The sharing economy is a subject that merits a thorough understanding of its underlying dynamics. Before coming to reinsurance, it is important to put the sharing economy into perspective. It can be called a system or framework where community platforms are leveraged for sharing services or assets by individuals. It has grown exponentially over the last few decades, enabled by growth in digital platforms and higher mobile app usage by customers.
The insurance industry has also adapted itself to newer models accordingly. On-demand and flexible products and services enabled through technology like IoT, AI, and big data has driven reinsurance in the shared economy. There are now products which enable risk management commercially without the conventional un-affordability or non-viability for individuals otherwise purchasing full commercial polities. Some of the challenges and opportunities in reinsurance in this paradigm also deserve a closer look. The opportunities are clear- higher access, inclusion, and overall efficiencies. The risks include data protection, privacy regulations, and overall security. Cybersecurity is thus a major trend in the space along with the growing usage of AI and big data. Some other regulatory aspects attached to the space in a sharing economy are concentrated around data privacy too.
It matters clearly since there is a marked propensity amongst millennials and younger demographics towards the sharing economy as per reports like the Global Data 2022 UK Insurance Consumer Survey and others. Multiple peer-to-peer platforms are thus offering insurance via integrated models in partnerships with insurance companies. This is enabling insurance companies to get higher access to newer customer segments and markets alike.
Reinsurance refers to insurance that is purchased by the insurance company from other insurance companies for safeguarding itself in case of risks arising from major claims-related scenarios. With this system, some of the company’s own liabilities are passed onto the other insurer. Hence, it is a contact mechanism between a reinsurer and an insurance company. The latter will transfer risk to the former while the reinsurer also assumes the entire/part of the insurance policies issued by the latter.
There are various kinds of reinsurance agreements. Treaty reinsurance is a contact type where reinsurers accept all classes of policies from insurance companies including those that have not been underwritten or issued yet. Facultative reinsurance covers individual policies such as reinsurance for the additional insurance on any asset or coverage for various components of multiple policies which are clubbed together. Proportional reinsurance is where the reinsurance entity gets a prorated share of the policy premiums that are sold by the insurance company. It will thus bear a part of the losses as a pre-fixed percentage in case of claims while reimbursing the insurance company for customer acquisition, processing, and underwriting costs.
Under non-proportional reinsurance, the reinsurance entity will only have liability in case the loss of the insurance company surpasses a certain amount. This is called the priority/retention limit and is chosen on the basis of a single type of risk or category of the same.
Reinsurance customers pay premiums in return for the promise of the insurance company to pay out future claims as per the coverage provided. Reinsurance companies have risk modelers and managers for contract pricing just in the manner of regular insurance companies. However, the customer base is different in this case and is under a broader jurisdictional net of legal guidelines. Regular insurers can sell and advertise their offerings to the mass market while reinsurers function in the background. They have smaller employee counts and usually build on niche segments with lesser competition.
Reinsurance contracts are not regulated in the same manner as regular insurance contracts. This is because both parties in the agreement are perceived to have the same knowledge and expertise in the industry along with equal bargaining abilities as per legal frameworks. Reinsurers are regulated on the basis of the regions where they file incorporation documents and where they conduct business/transact. They usually tackle more complicated insurance risks that regular insurers do not wish to absorb. They mostly deal with insurance companies, but sometimes they may underwrite policies for MNCs, intermediaries in the financial sector, and banks. However, the biggest client base in this case is insurance companies. Some risks may include recession, war, commodity market fluctuations, and so on. Reinsurers usually build a global footing as a result, enabling them to spread their risks throughout bigger zones.
To sum it up, there is a need to safeguard business models that arise from the sharing economy concept. Reinsurers and insurance companies can transact and enter into contracts, although they have to be mindful about data privacy and other regulations. Offering stable and unhindered coverage minus disruptions is the need of the hour.
With the evolving regulatory landscape around the sharing economy, how can reinsurers ensure compliance and offer stable coverage?
Reinsurers should have standardized and steady coverage mechanisms and frameworks that take into account multiple risk factors for each segment. At the same time, there should be compliance as per region/state rules and restrictions.
How can reinsurers develop affordable and accessible microinsurance solutions for individual participants in the sharing economy?
Reinsurers can look at more affordable solution buckets for microinsurance to individual sharing economy participants. They can accomplish this by streamlining their risk and coverage categories into particular groups and tailoring the same as per their individual participant/client base.
Are traditional insurance policies sufficient for sharing economy platforms, or is specialized coverage required?
Traditional policies may often be sufficient for sharing economy platforms if it fits the particular or individual risk category or requirement. However, specialized coverage may be required at a more personalized level and reinsurers should have the technology and resources to come up with the same.
Can reinsurance help sharing economy companies expand globally?
Reinsurance may help sharing economy entities expand their presence globally. This is because they can attract a larger number of insurers worldwide with varying coverage and risk requirements. At the same time, reinsurance will enable global expansion by default, since risks have to be spread out worldwide in order to manage them better.
How does reinsurance contribute to the stability of sharing economy platforms?
Reinsurance will enable sharing economy platforms to embark on much-needed diversification for future stability and growth. It will lead to a rebalancing of portfolios and line sizes dynamically going up or down throughout multiple products. This will help spread out business risks in a well-thought-out manner.
