The Sky’s the Limit: Opportunities for Change Within the Insurance Industry
The economy is changing, and with it, the needs of the insureds. We evaluate the On-Demand vs. Pay-As-You-Go models for insurance coverage, and how each may fit into the admitted and non-admitted market.
Traditions are what typically keep us grounded and sane when the world turns upside down. Traditions are familiar and even comforting, especially during times of uncertainty. Our traditions remind us of who we are and where we come from. They give us hope and the courage to change and move forward despite significant obstacles or tremendous doubt.
What happens when traditions turn legalistic? Usually, the legalist resists change, forcing others to conform to their viewpoint or rules, their way of “doing things.” The legalist can be so strict in their opinions, they may ignore creativity and the wonder of possibility altogether. In essence, the legalist bases decisions on fear – the fear of change. The insurance industry reminds me of the legalist, but perhaps, there is hope for an industry that leans towards a legalistic approach.
When Tradition and Legalism Collide
The Deloitte Academy published a study spanning eight countries with more than 8,000 participants, and the results were interesting. The study showed “roughly 60 percent of UK insurance consumers favor products that are materially different from the traditional, static 12-month policy.” Regarding automobile insurance, the study revealed that in most countries, consumers wanted “more flexibility and control of their motor policy,” including “invisible insurance embedded into their leasing contracts.” The entire study was eye-opening because it showed that “59 percent of UK tenants with renters insurance want the ability to choose the level of coverage for specific items” and “53 percent want the ability to adjust their insurance based on what they need or can afford.”
Traditional insurance policies are built around a 12-month term for most insurance products, commercial and personal lines alike. So, what is going on, and what has precipitated this change? If you think about it, it makes perfect sense. There have been tremendous advancements in technology, from drones to electric vehicles to artificial intelligence. Let’s face it, in the last few years alone, technology has seen some incredible advancements in the medical, auto, energy, retail, and yes, even the insurance industry. However, technology alone did not precipitate changes in attitude in the insurance industry. Technological advances were only the catalyst for change. The recent changing attitudes about insurance sprouted out of necessity. In other words, the insurance industry is being forced to change because the world and world economy are changing due to technological advances, not to mention a global pandemic.
Change in Static
When the worldwide pandemic began, it set in motion a chain of events that no one saw coming. In the U.S., states began locking down with stay-at-home orders, which led to unemployment, and eventually to “out of business” signs posted in shop windows. Especially hard hit was the hospitality industry. Whole livelihoods were wiped out virtually overnight, and people lost everything, homes, cars, jobs, and insurance. Out of this tragedy, a new economy settled in that has come to be known as the “Gig Economy.”
The Evolving Insurance Trend
A recent Insurance Journal magazine article, The Evolving Gig Economy, states, “There was a surprising surge in U.S. business formations in 2020. Overall, the federal government fielded about 600,000 more business applications through early October than it did in the same period in 2019, according to a breakdown by the US Census Bureau.” Because of this new economy, business models had to be reevaluated. Grocery stores started offering curbside pickup and delivery services, online services for pharmaceuticals, clothing, and movies exploded. With people working from home, balancing family and work, the need for flexible work hours became essential, especially with many families having to home school their children. To make up for lost income, many found odd jobs, such as house sitting, pet sitting, dog walking, freelance jobs such as photography, or handyman jobs for “honey-do” lists without the “honey.” The list goes on ad-infinitum. This new “gig economy,” with evolving business models, gives the insurance industry little choice. In the same way business models had to be reevaluated, so did the 12-month static policy. For the insurance industry, the status quo had to be reimagined.
The New Static
The Deloitte study focused on personal lines insurance coverage, auto and homeowners, written primarily through the admitted market and easily obtainable through an online app using a smartphone. Otherwise known as on-demand insurance. In a recent NAIC article, On-demand Insurance, “According to Insurance Thought Leadership, economic and technological changes have led to the rise of on-demand insurance products, including products with continuous underwriting, microinsurance products, and gig (or sharing) economy workers.” The same NAIC article goes on to explain that “Gig (or sharing economy) insurance refers to the rise of freelance or “gig” opportunities such as Uber and Airbnb. Insurers are creating products to allow these independent contractors to be covered by swiping right when they need to be covered.”
Who would have thought just a few years ago that individuals would be able to purchase insurance immediately with the swipe of a phone online without ever speaking to an insurance agent or carrier? Today, anyone needing insurance can simply fill out an online application, answer a few questions (all from a smartphone), and just like that, insurance coverage on-demand. Technology at its finest! Basically, as the same NAIC article further states, “On-demand insurance allows consumers to purchase insurance coverage on their smartphone whenever and wherever they want, usually when the asset requiring coverage is in use and at risk.”
