Breaking Tradition: How Mobility is Forcing Captives to Rethink Insurance

There is a horror story floated by captives and whispered by worst-case scenario conspiracy theorists in which rideshare drivers lease vehicles, get into a car wreck, and their insurance doesn’t cover commercial activity, leaving the captive stuck with both the damages and a delinquent borrower.

These claims aren’t totally unsubstantiated. Services such as Uber and Lyft are required to provide some insurance when a passenger is in the car; but when a driver is awaiting his next pickup and he gets into an accident, it falls on his personal insurance provider.

Depending on the state, that personal insurance may not cover rideshare drivers without supplemental coverage. However, mileage restrictions written into traditional lease contracts probably prevent this from becoming a widespread problem, Harry Campbell, founder of The Rideshare Guy blog, told AFN.

“Most leases cap your miles per year at 10,000, and a full-time driver will put 1,000 miles a week on their car, easily,” Campbell said, adding that a lessee would reach his yearly mileage limit in two and a half months in this scenario. “The terms prevent a driver from doing it in general and on scale. But does it happen? Yeah, for sure.”

Even if it’s not common, this worst-case scenario underpins how traditional models of car ownership and insurance are increasingly leaving out consumers seeking alternative modes of transport and availability, largely in urban centers.

There are a slew of questions about how insurance will be handled under these new rideshare, carshare, residential, and peer-to-peer leasing models, said Jay Sarzen, senior analyst at Aite Group.

For example, will the programs bake the price of insurance directly into the subscription fee? Is insurance mandated through the program, or can you seek out third-party insurers? If it is required, do you get a choice of insurers? Do those insurers even want to cover certain borrowers, given their past driving histories?

Whatever method prevails in the short-term, captives in particular would be wise to seek out insurance partners, Sarzen said. If the promised future of fully autonomous driving ever comes to fruition, OEMs will be the ones responsible for the technology in the event of a crash.

“It probably makes sense to develop those relationships for the future when, at some point — 25 to 30 years from now — we’re at the point where autonomous cars are the norm,” Sarzen told AFN. “Those cars likely will have their insurance covered by the carriers and not be done through individual efforts.”

This autonomous future certainly isn’t happening overnight, but in the meantime, there are going to be more opportunities for financial institutions and insurance companies to collaborate, said Peter Kosak, executive director for General Motors Co.’s urban mobility programs.

“I do see a very different future where there is growing autonomy and people start to share autonomous vehicles — either in small groups or open sharing by sharing services — where you can see new financing models and insurance models arising out of a more curated and disparate ownership sharing environment,” Kosak told AFN. “On-demand access to mobility is only going to increase because it economically makes sense. In that environment, both the financing and insurance industries are going to have opportunities and challenges, and maybe there is the opportunity for both of those areas of expertise to collaborate.”

GM is investing heavily in its mobility program Maven because it believes data will be vital to discovering what models make the most sense from a business standpoint, Kosak said. Too many programs overcharge consumers because they are afraid of the very real risk associated with unknown residual values of a vehicle coming out of one of these programs, he added. But if no one signs ups for the program in the first place, you never get that vital data.

“Having data — how are the vehicles actually used?” Kosak said. “How many miles are they driven? How well taken care of are they? What is the accident rate? How many dings, dents, and worse accidents do they experience as a population? Gathering that kind of data, I think, is instrumental in driving out uncertainty. The more you can drive uncertainty out, the easier it is to either insure or finance something.”

Almost all of these mobility programs are far more expensive in the long-term than traditional financing, in exchange for increased flexibility, The Rideshare Guy’s Campbell said.

Book by Cadillac, for example, is a “white glove concierge” service that allows users to swap out any current-model vehicle in the brand’s line for personal use at any time, and have it delivered to their home. For the flexibility to have an SUV for the weekend and a sports car to go to work, it will run consumers $1,500 a month.

“You’re getting the flexibility of a month-to-month membership so there is no long-term commitment,” Melody Lee, director of brand marketing for Cadillac, told AFN. “Intangible aspects are built into the model as well: the opportunity cost, the flexibility, the simplicity, and the high-level of service, as well as having your car picked up and dropped off by a concierge — it’s all built into the price model.”

Flexible lease programs for rideshare have been criticized by some Uber detractors as predatory, because of how expensive they can be for how little drivers are paid, Campbell said.

“Uber’s critics would say that a $200-a-week lease is predatory, but I don’t think they understand that it’s unlimited mileage and you can get out of it any week,” he said. “You have a lot of drivers, frankly, who are coming into these programs that don’t have other options. If they could finance a car on their own, they obviously would, but they don’t have the credit. They don’t have the down payment, so it’s kind of a last resort.”

Even though monthly fees can be expensive for consumers now, these programs are going to continue to form and spread, because it’s easier for a company to manage the costs of rideshare, rather than an individual, Campbell said.

“You might be able to easily see how much it’s costing you in gas each week, but the delayed costs — like maintenance and depreciation — don’t pop up until you try to sell the car,” he said. “It’s much easier to do it on a fleet-level, like an Enterprise or Rent-A-Car, for example, that is buying and selling millions of cars and renting them out. They have the numbers down to a tee.”

In the long-term, consumers will want more insurance options than are currently offered through these mobility programs, said Dan Preston, CEO of the per-mile basis insurance startup MetroMile.

“If the industry delivers on the promise, and the claims experience is very easy and straightforward, then I have no reason to believe consumers won’t be happy with the insurance that comes with it,” Preston said. “But if there are challenges with that claims experience, if the prices are inflated because of it, then I think there will be strong consumer demand for whatever insurance product they are looking for.”

The second-largest insurer in the U.S., The Allstate Corp., has considered this same question and ultimately opted to continue to provide insurance as a third-party intermediary, rather than the primary provider mandated under one of these mobility programs.

“It’s not something we’ve pulled the trigger on yet because we’ve seen the best coverage for the driver — the most affordable way for the driver to be fully protected — was to provide more supplemental coverage,” said Dave Border, president of Allstate Dealer Services. “But if the model changes, and people are operating in a different format, we’ll look at doing things differently to meet those customer needs. Our goal is to evolve with the customers’ needs.”

While MetroMile offers coverage that works for both personal and commercial use, Allstate opted for a program called Ride for Hire, which is used as a supplement to a consumer’s primary coverage. Rideshare drivers tend to differ greatly in the amount of hours they work, so pricing a product at the average becomes very difficult, Border explained.

Programs such as Getaround, Turo, and Croove go a step further, allowing car owners to earn money by renting out their vehicles.

Insurance under carshare models is already very risky when it’s with an OEM, but when it becomes a private-party sharing model, GM’s Kosak said there are even more unknowns.

“These programs are somewhat speculative, so to the extent insurance companies like Zurich, AIG, and others are willing to try things even in small scale to learn and see what the risk profile is and what behaviors are, that’s a new role for them to enable new ownership and shared-use models,” he said.

Now is not the time to be “sweating the incursion” of new ownership models, but if insurance companies are smart, they will find a way to pivot, Aite Group’s Sarzen said. If the day comes when you can wake up, order a self-driving car, and read the newspaper on your way to work, “at that point, insurance companies could be facing some real issues, because who would buy auto insurance anymore?” Sarzen speculated. “These conversations are all being held, but I can assure you no one thinks this is imminent and it’s not happening tomorrow.”