News & Markets
Shake Out in the Oil and Gas Sector May Not Be All Bad By Stephanie K. Jones
hile the per barrel oil price has rebounded in recent months after it plunged to under $45 per barrel in March 2015, the energy industry — and by extension the energy-focused insurance sector — continues to adjust to the impact of the extreme price drop that began in summer 2014. By the time the price of a barrel of oil topped out at more than $100 last year, oil and gas production activity in Texas was in the kind of upward spiral that tends to make would-be energy moguls out of peo2 | INSURANCE JOURNAL-TEXAS June 1, 2015
ple who really have no idea what they are doing. What a difference a year makes. Now, those who jumped in thinking they could make money at $100 a barrel are out, receipts and payrolls are down for those that are still in, and some clients are seeking to cut back on their insurance costs. But all that may not be such a bad thing, according to some insurance professionals who specialize in the area. While the price bust has been traumatic for many people, with jobs lost and companies going under, the production activity “probably needed to taper off a little bit
because it was going so crazy, especially in Texas. ... It seems like there was carelessness out there. In my opinion it might weed out some of the people that don’t really know what they’re doing and they guys that do know what they’re doing, they’re the ones that are going to stay in business,” said Billie Gorrell, president of The Woodlands, Texas-based Ashley General Agency. The extreme price plunge definitely has had an impact on the industry, but “the bad companies are the ones that are feeling it. The bad companies are the continued on page 4 www.insurancejournal.com
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News & Markets continued from page 2 ones that are being run out, they’re being forced to sell,” said Thomas Blanquez, an oil and gas specialist with San Antoniobased wholesaler Quirk & Co. “But the resourceful companies, the ones that have been through this before and weathered the storm, they’re going to be able to come through and I believe probably stronger than they were before this.” The sudden and drastic change “left a lot of people wondering what the game plan should be. … The direct immediate impact is that it’s going to affect insurance companies’ bottom line in written premiums. That’s because the account that you were writing last year, and year over year, that were expecting 10, 15, 20, even more — 40 to 50 percent — increases
Rotary Rig Count by Major Producing State, 5/15/2015 State Alaska Arkansas California Colorado Kansas Louisiana New Mexico North Dakota Ohio Oklahoma Pennsylvania Texas Utah West Virginia Wyoming
9 6 13 39 14 73 44 79 24 103 46 373 7 21 22
8 12 48 65 34 113 89 174 39 195 60 891 27 25 45
Source: Baker Hughes
North America Rotary Rig Count by Location, 5/15/2015 Area Land Inland Waters Offshore U.S. Total Gulf of Mexico Canada North America
850 4 34 888 33 77 965
1791 13 57 1861 56 153 2014
Source: Baker Hughes 4 | INSURANCE JOURNAL-TEXAS June 1, 2015
… as far as payroll Change in U.S. Rig Count May 2014 to May 2015 and sales go, you’re Change from actually seeing the 5/15/2015 5/15/2014 Last Year exact opposite of that 888 1861 -973 now,” said Blanquez. Source: Baker Hughes In the current environment, firms are laying people The problem is the difficulty in predictoff, decreasing fleet sizes and trying “to ing what receipts are going to be going fordecrease their insurance limits if they ward, so it probably would be a good thing can because they’re losing contracts that for agents to check with their insured no longer require the higher umbrella or periodically, she said. excess limits,” he said. “My concern would be to make sure That’s a challenge for agents and they keep an eye on, if their receipts are brokers, said John Collado, Southwest way down to correct it during the year so Regional CEO at USI Insurance Services. these insureds don’t end up paying more “Insurance carriers are not very favorable premium than they need to,” she said. about mid-term changes. … But on the Gorrell added that it’s important on flip side if you’re that business owner and the wholesale side to be mindful as well. you’re paying for insurance and exposures “I haven’t had an account that hasn’t gone that you just don’t have, you’re not very down in sales a little bit. It’s just the way happy about it.” it is,” she said. Collado said agents and brokers seeking Still, said Blanquez, “you have to walk mid-term changes are bound to experience that fine line to make sure that you mainpushbacks from carriers. But, he said, tain underwriting integrity but at the “as an industry we should try to fight to same time you don’t want to lose all of represent our clients well and if there are your business. … Companies, underwritadjustments to exposures, they should be ers, brokers — that’s where we’re all leanchanged.” ing on each other relationship-wise to fig The problem is “that while written preure out what it’s going to take to keep the miums are down because sales are down, business. At the same time we can’t gut payrolls are down, the severity of the classthe policy, we can’t gut the rate because es of