The sharing economy has gone from a passing fad to an enduring subsector—and the pandemic accelerated this rapid growth. New businesses have been created using technology to match supply and demand for a product and service.

Businesses operating in this innovative economy are disrupting typical models and changing the way people think about consumption, causing new legal liability challenges. As a result, they are creating unique demands on the insurance industry.

Some examples of the businesses involved in the sharing economy include:

• Alternative mobility and micro-mobility companies, such as car, moped, scooter, bike and e-bike sharing.
• On-demand delivery for all sorts of items, including food, medicine and groceries.
• Space and asset sharing, such as homes, swimming pools and lawnmowers.
• On-demand services and tasks for help with assembling furniture, babysitting, elder care and dog walking.

Pandemic-Driven Growth in the Sharing Economy

As people were just starting to become more comfortable using platforms and applications for services or assets in the sharing economy, the pandemic occurred—and it added more fuel to the momentum, driving growth in this new economy.

For example, food delivery apps became essential due to restrictions on in-person shopping, and micro-mobility and car-sharing apps boomed as customers sought alternatives to mass transit.

Other services like space-sharing took the pandemic as an opportunity to highlight alternatives to crowded hotels. It also gave them the ability to show their safety and cleaning protocols and streamlined check-in and check-out procedures.

Insurance Challenges

However, underwriting new businesses in this environment has become quite challenging, as the unique risks require a different set of considerations than traditional companies. Where the traditional model has included a company selling a product directly to a consumer, a sharing economy platform uses technology to connect buyer and consumer.

The challenge is determining the legal liability associated with selling a good or service in the sharing economy. Depending on the level of involvement in the transaction and representations made, an individual's or company's liability exposures can vary greatly. Therefore, underwriting companies operating in the sharing economy may require specialists who truly understand the particulars of the industry and know what risk dynamics to evaluate.

Companies operating within sharing economy platforms face unique risks. For example, users of many of these new apps must accept the business' terms of service or rental agreements. Often, the wording in the terms of service intends to clarify and drive the exposures to various participants. Understanding these user agreements is crucial in the overall underwriting process.

Another challenge is understanding each state's industry-specific laws as regulations, propositions and legislation are evolving extremely fast. For example, ride-sharing insurance requirements vary by state. The carrier needs to know what those requirements are to provide the correct coverage and service claims.

Many states also have specific definitions and requirements concerning the relationships between an employee, employer and independent contractor. These can impact a company's business model and financial viability, and of course how insurance coverage is structured.

Traditional insurance policies are typically a one-year period with a flat premium paid. New and emerging business models benefit greatly by using a different pricing model. Start-up companies are less established, and their revenue streams are unpredictable. Pricing that accurately reflects the true exposure is preferable.

For the sharing economy, usage-based insurance is most often the best option. With this model, clients only pay in correlation to their activity volume.

Using Technology to Connect the Sharing Economy to Insurers

A key element to a usage-based premium model is connecting the sharing economy company to the insurer with passive technology. This can happen manually, but there are benefits to using technology to virtually eliminate human error. In addition, there are no monthly time requirements and data is sent over in the expected and most useful format.

Many insurers do this with commercial auto coverage, with telematics devices monitoring a driver's location, behavior and habits in the car. The data is then reported to the sharing economy platform, combined with trip information and shared with the insurer to accurately price coverage.

Connected devices can open the door to more precise costs for customers for other types of coverage, such as general liability policies, which are most likely priced using static exposure bases, such as square footage of a building. Greater accuracy can be attained if sensors were used to measure movement, traffic and even footsteps in the store.

This type of data isn't just helpful to insurers. Businesses can also benefit from access to real-time data dashboards where they can see how their company is performing. They can examine claim trends to help identify opportunities for risk management.

Andrew Zarkowsky is technology industry practice lead at The Hartford. Bernie Horovitz is CEO of Y-Risk LLC.

The Hartford® is The Hartford Financial Services Group, Inc. and its property and casualty subsidiaries, including Hartford Fire Insurance Company. Its headquarters is in Hartford, CT. The information provided in these materials is intended to be general and advisory in nature. It shall not be considered legal advice. The Hartford does not warrant that the implementation of any view or recommendation contained herein will: (i) result in the elimination of any unsafe conditions at your business locations or with respect to your business operations; or (ii) be an appropriate legal or business practice. The Hartford assumes no responsibility for the control or correction of hazards or legal compliance with respect to your business practices, and the views and recommendations contained herein shall not constitute our undertaking, on your behalf or for the benefit of others, to determine or warrant that your business premises, locations or operations are safe or healthful, or are in compliance with any law, rule or regulation. Readers seeking to resolve specific safety, legal or business issues or concerns related to the information provided in these materials should consult their safety consultant, attorney or business advisors. All information and representations herein are as of February 2022.