The Sharing Economy: Evolving Toward Captives
As companies grow, their risk management programs generally evolve, from guaranteed cost programs (i.e., purchase insurance from dollar one with no deductible) toward more complex risk retention and mitigation structures.
For traditional industries, it can take years to move from one structure to the next. But for companies operating in the sharing economy, where assets or services are shared between private individuals and growth rates are high, the scenario is different.
For the companies operating in the sharing economy, such a risk management evolution happens much faster because many of the material risks they face are new exposures that are unfamiliar to the commercial insurance market. Because the risks of sharing economy companies tend to be less understood and they increase quickly, insurer capacity may be limited and pricing may be higher.
Captives can provide sharing economy companies with the following benefits:
- Funding of retained risk in a captive may provide leverage when negotiating with commercial insurance markets.
- May improve unit economics due to the flexibility a captive allows.
- Ability to manuscript wording.
- Ability to offer insurance to connected but unrelated parties (i.e., delivery drivers).
- Access to the reinsurance market, which may have more flexibility for certain risks.
With the ability to gather significant amounts of data with ease, firms with sharing economy models are prime candidates to support and operate alternative risk structures to solve their unique insurance needs.