business that they’re writing are not,” that’s not really the way we should act in said Blanquez. this type of situation.” He said he’s now focusing on the good accounts, “the ones we want to get our underwriters to go to the mat ‘If you’re that business owner and on and apply the maximum cred- you’re paying for insurance and its.” exposures that you just don’t have, As to the risks that are priced you’re not very happy about it.’ correctly, “if somebody wants to come in today and undercut the market just to pick up the account then Same as It Ever Was that’s fine,” Blanquez said. Some things haven’t changed in the Agents and brokers need “to get with energy sector year over year. One is that their insured and see where they’re going insurance capacity is still up and pricing and see what’s going on with their busiis competitive for oil and gas-related business,” Gorrell said. nesses, with one glaring exception: com It’s certain receipts are going to change mercial auto. Like last year, commercial and both agents and insureds need to “be auto is where claims are coming from and really mindful of what the next year is the market continues to be a tough one. going to hold,” she said. continued on page 12 www.insurancejournal.com
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News & Markets Lack of Uptake Creates O&G Pollution Coverage Gap By Stephanie K. Jones
leakage and that has gotten into the groundwater table,” he said. hile stand-alone pollution insur As a result, “the enviance coverage for energy risks is ronmental insurance maravailable in the marketplace, more often ketplace a few years ago than not those who need it the most may saw the potential opporbe unaware it is available or decide not to tunity to fill that coverage purchase it. gap … and provide cover That creates a coverage gap for many oil age for the gradual polluand gas production-related operations for tion incidents, as kind of risks like seepage and pollution migration a dovetail to the current that aren’t covered in energy general liabilenergy casualty products ity and control of well policies, according that are available,” Heft to John Heft, senior vice president and said. director of the Real Estate Practice at New When oil was at its Jersey-based New Day Underwriters. peak and revenues were Energy GL and control of well policies substantially higher, enertypically cover pollution caused by sudden gy industry businesses and accidental events like tank ruptures, may have been able absorb pipeline breaks and explosions. But operthe costs related to a site ators and non-operators of wells, pipeline companies, waste material collection and pollution incident. With storage systems providers, support contracthe decrease in oil prices, tors and many more may be at risk for the some operators and othkind of pollution exposures that would not ers in the business may be considered sudden and accidental, said not be looking to add Heft. business expenses, but The oil and gas area is seeing insurance now is the right time “to claims related to gradual pollution, such as take a hard look at enviseepage and migration from leaking equipronmental insurance for ment, pipelines and tanks. Also from waste your operation, whether you’re an owner, containment areas that may have had a operator, non-operator of wells, if you breach, he said. have a portfolio of wells, either production With the expanded use of extraction wells or disposal wells, or you’re in the methods such as hydraulic fracturing, or construction side, now you really need to fracking, which produces large amounts think about it. Because if you had a gradual of wastewater mixed with chemicals and pollution issue, can you really afford to sludge, there is greater take that type of hit?” Heft public awareness of ‘The claim is the wells said. hazards that may result As claims go, it’s in weren’t constructed severity, from the disposal of not frequency, properly and sealed.’ where the risk lies. “It’s those waste materials. a severity based product, And with greater public meaning that when a claim does happen awareness comes an increase in allegations — it’s not going to happen often — but of pollution, especially related to the wells when a claim does happen it’s typically into which fracking wastewater is injected going to be large,” he said. under high pressure, Heft said. Energy related companies may feel like “The claim is the wells weren’t conthey have some environmental coverage in structed properly and sealed, there was
6 | INSURANCE JOURNAL-TEXAS June 1, 2015
the GL policy, and that’s where the counsel needs to be improved from agent to client, he said. Still, Heft thinks the brokers out there in the industry are having those conversations with their customers. “It’s still overall a very small penetration in the energy space that purchases the gradual pollution coverage, but I think it’s growing now that there’s an awareness of it,” he said. Thomas Blanquez, an oil and gas specialist at San Antonio-based insurance wholesaler Quirk & Co., is not so sure. He said his brokers are talking to clients about pollution coverage. But, Blanquez said, the classes of business “that have the most exposure for site pollution probably buy the least.” www.insurancejournal.com
