Update: We’ve released a new whitepaper examining the Sharing Economy industry. We dive into the insurance landscape, legal climate and how to approach risk management for companies in this sector. You can download the report here!
So you’re starting an on-demand company…
Getting insurance in general can be a total pain (although we do try and make it easier at Founder Shield!). Getting the right auto insurance for an on-demand delivery company is an acute pain unto itself. The reasoning is actually quite simple: the massive risk exposure scares the hell out of underwriters! Historically, auto-related risks are incredibly difficult to underwrite. Auto claims occur in higher regularity than most other claims resulting from on-demand services and typically are the most costly.
This, compounded with the fact that most on-demand companies are essentially startups with little to no operating experience (or loss history), can scare away the untrained insurance underwriter.
Most brokerages approach an on-demand company in one of two ways:
- steer clear of this risk and claim to not have any carriers interested
- or take you for a roller coaster ride featuring multiple underwriter rejections that eventually leads you back to the same place you started – with no insurance to show for your patience.
This is one of the main reasons we started Founder Shield in the first place. The beauty of insurance is that there is always a route to YES. At the end of the day, the right broker should always be able to find a solution for you. Now, it might cost more than Kanye’s sneaker collection, but you should always be able to at least look at an option and then decide whether or not you want the policy.
Back to the on-demand space. One of the fastest growing markets in the venture world (think Uber, Lyft, Shuddle, Instacart, Postmates… etc.), happens to also be a vertical that needs to have their insurance perfected from day one. Whether it is TNC requirements, investor requirements, or simply smart risk-mitigation, insurance is purchased very early in an on-demand company’s life cycle.
We’re fortunate to call many of the largest on-demand companies our clients. The expertise we’ve accumulated has helped us continue to pave the way for insuring new on-demand startups swiftly and with relative ease. Here are a few key takeaways from our ever-growing on-demand auto insurance knowledge base. This is not a complete A to Z list of everything you need to know, but it’s a great starter kit for what you need to know about getting auto insurance for on-demand companies.
So why is on-demand business insurance so damn expensive? Other than the high frequency of auto insurance claims (which doesn’t help the cause), there’s a supply issue here: there are only a handful of markets (carriers) that will consider this risk exposure in the first place. This, accordingly, reduces the broker’s leverage.
Think about it this way: the average driver gets in about 4 accidents in a typical driving lifetime. There’s a fair bit of risk there, but it’s a tangible risk that an underwriter can wrap his or her head around. He or she can reasonably bet that you’ll go at least a couple years accident-free. Now, apply that risk factor to a fleet of 10,000 independent contractors, all of different age and experience levels, operating across several state lines. Suddenly the underwriting becomes a daunting task, and the odds of dealing with accident claims early (and often) skyrocket. This hyper-exposure to frequent claims drives the price up and the desire to write these policies down, reducing the supply.
“Premium basis” means the rate that the underwriter utilizes to determine what the policy costs (the premium). The premium is set based off a the number multiplied by the rate. For example, let’s say expected revenue is $2MM and the auditable rate is $25 per thousand dollars of revenue. In this case, your premium for the year would start at $50,000 for the year and at the end of the year could potentially increase if your total revenue went above $2MM). There are 3 major rating methods in the on-demand space:
- Number of miles driven by your drivers
- Number of trips driven by your drivers
- Total revenue for the policy period
Now…which data point should you use? This obviously depends on your business model, but we’ve seen success using revenue as an auditable rate. Costs tend to get a bit out of hand when you use the number of trips or miles driven as a premium basis.
For example, let’s say you are Gett and you are doing a $5 taxi ride promotion. Using the per mile / per trip rating method simply adds to the cost of the promotion by “charging” you the same amount you would for those miles/trips driven if you were charging your customers full price. It skews the premium in the carrier’s favor. However, if you’re rated on a revenue basis, the promotion only makes your insurance cost more if you successfully boost revenues from the promotion (and exceed your estimated revenues for the year). It’s better to pay more because you absolutely killed it on revenue rather than volume, and rating this way helps significantly when you are putting together your pro-forma financials for the next 12 months.
Driver and vehicles criteria / screening procedures
This is a sticking point for underwriters and a very important consideration for any on-demand company. If you want underwriters to take you seriously and provide you with a great insurance policy, you need to run a tight ship. An insurance policy is a contract that forms a seriouspartnership and requires both parties to feel comfortable with one another. The most important process to have in place when operating an on-demand business revolves around knowing who your drivers are. It is critical to collect MVR’s (Motor Vehicle Records), do thorough background checks, and collect their personal auto insurance policies. If you use these tools and hire qualified drivers, the road to getting the proper insurance policy in place becomes a lot easier.
Primary vs. Secondary
Most HNOA (Hired & Non-Owned Auto) policies are written on a “secondary” basis. This means that when there is an incident that results in a claim, your insurance carrier does not get involved until the driver’s personal auto insurance policy is approached first. If that driver’s policy denies to pay out the claim or only pays out a portion of the claim, your insurance policy kicks in and pays the remaining amount. Most HNOA carriers prefer to write coverage on a secondary basis for obvious reasons. This is not really much of an issue as regardless of whether your policy is primary or secondary, if written correctly the intention is have it kick-in as soon as it is necessary and to protect the company financially.
At the same time, many companies we work with prefer to pay more to have their policy written on a “Primary” basis, meaning the company’s policy takes priority in a claim situation. A lot of times, this can simplify the claims process as the company and carrier do not have to first correspond with the driver’s personal insurance policy before a settlement can occur. It also provides a secondary recruiting benefit when trying to attract new drivers to the platform.
There’s a lot to digest and think about here! Fortunately, we are here to help make this process as seamless and stress-free as possible. As always, never hesitate to reach out with any questions. And finally, THANK YOU to all the on-demand companies out there! You definitely make our lives a lot easier.