Captives Can Be a Laboratory for Gig Economy Insurance Solutions

October 13, 2020

As the gig economy grows with new business models that often don't fit traditional insurance offerings, captive insurance companies can serve as laboratories to address the risk while gathering data that ultimately might make the risks more palatable to commercial insurers.

Speaking on a session titled "Captives and the Gig Economy" at the Self-Insurance Institute of America's (SIIA) 40th Annual National Conference & Expo, Ed Koral, managing director at BDO USA LLP, said, "When you think about the gig economy ... we have traditional ideas about where the insurance is supposed to reside and for where the risks reside."

But many gig economy jobs such as ridesharing or home-based work create ambiguity between personal activities or property and that which is related to the work, Mr. Koral said.

"You're splitting up time. You're splitting up assets. In some cases, you're splitting up clothing," he said. In many cases, standard retail insurance products don't respond well to something like a gig worker using a personal vehicle in a ridesharing or delivery business.

"We have people driving around, thinking they have coverage, and not having coverage," said Mr. Koral. "I think what you see most of all in the gig and sharing economy is not knowing what we don't know."

Mr. Koral noted that with many coverages now widely available in the commercial market, "before there was commercial coverage for [the risks], because there was nowhere else to turn, people used their captives."

As technology advances, it creates new opportunities, but it also creates insurance gaps, said another speaker, Peter Foley, CEO of LILCHA Holdings. "As a result of this great technology, you had some increasing gaps in protection," he said. In the early years of ridesharing, drivers thought they had insurance coverage but didn't. An alternative risk transfer solution was developed as the solution to covering them, he said.

In developing such solutions, data is essential, Mr. Foley said. "Data is critical," he said. "Data is the keys to the kingdom."

Gig economy companies could consider creating captive insurance companies to extend insurance to their workers, Mr. Koral said. "I take the risk, but at the same time, I work on collecting as much data as I can," he said. "Eventually, I can start convincing commercial insurance companies that this risk is something that you can collect information about, that you can understand, that is ratable. When a risk becomes ratable, no matter how bad the risk is, if you can predict it and understand it, you can insure it."

"As the captive, you become a laboratory," Mr. Koral said. The captive parent might not have enough information about the risk at the start, but over time it can collect enough data that it can ultimately bring the risk to the commercial insurance market.

Joanne Wojcik, content developer for SIIA's National Conference, moderated the session.

October 13, 2020