News & Markets Energy Production/Earthquake Link Calls for Sensible Risk Management By John Kemp
nderground disposal of waste water produced from oil and natural gas wells has been blamed for triggering thousands of small earthquakes in Oklahoma and a number of other U.S. states, including Texas, since 2009. Heightened seismic activity corresponds closely with the timeframe and location of increased drilling and hydraulic fracturing across the southwest United States, according to the U.S. Geological Survey (“Incorporating induced seismicity in the 2014 United States national seismic hazard model,” 2015). Most tremors have been barely perceptible to humans, but one at Prague in Oklahoma was recorded at magnitude 5.6, enough to cause severe shaking and damage to buildings. The quake swarms have sparked a debate about safety and economic opportunity in states and communities that depend heavily on oil and natural gas production for jobs and income. Waste Water Injection Most tremors seem to have been caused by re-injection of waste water brought to the surface along with oil and gas into deep rock formations, rather than by the hydraulic fracturing itself. Water, contaminated with salt, hydrocarbons and even traces of naturally occurring radioactive material picked up from formations underground where oil and gas are found, is actually the largest single output of the oil and gas industry. U.S. oil and gas wells produced over 57 million barrels per day of waste water in 2007, according to researchers (“Produced water volumes and management practices in the United States,” 2009). Since then, natural gas production has risen by 30 percent and oil production is up 80 percent, so the amount of produced waste water is almost certainly much higher. According to researchers, 95 percent of 8 | INSURANCE JOURNAL-TEXAS June 1, 2015
the produced water is disposed of underground by re-injecting it into the oil- and gas-bearing formation to maintain reservoir pressure or into other rock formations. But it has long been known that the removal or injection of a large volume of fluid into rock formations can trigger earthquakes. The first and most Research has identified 17 areas in the central and eastern United States with famous example of increased rates of induced seismicity. Since 2000, several of these areas have expeman-made earthquakes rienced high levels of seismicity, with substantial increases since 2009 that continue or “induced seismicity” today. Source: USGS due to fluid injection was reported at the Rocky Mountain Arsenal in the 1960s and 1970s. Contaminated liquid waste from a chemical weapons plant injected underground triggered thousands of tremors near Denver, the largest of which measured magnitude 4.8. Man-made earthquakes have also been linked to the impoundment of large volumes of water for hydroelectric power dams, geoUSGS Cumulative Earthquakes: Cumulative number of earthquakes with a magnitude thermal energy plants, of 3.0 or larger in the central and eastern United States, 1973-2014. The rate of earthquakes began to increase starting around 2009 and accelerated in 2013-2014. conventional oil and Source: USGS gas fields, enhanced oil recovery programs and mining. magnitudes. The magnitude and destructiveness of Below magnitude 2.0, they are unlikely earthquakes are directly related to the surto be felt by humans. Those between magface area of the rock that ruptures by a sudnitudes 3.0 and 5.0 will be felt. Those over den slip. magnitude 5.0 are likely to be damaging. The magnitude of naturally occurring In general, the bigger the volume of fluid earthquakes follows a well understood disinjected or removed from a formation, the tribution. Most are very small, with progresbigger the maximum potential earthquake, sively fewer occurrences of tremors at higher continued on page 10 www.insurancejournal.com
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News & Markets continued from page 8 according to the U.S. National Research Council (“Induced seismicity and energy technologies,” 2013). The Magnitude Scale Hundreds of quakes are induced by energy production (oil, gas, geothermal, hydro) every year in the United States and probably thousands around the world. Most are very small at magnitude 2 or lower, with a small number ranging up to magnitudes 3 and 4, which are felt, and very rarely to magnitude 5. The potential for hydraulic fracturing to cause earthquakes has caused concern among local communities and been seized on by environmental groups and climate campaigners to call for curbs on the practice. But it is vital to put the risk into perspective. Most of these induced seismic events pose little risk of damage to buildings or humans. They are better described as tremors or more neutrally as seismic events rather than the more emotive — though common— term earthquake. The magnitude scale is logarithmic so a magnitude 2.0 or 3.0 seismic event releases a very different amount of energy than a magnitude 5.0 or 6.0 one. The energy released by a magnitude 3.0 tremor, the sort that might be associated with oil and gas field operations, is roughly 15 million times smaller than the Nepal earthquake on April 25. Even the worst earthquake in Oklahoma’s current swarm, at Prague, released 2,000 times less energy than the one near Lamjung in Nepal. While some tremors have been directly traced to the pumping of fracking fluid at higher pressure into undetected fault zones, such as the one at Preese Hall in Britain, most are associated with the disposal of waste water. Induced seismicity is a side-effect of all oil and gas production rather than the fracking process. Some of the largest recorded seismic events have taken place at conventional fields which have been waterflooded to boost oil recovery. 10 | INSURANCE JOURNAL-TEXAS June 1, 2015
