On-Demand Insurance

The millennial consumers are remarkably different from their predecessors. This is true in the sense that whilst earlier generations preferred to own as many resources as possible, the current generation prefers to rent. This is the reason why apps supporting the on-demand economy have ended up disrupting multi-billion-dollar industries. Take the case of Uber, which has market capitalization worth billions of dollars and yet the world’s largest transport service does not own any cars or hire any drivers! Similarly, the world largest hotel service, i.e. Airbnb does not own any properties. This major shift brought about by the on-demand services has also created a lot of implications for the insurance industry.

In this article, we will have a closer look at the effect that the on-demand economy is having on the insurance industry.

We will also understand the relatively nascent concept of on-demand insurance for the on-demand economy.

Insurance Challenges for the On-Demand Economy

Consider the case of the insurance needs of a person who works the gig economy. The user normally uses their vehicle for personal as well as commercial needs. The problem is that for both these situations, the insurance policies provided are very different. Hence, if the user purchases two separate insurance policies, the costs can become prohibitive. The same is the case with people who rent their properties on Airbnb. The insurance policy does not cover any damage that occurs during the course of commercial use of the property. If a separate policy is bought for this purpose, once again, the coverage turns out to be too expensive.

In both these cases, the problem is that the insurance is being sold on an annual basis. Hence, even if a person rents out their house for 10 days in a year, they have to pay the premium for the entire year. This is where the on-demand insurance marketplace is coming in handy. These services allow users to purchase insurance for the products they need for a short period of time.

Let’s understand how this works with the help of some examples.

Examples: On-Demand Insurance

• Many companies are offering insurance products that are tailor-made for gig economy workers like Uber and Lyft drivers. In such cases, users can drive around with a normal insurance policy for personal use. However, as soon as they log in to Uber or Lyft, an additional cover kicks in. Hence, users are not required to purchase two annual policies. They can upgrade on demand. In such cases, the premium is decided based on a per mile rate. With the help of sensors and other devices, insurance companies are able to find out the exact number of miles driven and can charge premium accordingly
• Similarly, when a person is renting their house for the weekend on Airbnb, they can log on to a mobile app and can purchase insurance only for the weekend. They need not have an insurance policy for the entire year, even though they are renting for a few days

• Likewise, some people might be worried that their expensive equipment such as an expensive camera may be in danger when they are traveling. In such cases too, they can purchase insurance only for the travel duration. They need not pay a premium for the rest of the year when the camera is going to be safely locked up in the house

  The basic premise behind on-demand insurance is that it should be readily accessible and easy to purchase online. For this, users need to have a stock of everything valuable that they own on an insurance website. They can then use their mobile devices to switch on and switch off the insurance cover as and when required.

Problems with On Demand Insurance Services

• Firstly, it is important to note that this model may or may not be financially viable for the insurers. Both the situations are equally plausible. This is because the per day or the per mile rate for insurance being provided is quite high as compared to an annual rate. Hence, if more people start buying these products, it will be financially viable for the insurance industry. However, if the volumes do not grow as fast as expected, the insurers might end up losing revenue
• Secondly, there is also an increased possibility of fraudulent claims. It is likely that some customers will misuse the on-demand insurance services. They will switch on the insurance only after the damage has already happened. Then they will pretend that the damage happened later and will try to make a claim. However, it seems like the insurance companies have the technical resources to ensure that such fraudulent claims are weeded out. Since the system is obviously not 100% foolproof, fraudulent claims still remain an imminent threat.

• Thirdly, since customers will only buy insurance when they are about to face some kind of risk, insurers will have to leave aside more capital to cover increased premium pay-outs. This would mean that they have less capital on hand to invest in securities that generate income. Hence, the overall profitability of the insurance company is likely to be hampered.

  The bottom line is that at the moment, on-demand insurance is a small niche. It covers less than 1% of the total insurance market in the United States. It still has a long way to go before it becomes mainstream. However, the idea is very appealing to millennials who are used to purchasing things on-demand online.