insurance journal - the 2015 texas issue

TEXAS DIGITAL

2 | INSURANCE JOURNAL-TEXAS June 1, 2015 www.insurancejournal.com

News & MarketsTEXAS COVERAGE

because it was going so crazy, especially in Texas. ... It seems like there was care-lessness 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

Shake Out in the Oil and Gas Sector May Not Be All BadBy Stephanie K. Jones

While 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 exten-sion 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 peo-

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 seek-ing 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 com-panies going under, the production activity “probably needed to taper off a little bit continued on page 4



The problem is the difficulty in predict-ing what receipts are going to be going for-ward, so it probably would be a good thing for agents to check with their insured periodically, she said. “My concern would be to make sure they keep an eye on, if their receipts are way down to correct it during the year so these insureds don’t end up paying more premium than they need to,” she said. Gorrell added that it’s important on the wholesale side to be mindful as well. “I haven’t had an account that hasn’t gone down in sales a little bit. It’s just the way it is,” she said. Still, said Blanquez, “you have to walk that fine line to make sure that you main-tain underwriting integrity but at the same time you don’t want to lose all of your business. … Companies, underwrit-ers, brokers — that’s where we’re all lean-ing on each other relationship-wise to fig-ure out what it’s going to take to keep the business. At the same time we can’t gut the policy, we can’t gut the rate because that’s not really the way we should act in this type of situation.”

Same as It Ever Was Some things haven’t changed in the energy sector year over year. One is that insurance capacity is still up and pricing is competitive for oil and gas-related busi-nesses, with one glaring exception: com-mercial auto. Like last year, commercial auto is where claims are coming from and the market continues to be a tough one.

ones that are being run out, they’re being forced to sell,” said Thomas Blanquez, an oil and gas specialist with San Antonio-based 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 pre-miums. 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

… as far as payroll and sales go, you’re actually seeing the exact opposite of that now,” said Blanquez. In the current environment, firms are laying people off, decreasing fleet sizes and trying “to decrease their insurance limits if they can because they’re losing contracts that no longer require the higher umbrella or excess limits,” he said. That’s a challenge for agents and brokers, said John Collado, Southwest Regional CEO at USI Insurance Services. “Insurance carriers are not very favorable about mid-term changes. … But on the flip side if you’re that business owner and you’re paying for insurance and exposures that you just don’t have, you’re not very happy about it.” Collado said agents and brokers seeking mid-term changes are bound to experience pushbacks from carriers. But, he said, “as an industry we should try to fight to represent our clients well and if there are adjustments to exposures, they should be changed.” The problem is “that while written pre-miums are down because sales are down, payrolls are down, the severity of the class-es of business that they’re writing are not,” said Blanquez. He said he’s now focusing on the good accounts, “the ones we want to get our underwriters to go to the mat on and apply the maximum cred-its.” As to the risks that are priced correctly, “if somebody wants to come in today and undercut the market just to pick up the account then that’s fine,” Blanquez said. Agents and brokers need “to get with their insured and see where they’re going and see what’s going on with their busi-ness,” Gorrell said. It’s certain receipts are going to change and both agents and insureds need to “be really mindful of what the next year is going to hold,” she said.

Change in U.S. Rig Count May 2014 to May 2015 Change from 5/15/2015 5/15/2014 Last Year 888 1861 -973Source: Baker Hughes

Rotary Rig Count by Major Producing State, 5/15/2015State May 2015 May 2014

Alaska 9 8Arkansas 6 12California 13 48Colorado 39 65Kansas 14 34Louisiana 73 113New Mexico 44 89North Dakota 79 174Ohio 24 39Oklahoma 103 195Pennsylvania 46 60Texas 373 891Utah 7 27West Virginia 21 25Wyoming 22 45Source: Baker Hughes

North America Rotary Rig Count by Location, 5/15/2015Area May 2015 May 2014

Land 850 1791Inland Waters 4 13Offshore 34 57U.S. Total 888 1861Gulf of Mexico 33 56Canada 77 153North America 965 2014Source: Baker Hughes continued on page 12

continued from page 2

‘If you’re that business owner and you’re paying for insurance and exposures that you just don’t have, you’re not very happy about it.’

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the GL policy, and that’s where the coun-sel needs to be improved from agent to client, he said. Still, Heft thinks the brokers out there in the industry are having those conversa-tions 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 spe-cialist 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.”