And induced seismicity is not limited to oil and gas production. Some of the largest earthquakes that may have been triggered by man have been linked to dam projects in India (M6.3) and China (M7.9). The most frequent induced seismicity in the United States has occurred at the Geysers geothermal power plant in northern California, which triggers 300-400 tremors per year, with one to three of them rated at magnitude 4.0 or higher. The Geysers has a well-established program to pay for damage to property (such as broken tiles or cracked walls) linked to its operations. Communities in mining areas and near oil and gas fields have long experienced induced tremors: an average of 15 due to underground works are reported each year in the United Kingdom. Most induced quakes around the world are limited to between magnitudes 2.0 and 5.0, where they may be felt but are unlikely to do much damage according to researchers at Britain’s Durham University (“What size of earthquakes can be caused by fracking?”, 2013). Carbon Dioxide Storage Because the amount of fluid involved in hydraulic fracturing itself is relatively small, just a few million gallons, it is unlikely to generate a large tremor, unless injected into a heavily faulted area. The volumes involved in waste water injection are much larger and pose a greater potential danger. The risk of activating a large fault system provides a strong case for regulating both fracking and waste water injection and ensuring that operators have an adequate understanding of local geology and that their operations are monitored to detect any seismicity due to undetected faults. The biggest danger comes from proposals to lock away carbon dioxide underground as part of carbon capture and storage (CCS) schemes.
CCS has been identified as essential if the world is to continue using energy from fossil fuels such as coal and gas while curbing carbon dioxide emissions and limiting the rise in global temperatures to two degrees Celsius. To have an impact on climate change, however, CCS would have to pump billions of tons of supercritical CO2 under intense pressure into deep rock formations. The scale of the injections would pose an earthquake risk far greater than anything currently associated with oil and gas production. Regulating Fracking For some climate campaigners and environmental groups, the threat of earthquakes is another reason to ban or severely regulate fracking, and ultimately leave the oil and gas in the ground. But that response would be neither practical nor proportionate; the risk of earthquakes is associated with plenty of energy technologies that environmentalists like, such as dams, geothermal and CCS. Unfortunately, the response from some executives linked to the oil and gas industry has been to deny that any link exists and attack the scientific studies, which while not conclusive are strongly suggestive. A more sensible course would be to accept that there is a strong likelihood of a causal link between oil and gas production and seismic events and work towards sensible and proportionate regulations, recognizing that the quake risks are moderate and that oil and gas production remains essential. (Editing by Dale Hudson) Copyright 2015 Reuters. www.insurancejournal.com
News & Markets continued from page 4 Commercial auto aside the insurance marketplace for energy businesses has plenty of capacity and pricing is competitive to down, which is great for the buyer, Collado said. “Oftentimes when there’s adversity in an industry, it is sometimes double-whammied by the insurance market. But in this particular situation, the energy environment, we have a very positive buyers’ market. … That’s even over last year.” Blanquez said general liability in the energy sector is in one of the softest cycles “that we’ve seen in a while. The capacity that came into the market when we were in the middle of the oil boom, it’s still there. ... But auto has been and will continue to be probably in the next year or two a hardening line. It seems like it gets more and more tight and the prices continue to go up because the claims activity is absolutely continuing to increase,”
Blanquez said. Claims frequency continues to rise but it’s the claim amounts that are really soaring, he said. “The courts are ruling a much higher dollar amount than they were three
