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Digitalisation

Sharing economy – good for everyone?

Sharing economy – the new watchword for ecological, sustainable and resource-sparing economic activity. But is it true? Not necessarily. When the sharing economy breaks out of the niches to which it is currently confined, it will certainly have an impact on the economy, the insurance industry and society.

What is the sharing economy?

A number of other terms are used to refer to the phenomenon, such as share economy, peer economy and collaborative consumption. "Sharing economy" is increasingly being used as an umbrella term to cover all forms of shared use of resources that are not constantly needed and no longer owned exclusively by a buyer.

The term originally referred only to peer-to-peer exchange, i.e. the shared use of goods and services by a number of people. The distinguishing feature was some form of monetary compensation, which differentiated the transactions from purely altruistic mutual aid, donations or the online-based open-source community. The sharing economy now encompasses more and more forms of sharing and borrowing, including where firms themselves are the providers of goods and services. Examples are the various carsharing operations, which sell the right to use a car, or profit-making intermediaries for services such as carpooling and overnight accommodation. A wide range of apps and internet portals enable people to share everyday items like electric screwdrivers, cameras and tents.

Sharing – not a new idea

For centuries, farmers have formed cooperatives so that they can share equipment. DIY shops have long hired out tools, and people used to offer lifts on notice boards. However, the digital age has made sharing possible in many more areas. Today, you can check out all the details of virtually any item you need on the internet and then rent it from another private individual. For example, the largest sharing-economy platform for booking and letting private accommodation now has more rooms to rent than the world's biggest hotel chain.

Such forms of sharing by private individuals are now no longer merely a way of saving money, but also symbolise a new culture that places flexible, temporary use above permanent ownership. Young people living in cities, for example, especially value the flexibility offered by carsharing with usage billed by the minute. The basic business model behind it, "use instead of ownership", can be applied not only to physical goods – a well-known example is video and music streaming. This transformation in customer demand is matched by an economic trend among providers towards making costs more variable, with companies preferring to sell rights to use an item in a package including maintenance, insurance, service, etc. rather than ownership. Margins can be higher when various services are "bundled" in this way, and it also enables data on the usage of the products and their users to be collected and analysed.

Sharing economy – a win-win solution for ecology, the economy and society?

Earth Overshoot Day – the day in the year on which humanity exhausts the natural resources available for the entire year – is occurring earlier and earlier in the year. Despite more efficient use of resources, it has so far not been possible to reverse the trend against the background of a rapidly rising population and increasing prosperity. If more goods are shared and people attach more importance to being able to use things than to owning them, the overall volume of substances needed for production will be lower. For example, if the residents of a block of flats share seldom used tools such as power drills and high-pressure cleaners, the substances needed to produce them will be used more efficiently and consumption of resources will decrease. This will generally result in more competition and pressure to innovate among manufacturers. It could start a trend towards higher product quality because consumers factor in the possibility of sharing the product when they buy it. Emissions caused by the manufacturing process will also be lower. Users of equipment can spend the cash they would have needed to buy it on other things. Conversely, income can be earned by renting out items in demand. Consumers become prosumers, who not only use an item themselves, but also generate income with it, thus becoming producers.  

This could be a scenario for a post-materialistic society, in which sharing would replace ownership. Social interaction in society would increase due to the constant exchange of goods. Young people would no longer want to own their own car as a status symbol if the streets were littered with vehicles they could use at any time. In any event, the ability to use goods and services flexibly would suit the younger generations much more than long-term – and for a time irreversible – ownership.

Does the sharing economy have any drawbacks?

In a society based mainly on a sharing economy, it is likely that the overall demand for goods and services would fall, which would have an adverse effect on incomes and employment. On the other hand, there would be new growth markets, especially in the development and supply of digital services relating to sharing. Employees would perhaps need less money to live on if they bought fewer things over the long term.

The sharing economy is already resulting in various standards being eroded. The fact that the new ideas are posing a challenge for traditional industries and mechanisms and forcing them to modernise and innovate is certainly beneficial, with the new digital players helping to break down antiquated structures and get rid of regulations that serve only to protect established providers and that are an obstacle to innovation.

However, it cannot be the aim of a sharing economy for tried and tested health, safety and employment standards to be completely disregarded, or for providers of sharing-economy services to barely earn a living wage and be unable to jointly defend their interests. Governments are lagging behind with regulation. They face a dilemma between not wishing to stifle innovation and closing the door to undesirable developments in society.

Nor is the ecological impact necessarily only positive. For example, the sharing economy ultimately not only permits more intelligent consumption, but can also create more, and that additional consumption will not necessarily replace traditional ownership. Car owners might now use carsharing additionally for short distances. The availability of private carpooling could cause people to move from public transport to private taxis with higher emissions.  

In such a scenario, the idea of a less consumption-oriented society would evaporate. If private individuals lend each other items for a fee, sharing that was previously free-of-charge will become part of the economy. In the past, apps for the free exchange of items have enjoyed surprisingly little success.