Lack of Uptake Creates O&G Pollution Coverage Gap By Stephanie K. Jones

While stand-alone pollution insur-ance coverage for energy risks is

available in the marketplace, more often than not those who need it the most may be unaware it is available or decide not to purchase it. That creates a coverage gap for many oil and gas production-related operations for risks like seepage and pollution migration that aren’t covered in energy general liabil-ity and control of well policies, according to John Heft, senior vice president and director of the Real Estate Practice at New Jersey-based New Day Underwriters. Energy GL and control of well policies typically cover pollution caused by sudden and accidental events like tank ruptures, pipeline breaks and explosions. But oper-ators and non-operators of wells, pipeline companies, waste material collection and storage systems providers, support contrac-tors and many more may be at risk for the kind of pollution exposures that would not be considered sudden and accidental, said Heft. The oil and gas area is seeing insurance claims related to gradual pollution, such as seepage and migration from leaking equip-ment, pipelines and tanks. Also from waste containment areas that may have had a breach, he said. With the expanded use of extraction methods such as hydraulic fracturing, or fracking, which produces large amounts of wastewater mixed with chemicals and sludge, there is greater public awareness of hazards that may result from the disposal of those waste materials. And with greater public awareness comes an increase in allegations of pollution, especially related to the wells into which fracking wastewater is injected under high pressure, Heft said. “The claim is the wells weren’t con-structed properly and sealed, there was

leakage and that has got-ten into the groundwater table,” he said. As a result, “the envi-ronmental insurance mar-ketplace a few years ago saw the potential oppor-tunity to fill that coverage gap … and provide cover-age for the gradual pollu-tion incidents, as kind of a dovetail to the current energy casualty products that are available,” Heft said. When oil was at its peak and revenues were substantially higher, ener-gy industry businesses may have been able absorb the costs related to a site pollution incident. With the decrease in oil prices, some operators and oth-ers in the business may not be looking to add business expenses, but now is the right time “to take a hard look at envi-ronmental insurance for your operation, whether you’re an owner, operator, non-operator of wells, if you have a portfolio of wells, either production wells or disposal wells, or you’re in the construction side, now you really need to think about it. Because if you had a gradual pollution issue, can you really afford to

take that type of hit?” Heft said. As claims go, it’s in severity, not frequency, where the risk lies. “It’s a severity based product,

meaning that when a claim does happen — it’s not going to happen often — but when a claim does happen it’s typically going to be large,” he said. Energy related companies may feel like they have some environmental coverage in

‘The claim is the wells weren’t constructed properly and sealed.’



magnitudes. Below magnitude 2.0, they are unlikely to be felt by humans. Those between mag-nitudes 3.0 and 5.0 will be felt. Those over magnitude 5.0 are likely to be damaging. In general, the bigger the volume of fluid injected or removed from a formation, the bigger the maximum potential earthquake,

Energy Production/Earthquake Link Calls for Sensible Risk ManagementBy John Kemp

Underground 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 frac-turing 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 build-ings. 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 frac-turing itself. Water, contaminated with salt, hydrocar-bons and even traces of naturally occurring radioactive material picked up from forma-tions 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

the produced water is disposed of under-ground 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 remov-al or injection of a large volume of fluid into rock formations can trigger earthquakes. The first and most famous example of man-made earthquakes or “induced seismicity” 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 earth-quakes have also been linked to the impound-ment of large volumes of water for hydroelec-tric power dams, geo-thermal energy plants, conventional oil and gas fields, enhanced oil recovery programs and mining. The magnitude and destructiveness of earthquakes are directly related to the sur-face area of the rock that ruptures by a sud-den slip. The magnitude of naturally occurring earthquakes follows a well understood dis-tribution. Most are very small, with progres-sively fewer occurrences of tremors at higher continued on page 10

Research has identified 17 areas in the central and eastern United States with increased rates of induced seismicity. Since 2000, several of these areas have expe-rienced high levels of seismicity, with substantial increases since 2009 that continue today. Source: USGS

USGS Cumulative Earthquakes: Cumulative number of earthquakes with a magnitude of 3.0 or larger in the central and eastern United States, 1973-2014. The rate of earth-quakes began to increase starting around 2009 and accelerated in 2013-2014. Source: USGS

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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 earth-quake risk far greater than anything current-ly associated with oil and gas production.

Regulating Fracking For some climate campaigners and envi-ronmental 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 prac-tical nor proportionate; the risk of earth-quakes 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.