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or four years ago.” Collado estimated that the loss ratio in commercial auto is running about 140 percent. “Auto is a huge loser because the drivers are hard to find. We’ve even heard of companies asking to get under-aged drivers approved and we’re in some case getting that successfully done,” he said. With the downturn in oil prices Collado said the number of requests to allow drivers under the age of 18 may go down, but he’s still seeing such requests, especially for lower skilled driving jobs. The Recovery While the price per barrel of crude oil hovered around $60 on May 21, no one’s really expecting a recovery to $100 per barrel in the near future. As to when and how high, “if you get a room of five people you’ll get five different answers,” Blanquez said. “The common thread in the conversations is that it will recover, there’s no doubt that it will. The moving target is, one — how quickly and two — what is the new price going to be, because $100 a barrel-plus that’s not going to happen any time soon.” But he said a price of $70 per barrel by the end of the year may not be out of reach. “That would be a huge, an awesome recovery. I think everybody in the industry would be happy with $70, compared to where it was,” Blanquez said. www.insurancejournal.com
News & Markets Survey: High Growth Agencies Really Do Build Business Differently By Stephanie K. Jones
The high growth firms consisted of “individuals or groups of survey of high growth insurance firms individuals that were conducted and released late last year known in their niche. found that such organizations hire difThey had built-in conferently and produce business differently nections and networks. than low growth firms. They used social media, They also make use of specialized skills publishing and expert and research to build connections and netspeaker and interviews works, while lower growth firms generally at a very high level. do not, according to Julie K. Davis, founder They built business on of Risk Communities LLC, a research, the strength of who they branding and marketing firm based in were as compared to Austin, Texas. other firms.” Speaking at the Independent Insurance Due to their niche Agents of Texas’ Joe Vincent Management identification, their netSeminar, Davis said in 2014 her firm conworking and social outreach, such firms ducted a survey of 32 insurance industry found it easy to attract leads, “and many organizations, including insurance agenof them had a strong entrepreneurial track cies, insurance carriers, insurance wholerecord of innovating new products,” she salers, law firms specifically serving the insurance sector and claim firms across the said. United States. Their sizes started at $1 mil On the other hand, low or average lion in annual revenues and went up there. growth firms typically did not have spe The survey sought to determine how cialty niches and self-identified as generhigh-growth firms handled business chalalists. Employees at such firms tended to lenges, how they built and maintained have high level technical skills “but they consistent growth, the role of research and didn’t really have the skill set to build marketing budgets. leads on their own. They depended on one In the 2014 survey, “we interviewed all or two rainmakers in the insurance agenof our participants and asked what were cy,” Davis said. their most highest business challenges. The lower growth firms also had little Over half ranked talent use for branding attraction and retention ‘More than half of the firms tools, such as and finding new pros- surveyed used research as social media, pubpects” as areas in which the primary tool to generate lishing and expert they struggle the most, new business revenue.’ speaking, and Davis said. “What we they usually did found was those two were intermingled.” not have an entrepreneurial track record Other challenges included increased when it comes to building businesses. competition from different sources, and Low growth firms focused on market building and branding reputation. quotes, quote comparison, and had little focus on the coverage element. “Maintaining a technical competence The lower growth companies also did was the lowest-ranked item,” Davis said. not necessarily seek to understand “the The surveyed firms knew there were many client’s unique risk profile and some of the sources to get the education necessary to challenges and some of the trends they build insurance technical competence. might be facing,” she said. When hiring, high growth firms valued By comparison, high growth firms tendspecialized skills and expertise, Davis said
14 | INSURANCE JOURNAL-TEXAS June 1, 2015
ed to utilize research not only to find new trends in the marketplace and launch new products and services, but also to better understand the needs of their clients. “More than half of the firms surveyed used research as the primary tool to generate new business revenue. The research, again, was their primary foundation piece for building their network, their referrals and recommendations. It also is a primary piece for uncovering new needs and problems and creating solutions,” Davis said. She cited as an example a “particular brokerage focused on writing coverage for paper recyclers.” Through a study of the industry the brokerage found that paper recyclers had a high “level of privacy concerns and cyber liability problems. They did research, created surveys, did interviews. And they launched a product called Shredder Guard which provides privacy liability to the paper shredders,” she said. The paper recycling program resulted from an opportunity to develop new products for existing customers that came out of a client satisfaction survey, Davis said. “The paper shredders were saying ‘you’re not really doing enough for our industry, there’s a particular hole that needs to be filled — that is the privacy liability, the cyber liability issues,” she said. www.insurancejournal.com