However, the possible effects outlined depend to a large extent on how widespread the sharing economy becomes. Though its significance will doubtless grow, it is still too early to say whether it will one day replace purchase and ownership as the prevailing form of consumption.

Ambivalent consequences for the insurance industry

Even if it is not yet clear how great an impact the sharing economy will have on the economy and society, the insurance industry needs to be prepared. Traditional property and liability covers will, of course, still be in demand in the future. In many respects, use in the context of the sharing economy in Germany is already covered by current policies that aim to reflect what policyholders actually do in life, insuring common risks such as policyholders renting items out to people they know (in some cases for a small a premium). This sometimes includes limited commercial use.

However, if, for example, flats are let in a quasi-commercial manner and much more frequently than holiday apartments via accommodation portals, the number of claims, and hence pricing for private policies, could be affected in the long term. Here and elsewhere, depending on the jurisdiction, there are some large grey areas regarding liability issues, which creates uncertainty for borrowers, renters and insurers. To avoid legal disputes, some portals insist on insurance for each rental transaction. In some cases, traditional insurers cover these risks in the background for an intermediary portal, while a number of providers, Slice for example, have specialised in the insurance needs of sharing-economy platforms.

Example: motor insurance

Another example is traditional motor insurance, where a distinction must be made between rental between private individuals and commercial carsharing. The persons insured to drive an insured vehicle vary depending on the contract. With some policies, anyone with a driving licence may drive the vehicle, whilst other cheaper policies can cover a restricted group of drivers, or even stipulate that only a single named person may drive the vehicle. Sharing-economy portals therefore make an additional insurance taken out via an intermediary compulsory, which could boost demand for insurance.

However, if commercial carsharing became very widespread the total number of vehicles registered could fall significantly, which could in turn affect motor premium income. At least in big cities, carsharing could transfer demand for insurance from private individuals to commercial carsharing providers. This could be both a curse and a blessing for insurers. If carsharing providers or intermediary portals have all of their "borrowing" transactions covered by an insurer, insurers could write larger amounts in one go, as is already the case with fleet insurance. This could reduce the cost of sales and claims processing. On the other hand, this concentration would also considerably strengthen the carsharing providers' negotiating position, especially if the market were shared by only a few operators. Nor would it be inconceivable for the providers – who are often large car manufacturers – to cover the property and liability risks themselves.

There is certainly a need for clarification on how the telematics data obtained by carsharing providers are to be handled. Insurers must have access to relevant telematics data if they are to calculate premiums and settle claims fairly. Theoretically, a ride-sharing provider could exploit the privileged information it holds and only have the worst drivers insured externally.

Carsharing could also accelerate growth in the use of autonomous vehicles. Initially very expensive, they would at first only be purchased by a small segment of the population, but would probably soon appear in car manufacturers' carsharing pools due to the higher level of utilisation and for marketing purposes.

Peer-to-peer (P2P) insurance

"Peer-to-Peer (P2P) insurance" is a term often used in the context of the sharing economy. It refers to the joint insurance of risk in a small community. The principle is simple. A small group of insureds forms a pool, in which they all have an identical insurance policy. The premium, after deduction of administration expenses, reinsurance costs and a margin for the provider, goes into a joint pot, which is used to pay claims. Anything left in the pot at the end of the year is either paid out to the members or donated to a good cause. This is intended to discourage insurance fraud. And the insurer has no incentive to reject legitimate claims as it cannot increase its margin on the business by doing so. If claims exceed the budget, the reinsurer steps in.

There are now some P2P insurance solutions in the international market with a structure resembling a mutual insurance society with a very small number of members. Though such insurtech players are frequently mentioned in the same breath as the sharing economy, they are not, strictly speaking, part of it. Indeed, traditional insurers also started out as a pool of people who formed an insured community. Each policyholder pays a premium based on the risks they have, and those risks are then covered all the time – no sharing is involved. It would only be part of the sharing economy if a number of policyholders shared policies and each of them could borrow insurance cover exclusively for a limited period on a case-by-case basis.

What is new with these models is that the policyholders at many providers know each other. At So-Sure for example, groups of friends and acquaintances can get together to insure their mobile phones. If the claims in a group are lower than anticipated, the policyholders receive a refund, which should significantly reduce fraud.

Conclusion

Sharing economy is a trend fuelled mainly by digitalisation. Not everything attributed to the sharing economy is really a part of it. It may well lead to many changes in the economy and society, and also for insurers, though we do not expect sharing to replace ownership in most areas. Fundamental changes are only likely in the area of mobility, especially in major cities, though they may well be overshadowed there by even more significant trends such as autonomous vehicles.

Whether they are technically part of the sharing economy or not, business models that offer flexible, temporary use of an item in a package including service, insurance and maintenance will gain ground, and that means new business models for the insurance industry too.

Munich Re Experts
Alexander Dietrich
is an economist specialising in the analysis of economic and insurance market topics.
Christina Wallner
is an economist in Munich Re’s Economic Research Department and works on topics such as digital trends.
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