Furthermore, “These innovations are helping to reinvent the way insurance products are created, underwritten, priced and distributed.” The author of the NAIC article is exactly right. On-demand insurance has proven creativity is alive, and the sky’s the limit on the possibilities.
Insureds today can purchase the amount of coverage they need, when they need it, directly from their home computer or smartphone. The one drawback of on-demand insurance, as pointed out in the NAIC article, is that “since coverage can be turned on and off easily with a swipe on a smartphone, the possibility of fraud risks increases with consumers who only turn on their insurance when wanting to make a claim.” Will some insureds abuse online on-demand insurance? Certainly, but there has always been that 2% who look for loopholes to jump through.
Evaluating On-Demand vs. Pay-As-You-Go Insurance Models
On-Demand and Pay-As-You-Go are not identical; they are not synonymous with each other and are two different options. On-demand is insurance purchased immediately, bypassing an agent or broker and going directly to the carrier through an online app. Pay-As-You-Go is insurance purchased for the desired time period (policy term) and for the coverages the insured needs. In the admitted market, a policy can be purchased immediately from a smartphone, and at the same time, the insured can have the amount of coverage they want for the term they want. So, within the admitted market, the insured is afforded the freedom of both options: On-Demand and Pay-As-You-Go.
On-demand insurance in the admitted market is all well and good, but what about the Excess and Surplus Lines (non-admitted) market? How does one take the same on-demand “gig” economy insurance business model and apply it to commercial insureds who cannot find insurance coverage in the admitted market? How does it translate for commercial general liability, contractor’s liability, premises liability, or business auto coverage? Moreover, how does it translate into a profit since these commercial policies for the “gig” economy are more likely to be stay-at-home, self-employed, small business owners?
Coverages written through the Excess and Surplus Lines market generally cannot be purchased through an online app by swiping right on a smartphone. For one thing, state statutes require that non-admitted insurance be purchased through a licensed surplus lines broker and most states require documentation of diligent effort. In addition, there are too many state regulations and regulatory notices that must be completed and, in many cases, attached to the policy before issuance, preventing the use of the on-demand insurance business model. In the Excess and Surplus Lines market, the choice for on-demand insurance is not an option. Nevertheless, the Pay-As-You-Go option is a valid choice. An insured can choose the coverages they need for the term they need at an affordable price, but not immediately online.
Enter Creative Possibilities, Stage Left
The wonderful thing about being young, coupled with technology, is that young people are typically not deterred by the legalistic strangling of creative ideas. Young people today have an innovative spirit full of wonder and possibility, and these same young people are making great strides in an industry that does not always accept change easily.
Strangely enough, a new twist and a breath of fresh air have given new meaning to an old idea.
Let us take a look back before taking a look forward.
Commercial policies are typically written on a minimum earned or minimum and deposit basis. A minimum earned policy means that the insurance carrier requires a minimum amount of premium to write a policy. If the policy is canceled before the policy expiration date, then the minimum earned is deducted from the premium. Any remaining premium is refunded to the insured.
A minimum and deposit policy requires a certain premium amount due at the beginning of the policy period. Minimum and deposit premium policies are usually written on a per sales, payroll, inventory basis and audited at the end of the policy term. For example, if at policy inception, sales are estimated to be $1,000.00, but at policy expiration, the total sales turn out to be $3,000.00, then an additional premium amount based on the $3,000.00 in sales is due to the insurance carrier, less the minimum and deposit amount collected at policy inception. The premium amount collected at policy inception is a deposit, or an estimated amount, of what it costs the carrier to write the policy. The carrier audits the policy to determine the actual number of sales, payroll, or inventory at policy expiration, depending on what basis the policy was written. Depending on the type of coverage written, there may or may not be a return premium if the total sales, payroll, or inventory falls short of what was estimated at policy inception.
To confuse matters even more, not all auditable premium policies are audited at policy expiration. Certain policies are audited monthly, known as Reporting policies. Policies subject to premium audits are written on a fluctuating value basis, i.e., sales, payroll, inventory, etc. The way a reporting policy works is the insured sends a report to the carrier monthly (or quarterly) of their actual sales, payroll, or inventory. The deposit premium paid at policy inception is adjusted monthly by additional or return premium endorsements. Monthly reporting policies can be cumbersome but eliminate the annual premium audit at policy expiration, generating a sizable additional premium, possibly causing a problem for the insured if cash flow is limited.
Commercial insurance that can be written on a deposit and minimum basis subject to premium audits include General Liability, Contractor’s Liability, Products Liability, Premises Liability, and Business Risk policies, to name a few.
Here is Where it Gets Interesting
What individuals make up this “gig” economy? Who are they? What do they do? Some may be small contractors, such as general contractors, carpenters, painters, roofers, electricians, landscapers, lawn care specialists, and plumbers. What do all these individuals need? Insurance, and not the usual static 12-month term insurance.