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News & Markets Austin Rideshare Experiment Shows Drivers Lack Insurance Savvy By Stephanie K. Jones
osh Waldrum knows from first-hand experience that most of the folks who drive for rideshare services like Uber and Lyft are not well informed about the insurance issues that insurance professionals see as problematic such as coverage gaps, and the amounts and types of coverage needed. Waldrum is the director of search engine optimization (SEO) at Austin, Texasbased The Zebra, a digital auto insurance agency and online auto insurance comparison site. As a member of his company’s marketing team, he took the challenge of foregoing driving his car for a month in favor of getting around exclusively through the services of the rideshare companies Uber and Lyft. Then he wrote about experience in a blog on his company’s website. Asked why he did this, Waldrum told Insurance Journal: “We talked about it a lot. It somehow just naturally came up. I
16 | INSURANCE JOURNAL-TEXAS June 1, 2015
think I first mentioned, ‘What if we found somebody to give up their car for an entire year and document all the stuff?’ That was way too much. Then, ‘I think a month could make sense. I could do this. It’s not that hard.’ “It came from that. I blindly signed up for it. When it actually came [time] I was like, ‘Oh man, what was I thinking?’” But he said all was well in the end.
In all, Waldrum took 50 rides during the month of January 2015 — 25 with Uber in the first half of and 25 with Lyft in the last half. While his survey was in no way scientific, it was revealing. In conversations with drivers during his rideshare experiment, Waldrum found that a very large percentage of the drivers who work for these companies didn’t really know much about insurance requirements or about the coverage their respective companies provide. In addition, most didn’t tell their personal auto insurance companies that they were doing this. Specifically, he found that 72 percent of the drivers he spoke with were not familiar with the coverage offered by Uber and Lyft, and 92 percent of the drivers had not told their own insurance companies that they were driving for these companies. “Definitely all the drivers were an open book when I asked about this,” Waldrum said. Waldrum said he believes companies like Uber and Lyft probably do continued on page 22 www.insurancejournal.com
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News & Markets ‘On-Tap,’ Temporary Employees Challenging Workers’ Comp: Hartwig By Denise Johnson and Andrew Simpson
he workers’ compensation industry must contend with a fast-growing on-demand economy where jobs are filled via apps and more employees are temporary contractors. “Technology is changing how we think about jobs,” Dr. Robert Hartwig, president of the Insurance Information Institute (I.I.I.), told the audience of workers’ compensation experts at this year’s annual symposium of the National Council on Compensation Insurance (NCCI). He said the on-demand economy that includes temporary drivers, laborers, property owners-turned-landlords and independent professionals is transforming the American workforce and the insurance industry. Hartwig noted that on-demand services compensation. are not new. Home services provider These services and their workers are Angie’s List started in 1995, at-home comraising many insurance and liability quesputer helpers The Geek Squad started in tions. Insurance companies are beginning 1994, and Peapod began delivering grocerto “fill the many insurance gaps that arise,” ies in 1989. but Hartwig predicts there will be a peri “But the on-demand world is exploding od of court and legislative battles ahead as is the demand for ‘on-tap’ workers,” he before all the questions are answered. said. Need something done around the house? The Handy app can help. Hate Smartphone Speed doing laundry? Then just tap Washio. Want Smartphones are the “breakthrough someone else to do just about technology” that has made any task? There’s an app for that: the on-demand econoTaskRabbit. To find a lawyer, just my possible — globally, visit lawyers.com; for a place to according to the I.I.I. econstay, there’s airbnb.com; and, of omist. Fifty percent of all course, Lyft and Uber will take adults globally have one. you for a ride. The demand for temporary workers has increased All of these services depend on two and three times more temporary service providers. Dr. Robert Hartwig than for other workers The effects of the on-demand over the past five years and the trend is economy are creeping into just about every expected to continue, he told NCCI. insurance sector: personal and commercial Technology offers the ability to “match auto, homeowners and renters, professionlabor to jobs much faster and better than al and other liability lines, and workers’ 18 | INSURANCE JOURNAL-TEXAS June 1, 2015