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 thou-sands 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 campaign-ers to call for curbs on the practice. But it is vital to put the risk into perspec-tive. 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 mag-nitude 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.

And induced seismicity is not limited to oil and gas pro-duction. 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 geo-thermal power plant in north-ern 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 pro-gram 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 seis-micity due to undetected faults. The biggest danger comes from propos-als to lock away carbon dioxide under-ground as part of carbon capture and stor-age (CCS) schemes.


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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 driv-ers 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 bar-rel 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.

Commercial auto aside the insurance marketplace for energy businesses has plenty of capacity and pricing is competi-tive to down, which is great for the buyer, Collado said. “Oftentimes when there’s adversity in an industry, it is sometimes double-wham-mied by the insurance market. But in this particular situation, the energy environ-ment, we have a very positive buyers’ mar-ket. … 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 capaci-ty 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 activ-ity is absolutely continuing to increase,”

Blanquez said. Claims frequency continues to rise but it’s the claim amounts that are really soar-ing, he said. “The courts are ruling a much higher dollar amount than they were three

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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 gen-erate 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 prob-lems 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 prod-ucts 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.

Survey: High Growth Agencies Really Do Build Business Differently By Stephanie K. Jones

A survey of high growth insurance firms conducted and released late last year

found that such organizations hire dif-ferently and produce business differently than low growth firms. They also make use of specialized skills and research to build connections and net-works, while lower growth firms generally do not, according to Julie K. Davis, founder of Risk Communities LLC, a research, branding and marketing firm based in Austin, Texas. Speaking at the Independent Insurance Agents of Texas’ Joe Vincent Management Seminar, Davis said in 2014 her firm con-ducted a survey of 32 insurance industry organizations, including insurance agen-cies, insurance carriers, insurance whole-salers, law firms specifically serving the insurance sector and claim firms across the United States. Their sizes started at $1 mil-lion in annual revenues and went up there. The survey sought to determine how high-growth firms handled business chal-lenges, how they built and maintained consistent growth, the role of research and marketing budgets. In the 2014 survey, “we interviewed all of our participants and asked what were their most highest business challenges. Over half ranked talent attraction and retention and finding new pros-pects” as areas in which they struggle the most, Davis said. “What we found was those two were intermingled.” Other challenges included increased competition from different sources, and building and branding reputation. “Maintaining a technical competence was the lowest-ranked item,” Davis said. The surveyed firms knew there were many sources to get the education necessary to build insurance technical competence. When hiring, high growth firms valued specialized skills and expertise, Davis said

The high growth firms consisted of “indi-viduals or groups of individuals that were known in their niche. They had built-in con-nections and networks. They used social media, publishing and expert speaker and interviews at a very high level. They built business on the strength of who they were as compared to other firms.” Due to their niche identification, their net-working and social outreach, such firms found it easy to attract leads, “and many of them had a strong entrepreneurial track record of innovating new products,” she said. On the other hand, low or average growth firms typically did not have spe-cialty niches and self-identified as gener-alists. Employees at such firms tended to have high level technical skills “but they didn’t really have the skill set to build leads on their own. They depended on one or two rainmakers in the insurance agen-cy,” Davis said. The lower growth firms also had little

use for branding tools, such as social media, pub-lishing and expert speaking, and they usually did

not have an entrepreneurial track record when it comes to building businesses. Low growth firms focused on market quotes, quote comparison, and had little focus on the coverage element. The lower growth companies also did not necessarily seek to understand “the client’s unique risk profile and some of the challenges and some of the trends they might be facing,” she said. By comparison, high growth firms tend-

‘More than half of the firms surveyed used research as the primary tool to generate new business revenue.’

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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 scientif-ic, it was revealing. In conversations with drivers during his rideshare experiment, Waldrum found that a very large percent-age of the drivers who work for these companies didn’t really know much about

insurance requirements or about the coverage their respective com-panies provide. In addition, most didn’t tell their personal auto insur-ance 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 com-panies 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 compa-nies like Uber and Lyft probably do

Austin Rideshare Experiment Shows Drivers Lack Insurance Savvy By Stephanie K. Jones

Josh 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 profes-sionals see as problematic such as coverage gaps, and the amounts and types of coverage needed. Waldrum is the director of search engine optimiza-tion (SEO) at Austin, Texas-based 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

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.

