safe product safely, but making sure there's some sustainability about your particular priority. Because if not, you won’t get your deal.
So it feels like any operators out there with inferior risk management could potentially come undone shortly.
For example, Pony clubs were almost uninsurable because insurers thought the claims were through the roof. So when some risks go through their particular market cycles, risks can become uninsurable, and we are entering one of those market cycles right now. Only the very safest, well-backed and most responsible operators will survive.
DISCLAIMER: Marsh Advantage Insurance Pty Ltd (ABN 31 081 358 303, AFSL: 238 369) arrange insurance and are not an insurer. This interview and any recommendations, analysis, or advice provided by Marsh (collectively, the ‘Marsh Analysis’) are not intended to be taken as advice regarding any individual situation and should not be relied upon as such. Any statements concerning tax, accounting, or legal matters are based solely on our experience as insurance brokers and risk consultants and are not to be relied upon as accounting, tax, or legal advice, for which you should consult your own professional advisors. The information contained herein is based on sources we believe reliable, but we make no representation or warranty as to its accuracy. Marsh makes no representation or warranty concerning the application of policy wordings or the financial condition or solvency of insurers, re-insurers or clients. Marsh makes no assurances regarding the availability, cost, or terms of insurance coverage. LPCA Approval Number 20/526.
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