traditional ways.” The new “owners” are workers with time and skill. They can be paired at low cost with those who have a need or desire for that time and skill. No longer do workers have to be at a firm or a plant to connect with those with a need for their skills. Bringing together labor and those who employ labor is not new but the pairing today “occurs with a speed and breadth never before possible,” he said. Employment Restructuring What is happening is a “breakdown of the traditional employment structure,” the I.I.I. president said. This sharing economy movement is furthering trends that began in the 1970s and 1980s with globalization, labor strife and technology — and accelerating the demise of the traditional understanding of what a “good’ job” is. What will this mean for American workers and workers’ compensation? Many jobs are being “reduced to freewww.insurancejournal.com
lanced, temporary gigs.” Often, these opportunities leave low skill workers and those who lack flexibility behind, the economist said. On the positive side, these opportunities may free people from the confines of corporations, bureaucracy and traditional jobs at set locations. They help those who want or need flexibility. They may also give the unemployed and underemployed more opportunities. At the same time, the negative view holds that these temporary workers are treated as independent contractors “without intrinsic or basic economic rights.” This view suggests there could be an erosion of stability, retirement benefits, other job benefits as well as health, liability and workers’ compensation insurance, according to Hartwig. Many of these on-demand platforms have resisted assuming liability and responsibility, preferring to keep as much liability as possible on the individual, contracted worker. However, Hartwig noted, traditional insurance does not often cover workers while they are engaged in these services. Standard auto insurance won’t cover people while they are driving for Uber and home insurance doesn’t typically cover those who rent out their rooms. What’s more, unless they buy it themselves, on-demand workers “will generally have no workers’ comp recourse if injured on the job.”
tend to be young — 25-44 years of age, PwC found. They may want flexibility in raising their families. On-demand work is also appealing to seniors who are looking to augment their retirement. Besides being fueled by demand and worker interest, the on-demand economy is destined to grow because “Wall Street loves the on-demand economy,” according to Hartwig, citing the number of on-demand firms and the high valuations they get. Uber is a case in point — it’s now valued at more than $50 billion. Transformational Tech The on-demand surge is just one example of how technology in the workplace will affect insurance and workers’ compen-
sation, Hartwig noted. There were 200,000 industrial robots installed globally as of 2014, a number that is expected to reach 300,000 by 2017, according to the International Federation of Robotics. And many more of what Hartwig described as “transformational technologies” are around the corner: driverless cars and trucks, wearable devices, implantable devices, advanced robotics and artificial intelligence.
Profile of Providers Who are these on-demand workers? On-demand is growing but it’s not for everyone, yet. Only 19 percent of the population has actually used an on-demand service, according to a PwC online survey in December, 2014. About seven percent of the population is working in the sharing economy. But many more (51 percent) see becoming a services provider in it as a possibility in the future. Those scooping up the on-demand jobs tend to have household incomes below $50,000. These app-oriented service providers www.insurancejournal.com
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News & Markets The Rideshare Insurance Challenge By Stephanie K. Jones
ocal communities, states and the insurance industry are all grappling with the issue of finding workable solutions that provide public protection while allowing for innovation and growth in new sharing, or on-demand, economy ventures like transportation network companies, short-term home rental companies and housing exchange organizations. The ridesharing experience from an insurance perspective has been described as having three phases. Phase one is when driver is logged into a TNC application but does not have a passenger and is not matched with one. Phase two is when the driver and passenger are matched but the rider is not in the vehicle. Phase three is when the passenger has been picked up. Because larger rideshare companies like Uber, Lyft and Sidecar provide some commercial coverage for phases two and three, phase one is the period that concerns personal auto insurers the most due to the livery exclusions in personal auto policies. There are other points of consideration for insurers, as well. A National Association of Insurance Commissioners (NAIC) white paper, “Transportation Network Company Insurance Principles for Legislators and Regulators,” outlines insurance considerations to help state and local policy-makers who are crafting TNC laws or regula-
