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Gig economy risks: A perfect job for Captives

Just as the nature of work continues to change, including rapid growth in freelancing, or “gig”, employment, so too do the risks.
African Woman Using Car Sharing App While Sitting In Car

Just as the nature of work continues to change, including rapid growth in freelancing, or “gig”, employment, so too do the risks. Managing those risks and finding appropriate risk finance are important to sustain the growth of the gig and sharing economy. One source of risk capital that many gig industries may overlook is captives.

Temporary or short-term work in gig industries, ranging from home-sharing to ride-sharing to professional services, is becoming more attractive to individuals — and the businesses that contract with them. According to Intuit, 80% of large US companies expect to rely more on flexible workforces and non-traditional employees in the coming years. In 2021, at least 59 million Americans performed freelance work, contributing more than $1.3 trillion to the US economy, according to a study by Upwork.

Jobs in the sharing economy and gig industries vary widely. Activities performed in this sector include peer-to-peer leasing — such as borrowing a bike or tool, or home-sharing — mobility and ride-sharing for transportation, delivery of food or other goods, and skilled services such as writing, information technology services, and consulting.

The nature of the gig economy can be difficult for traditional insurers to underwrite. In home-sharing, for instance, the insured asset can be both personal and commercial property for specific periods of time during a given year. In addition, gig economy digital businesses usually have an “information asymmetry” – they possess far more knowledge and data on the dynamics of their markets than outside entities do. For these reasons, captive entities can be particularly helpful in financing gig economy risks.

Most businesses in the sharing economy and mobility sector exist to make people’s lives simple and more convenient, from expanding mobility and micro-mobility options to making it easier to use personal assets to generate income. Behind this simplicity lies complexity. This is captives can step in, as they allow for the flexibility that am emerging industry needs, coupled with the ability to solve for both traditional and emerging risks.

Gig risks run the gamut

Risks in the gig and sharing economy vary widely, crossing numerous industries. Examples of such jobs and risk exposures include:

Accommodations and home-sharing: This sector poses risks not only for hosts who rent out their properties, but also for guests. Hosts could incur property losses caused by guests, while also facing potential liability for conditions that lead to third-party property damage or bodily injury. Guests, meanwhile, could experience property loss or injury while using a host’s home.

Food and parcel delivery: Some delivery businesses employ drivers who use their own vehicles. Property and liability risks can arise from a driver’s on-road behaviors and interactions with customers. Non-owned auto risks include losses resulting from lack of maintenance or malfunction of the driver’s vehicle. Mishandling during transport and delivery also could cause damage to or contamination of the ordered items.

Transportation/ride-sharing/autonomous vehicles: The mobility sector of the sharing economy has multiple exposure areas. Ride-sharing companies, like many delivery businesses, employ drivers who operate their own vehicles. Transportation using autonomous vehicles may cause significant first-party and third-party property damage. Despite the sophistication of sensors and connected vehicles, accidents involving AVs continue to occur.

Freelance professional services: This diverse sector may have exposures ranging from errors and omissions liability to direct property damage to cyber liability.

A role for captives

The traditional role of a captive — insuring the risks of its parent organization — is relevant for gig economy companies. A larger benefit, however, is the financial flexibility that captives offer gig economy businesses, providing coverage options they otherwise might not have.

Captives are well-known for providing a stable source of pre-loss funding for emerging risks, which may ebb and flow depending on commercial insurers’ appetites. Rates for such coverage, when available in the commercial insurance marketplace, can be volatile, whereas captives often can write novel risks for less premium.

As regulated insurance entities, captives also can support additional revenue opportunities for gig economy parents. For example, home-sharing businesses might offer insurance products that fill unmet needs, such as home warranties and travel insurance. Ride-sharing companies might offer dynamic pricing dependent on use, if their fronting insurer agrees. Having flexibility is a pillar of the gig economy, and captives offer solid financial support to keep gig industries going.

For more information, download “The Definitive Guide to Captive Insurance,” or contact your Marsh representative.