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TEXAS COVERAGE

News & Markets

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 fur-thering 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 work-ers and workers’ compensation? Many jobs are being “reduced to free-

‘On-Tap,’ Temporary Employees Challenging Workers’ Comp: HartwigBy Denise Johnson and Andrew Simpson

The workers’ compensation industry must contend with a

fast-growing on-demand economy where jobs are filled via apps and more employees are temporary con-tractors. “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 sym-posium of the National Council on Compensation Insurance (NCCI). He said the on-demand econ-omy that includes temporary drivers, laborers, property own-ers-turned-landlords and indepen-dent professionals is transforming the American workforce and the insurance industry. Hartwig noted that on-demand services are not new. Home services provider Angie’s List started in 1995, at-home com-puter helpers The Geek Squad started in 1994, and Peapod began delivering grocer-ies in 1989. “But the on-demand world is exploding as is the demand for ‘on-tap’ workers,” he said. Need something done around the house? The Handy app can help. Hate doing laundry? Then just tap Washio. Want someone else to do just about any task? There’s an app for that: TaskRabbit. To find a lawyer, just visit lawyers.com; for a place to stay, there’s airbnb.com; and, of course, Lyft and Uber will take you for a ride. All of these services depend on temporary service providers. The effects of the on-demand economy are creeping into just about every insurance sector: personal and commercial auto, homeowners and renters, profession-al and other liability lines, and workers’

compensation. These services and their workers are raising many insurance and liability ques-tions. Insurance companies are beginning to “fill the many insurance gaps that arise,” but Hartwig predicts there will be a peri-od of court and legislative battles ahead before all the questions are answered.

Smartphone Speed Smartphones are the “breakthrough

technology” that has made the on-demand econo-my possible — globally, according to the I.I.I. econ-omist. Fifty percent of all adults globally have one. The demand for tempo-rary workers has increased two and three times more than for other workers

over the past five years and the trend is expected to continue, he told NCCI. Technology offers the ability to “match labor to jobs much faster and better than

Dr. Robert Hartwig

June 1, 2015 INSURANCE JOURNAL-TEXAS | 19www.insurancejournal.com

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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 cor-porations, 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 “with-out intrinsic or basic economic rights.” This view suggests there could be an ero-sion of stability, retirement benefits, other job benefits as well as health, liability and workers’ compensation insurance, accord-ing 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, con-tracted 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 them-selves, on-demand workers “will generally have no workers’ comp recourse if injured on the job.”

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 pop-ulation 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

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 inter-est, the on-demand econo-my 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 val-ued at more than $50 billion.

Transformational Tech The on-demand surge is just one exam-ple 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 devic-es, advanced robotics and artificial intelli-gence.



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 partici-pants in these new economic models with new products. Melissa Neis, vice president of Parr

The Rideshare Insurance ChallengeBy Stephanie K. Jones

Local communities, states and the insurance industry are all grappling

with the issue of finding workable solu-tions 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 com-mercial 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 consider-ations to help state and local policy-mak-ers who are crafting TNC laws or regula-

tions. In the paper, the NAIC points out that “though the largest TNCs provide commer-cial coverage, those TNC’s policies may not provide the same uninsured/underinsured motorist (UM/UIM) coverage, medical pay-ments 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 per-sonal auto policies exclude activities such

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obviously would have trans-lated into more expensive rides, as would a larger number of total rides taken. Waldrum also acknowl-edged 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.

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 com-pany 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 con-fused responses, where people really

weren’t totally sure when they were cov-ered 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 mainte-nance, 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

Farmers, USAA, Metlife and GEICO also have developed products for a limited mar-ket that address the “gap” period for TNCs. In addition, ISO has introduced two

new personal auto coverage options for

ridesharing drivers when they’re logged in but don’t have any passengers. One of ISO’s new options would apply from the time a driver logs in to the TNC platform until they’ve accepted a ride request. The other option would apply from when they log in to the TNC plat-form up until a passenger occupies their vehicle.

Insurance Brokerage in Chicago, said it’s probably “going to take time and experi-ence 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 pro-grams 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

TNC market in small steps, however. In November 2014, Erie Insurance in Indiana and Illinois began offering cov-erage for every part of the trip: before, during and after the hired ride through an endorsement to the personal auto policy that allows for business use, such as ridesharing. Erie said depending on consumer response it plans to expand the product to other states. Neis described Erie’s ridesharing endorsement as “state of the art” and said her agency gets “phone calls for it all the time. We’re adding drivers left and right.”



‘We’re adding drivers left and right.’

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