tions. In the paper, the NAIC points out that “though the largest TNCs provide commercial coverage, those TNC’s policies may not provide the same uninsured/underinsured motorist (UM/UIM) coverage, medical payments coverage, comprehensive coverage or collision coverage that the drivers had purchased in their personal auto policies.” The NAIC also acknowledged that many drivers are unaware that their personal auto policies exclude activities such
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as driving people around for a fee. And others may be aware but choose to take a chance. Industry Response Some say the insurance industry has been slow to respond to the needs of the growing TNC industry and other participants in these new economic models with new products. Melissa Neis, vice president of Parr continued on page 22
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News & Markets continued from page 16 communicate to their drivers about the insurance coverages the companies provide. But, he said, “I don’t think they do a good job of telling them the other piece of it, which is that their personal insurance company would want to know” that their insureds are driving other people around for a fee. One of the main concerns of personal auto insurers has been the coverage gap between the time a driver is logged into the online rideshare service application as being available to pick up a customer and when a customer is actually in the vehicle. Walrum said the rideshare drivers he spoke with generally were confused about such coverage issues. “I’d taken a lot of Uber before this whole experiment. Since I started working here I always found myself asking the drivers about insurance because I’m learning about it here and it was interesting,” Waldrum said. “There was confusion all around the board. When I’d ask them, ‘How does Uber’s insurance work?’ or ‘How does Lyft’s insurance work?’ I got a lot of confused responses, where people really continued from page 20 Insurance Brokerage in Chicago, said it’s probably “going to take time and experience for a lot of the mainstream carriers to jump on board on these types of new products.” But specialty agencies, like Parr Insurance, are beginning to develop programs to address the needs of the sharing economy, she said. “What we’re seeing is specialty agencies that will build out programs specifically for a business, a shared economy business. And that’s going to be probably the model until the data is there to support pricing, especially on the homeowners side,” Neis said. Some insurers have been entering the 22 | INSURANCE JOURNAL-TEXAS June 1, 2015
weren’t totally sure when they were covered and what was covered by Uber and Lyft,” he said. Cheaper Rides In his blog post, Waldrum said that factoring in the cost of car payments, gas, personal auto insurance and auto maintenance, ridesharing, at least for him for one month, was cheaper than driving his own car. Waldrum estimated his personal auto expenses for a month amounted to $640, while the cost of his 50 Uber/Lyft rides for the month of January came to $527. He recognized that the results were subjective and that his commute to work was only 3.25 miles. A longer commute
obviously would have translated into more expensive rides, as would a larger number of total rides taken. Waldrum also acknowledged the limitations in exclusively using rideshare services versus driving one’s own vehicle. “After doing this experiment, I realized that having the flexibility to go anywhere at any point in my own car was something that’s hard to put a price tag on,” Waldrum wrote. He said his experiences with both Uber and Lyft were “completely satisfying,” however. The average wait time for both was just over four minutes and though he had expected he might have a harder time getting a ride in the morning when it was time to go to work, that did not occur. Uber was somewhat cheaper than Lyft (Uber lowered its prices during the time of Waldrum’s experiment); the 25 rides with Lyft cost Waldrum $60 more than the 25 rides with Uber. He found that more than half of the drivers he used — 60 percent — drove for both Uber and Lyft, and that there was a wide range in the age of the drivers — from college students to retirees.
TNC market in small steps, however. Farmers, USAA, Metlife and GEICO also In November 2014, Erie Insurance in have developed products for a limited marIndiana and Illinois began offering covket that address the “gap” period for TNCs. erage for every part of the trip: before, In addition, ISO has introduced two during and new personal after the hired ‘We’re adding drivers left and right.’ auto coverage ride through options for an endorsement to the personal auto ridesharing drivers when they’re logged in policy that allows for business use, such but don’t have any passengers. as ridesharing. Erie said depending on One of ISO’s new options would apply consumer response it plans to expand the from the time a driver logs in to the TNC product to other states. platform until they’ve accepted a ride Neis described Erie’s ridesharing request. The other option would apply endorsement as “state of the art” and said from when they log in to the TNC plather agency gets “phone calls for it all the form up until a passenger occupies their time. We’re adding drivers left and right.” vehicle. www.insurancejournal.com
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