Remember, in a “gig” economy, many of the insureds comprise work-from-home, self-employed, seasonal, small start-up companies made up of individuals who may have lost their jobs or are taking on second jobs to make ends meet. Maybe the time is right to create a whole new insurance business model for an untapped market. Or perhaps it has already been created with Pay-As-You-Go insurance.
The Pay-As-You-Go model gives Reporting policies a new twist and a whole new meaning. The basic concept of Pay-As-You-Go is just that. The insured pays for coverage for a specific period, based on miles the insured drives, sales, or months worked, such as seasonal jobs. On-demand insurance is perfect for the freelancer, second part-time job seeker, the contractual worker, consultants, individuals who need insurance coverage and can obtain it with a swipe to the right.
Traditional Insurance Collides with a Gig Economy
What about the small business owners, self-employed working from home or renting a small shop, using their personal computers to keep up with receipts, invoices, and bank statements, trying to keep food on the table for their families? Not everyone can be a freelance photographer working on a contractual basis, traveling the world as a photographer (if only I were 30 years younger and knew how to work a camera!).
Today, many people are just trying to figure out how to pay the electric bill, phone bill, food bill, mortgage, or college tuition, all the while keeping their heads above water. Then throw in insurance on top of all that.
The Pay-As-You-Go option is a viable solution, and one insureds and carriers alike should consider. The Pay-As-You-Go model is designed for insureds to purchase insurance for only the coverage they need. The insured can purchase and pay for only what they need and when they need it. The biggest obstacle being that coverage purchased in the Excess and Surplus Lines market, for the most part, cannot be purchased online or on-demand. However, with Pay-As-You-Go, the insured can buy the coverage they need for the term they need, at a price they can afford.
Creating a commercial package policy based on a Pay-As-You-Go model is ideal for this untapped market. Still, it would have to be unique, strategic, and properly rated if it is to be successful, especially if providing insurance terms on a one-, three- or nine-month basis. What types of coverages would this untapped market need? Most likely general liability, cyber liability, business auto coverage, possibly premises liability or property coverage, and if the insured is a general contractor, product liability, contractor’s liability, or professional liability. How can these coverages be packaged? How can commercial package policies be reimagined to be profitable enough to cover broker and carrier operational costs yet appealing enough for the commercial insured to buy it?
Let’s look at our list again:
- Commercial General Liability
- Cyber Liability
- Business Auto Coverage
- Premises Liability
- Professional Liability
- Products Liability
- Contractors Liability
- Property Coverage
If a commercial general liability policy is subject to premium audits based on sales, the Pay-As-You-Go model is perfect. If the insured only has sales at irregular intervals over a 12-month term, the insured might report their sales for only those months business was conducted. The business auto policy also fits the Pay-As-You-Go model in that the coverage can be rated based on miles driven. The same is true for premises liability if the insured rents a small shop but works on a seasonal basis and only utilizes the shop for certain months out of the year.
It may be that product liability or professional liability will not fit the Pay-As-You-Go model, but who said all coverages on a commercial package policy had to be based on a Pay-As-You-Go model? Is it possible to create a commercial package policy with certain coverages rated on a Pay-As-You-Go model and other coverages rated on a six-month or 12-month policy term? Can coverages in our list be packaged together, and can any of them be rated on a Pay-As-You-Go basis? I do not have the answers to all these questions, but it is something to think about. Are there any unwritten rules that say all package policies must be 100 percent based on a fixed 12-month policy term? Why not create commercial package policies on a 25/75 or 50/50 or even 75/25 Pay-As-You-Go basis? Better yet, can an insured who works from home add homeowner’s coverage to their commercial package policy? Is that possible? Is it realistic? I do not know. What I do know is that the new “gig” economy has opened the door to a whole new market of commercial insureds looking for insurance that is flexible and affordable to meet their needs, whether on a three-month or eight-month term and whether it is for single coverage or packaged coverages.
Answers to Questions Not Yet Asked
The Excess and Surplus Lines market has traditionally taken the high loss, obscure, out-of-the-ordinary risks and created forms and rates for many insured’s who could have never found coverage through the admitted market.
What does a Pay-As-You-Go model look like for the commercial insured in the Excess and Surplus Lines market, caught up in a “gig” economy? While I cannot answer that question definitively, I can say the Pay-As-You-Go insurance business model offers commercial insureds reduced premiums, reduced terms, and affordable insurance options. A Pay-As-You-Go model may also provide increased retention for carriers by writing insurance coverage for a new market of commercial insureds who do not fit the On-demand model of a “gig” economy.
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Julia is a regulatory and compliance director with more than 20 years of experience in the insurance industry. She has extensive knowledge of surplus lines tax and licensing guidelines. For the past ten years, Julia has taught the Surplus Lines Fundamentals course for the Securities and Insurance Licensing Association (SILA). She currently oversees business development at InsCipher.