James River-Uber debacle illustrates challenges of insuring gig economy

On December 31, 2019, specialty insurer James River cancelled all of its policies issued to Raiser, an affiliate of Uber. The move was prompted by the company reporting a net loss of $25.2 million in the third quarter of 2019, which it attributed in large part to the lack of profitability on the Uber account.

James River insured Uber in 20 states, Puerto Rico and the District of Columbia. The policies sat in its commercial auto line of business within its excess and surplus lines. The move was even more noteworthy because they were not set to expire until the end of February 2020.

But the company’s move highlighted a bigger issue. Companies such as Uber are cutting edge in what they do, and their business model has disrupted entire industries. But a consequence of this is that the dynamics in their business and sector can also change very fast – and it can be tough for insurers to keep pace.

Hilary Loynes Palazzolo, a partner at The Rudnicki Firm and a specialist in insurance coverage and commercial litigation, told Intelligent Insurer the decision by James River highlights the challenges insurers in the ride-hail and gig economy market are facing.

“The insurance industry has been pricing risk for Uber for the past decade with great losses. They’re having a hard time assessing the risk and adjusting to it,” she said.

Specifically, James River noted that during the time it held the Uber account, Uber expanded into new regions, added tens of thousands of drivers, and moved into other business lines, including food delivery and freight. It also indicated that, even after negotiating a pricing increase in 2018, changes in the legal landscape cancelled this out.

Palazzolo, who also served as chair of the excess, surplus lines, and reinsurance committee of the American Bar Association, stressed that the rapidly-changing nature of the gig economy in the US means that insurers are struggling to price risk. “Underwriters are struggling to keep up with the pace of this change,” she said.

One specific regulatory change cited by James River is a new law in California, which codifies the California Supreme Court’s decision in Dynamex West Inc. v. Superior Court of Los Angeles, and will make it more difficult to classify workers as independent contractors. In other words, gig economy contract workers, like ride-hailing drivers, appear poised to come under the legal protections granted to employees.

The decision, which has already faced backlash from Uber and the Truck Drivers Association could dramatically affect ride-hail companies like Uber and Lyft and the insurers that support them.

“Independent contract employees, which is how Uber defines its workers, don’t receive the same traditional benefits as employees,” said Palazzolo. According to the New York times, the change in law and definition of workers could cost Uber and other services 20 to 30 percent more.

“As new companies emerge, existing companies continue to shift their business structures, and courts and policymakers continue to grapple with regulating the gig economy, the risks to insurers and insureds alike will continue to be hard to define,” said Palazzolo.

“With insurers seeing losses year after year, companies must become more innovative with what they offer.”

Palazzolo stressed that the outcome of the various legal challenges to the California law will have an impact on insuring the gig economy. If the law withstands legal challenge, other states, including New York and New Jersey, are likely to follow suit. Even if states do not fully adopt the law, the law could work to reset the standards for worker protections across the US.

“The shifting legal and regulatory standards and societal expectations will continue to create problems and opportunities for insurers and companies in the gig economy,” she said. “These changes, however, are not the only factors impacting the profitability of these insurance programmes.”

She noted that a review of the commercial auto insurance sector shows that the industry is struggling to make a profit. According to Fitch Ratings, the segment is poised for a ninth consecutive year of underwriting losses in 2019.

There is some light at the end of the tunnel for insurers. In fact, Uber replaced James River quickly. Uber continues to do business with several insurance companies, including Farmers Insurance, Progressive, and Allstate. Meanwhile, Liberty Mutual has created a Sharing Economy & New Mobility practice to provide a range of solutions to help ride-hailing, vehicle-sharing, car subscription and autonomous vehicle companies better manage the risks they face. It has also agreed to provide coverage for Uber drivers and passengers throughout New England, South Carolina and Puerto Rico as part of its 2020 auto insurance programme.

Palazzolo notes that such insurers may well leverage technology to help them better understand and price such risks.

“As the gig economy ages, and grows, technology will continue to develop to assist in addressing the underwriting concerns that arise in providing insurance to the gig economy,” she said.

“We are already seeing individuals and companies sharing more information with third parties. The use of dash cams, telematics and electronic logging devices, for example, are already being used to provide additional analytics for insurers. Insurers are also starting to use data collected from others to price the risk.”

She continued: “A review of the industry shows that not only are insurers losing money as a result of mispricing the risks but insureds are also incurring huge expense. Insurance is one of the largest expenses to companies engaging in the gig economy including ride-share companies. Indeed, these expenses pose great risk to the ride-share industry’s profitability.

“Until the parties can arrive at some equilibrium whether that be through modification to the traditional offerings or underwriting modelling both will continue to struggle. Given the continued rapid changes in the gig economy, effectuating these changes will remain difficult.

“However,” Palazzolo added, “the massive growth of the gig economy will create significant opportunities for companies that can develop new approaches to insuring this market.”