Bermuda based James River Insurance announced recently that they could no longer carry one of their biggest clients: Uber. This Uber news represents just the latest challenge facing the once red-hot, but currently struggling, ride-sharing company.
At one point, James River Insurance was an early pioneer of issuing policies to transportation network companies, including ride-sharing services such as Uber. Late last year, however, representatives of James River Insurance announced that the risk had grown too great to guarantee profitability. It also admitted that it had incorrectly priced policies while providing coverage.
James River Insurance announced the dropping of the policies in October. With the exception of claims awaiting processing, all policies ended on December 31.
Uber’s Florida and California Problem
Two states, Florida and California, caused the lion’s share of James River Insurance’s problems with Uber.
According to Insurance Journal, Uber’s Florida issues caused “outsized” problems in policy coverage. A much larger than an average number of uninsured and underinsured drivers in the state created an unacceptable atmosphere of risk.
Issues related to Florida alone, however, did not lead to the policy cancellation. Another source of trouble came from California’s anti-gig law that took effect on January 1. This legislation virtually ended freelance work in the state, including that with ride-sharing companies such as Uber.
Adam Abram, James River Insurance executive chairman, and the chief executive officer told Insurance Journal that, “We believe (it) will adversely alter the claims profile for ride-share companies.” This came after Uber agreed to substantial premium increases to cover policy challenges already affecting profitability in 2016 and 2017.
A New Type of Business Brought a New Type of Risk
When James River Insurance opened coverage for Uber, the company still basked in an economic and cultural glow. Traditional taxicab companies, many of which benefited from local regulations, could not compete with Uber’s service model. They also could not respond as quickly, in most cases, to ride requests.
Abram noted to Insurance Journal that “In Uber, we wrote a new type of risk that originally seemed to be highly profitable.” Unfortunately, insurers discovered that they had underestimated their exposure and lost millions, as Abram admitted, “Candidly, in some years, we mispriced the risk.”
In 2019, the company had to boost cash reserves by $57 million to cover $50 million in losses on theUber account alone. Last November, it took out over $1 billion in funds to cover claims related to Uber. The negative Uber news comes on top of the losses that auto insurance companies have racked up over the past nine years on conventional policies.
Although premiums had already increased considerably, the market shock from California’s new gig employment laws served as the last straw.
Additional pressures came from losses in James River’s other auto insurance offerings. As James Auden, managing director of Fitch’s Insurance Ratings Group explained to Insurance Journal, “Pricing increases alone have been insufficient.”
He went on to explain that, “the chronic underwriting losses in commercial auto in the last eight years reveal a need for change in several areas including risk selection, underwriting practices, and claims.”
The re-evaluation of acceptable risk in the new insurance market climate, plus the losses from the account, made Uber an expendable client.
Uber Growth Contributes to Company Woes
One of the issues facing Uber was its rate of growth. The firm grew too big, too fast as it raced to extend its network globally. The once agile company found strong competition in the United States from Lyft. In Europe and Asia, newer ride-sharing firms such as Bolt have overtaken Uber in usage.
Competition in Russia, China, and Southeast Asia has pushed the company from these areas entirely.
Uber’s expansion was spurred by pressure from a possibly unsustainable business model. As financial expert Stephen McBride explained in Forbes, rising expectations of driver pay converged with the ballooning of the company’s largest expense, which was and is insurance.
The company’s insurance needs cover more than simply the cars used to ferry clients. They also must obtain insurance for workmen’s compensation, general liability, cyber incidents, and other challenges faced by a digital age company.
Uber’s solution in addressing these problems, as McBride explains, was in global expansion. While it entered markets and established itself easily, it only prospered when it faced no competition. When new services entered the market, Uber was neither well enough established, nor equipped as a company to respond effectively.
In 2018, Uber lost over a billion dollars. In the first quarter of 2019 alone, it lost five times that amount. With the likely loss of lucrative markets in California, it is difficult to say what the 2020 impact will be.
James River Insurance’s announcement did give Uber enough time to work with Allstate, Progressive, Farmers, and others to achieve a seamless transition of coverage.
James River Insurance Ratings Not Affected
Despite taking tens of millions in losses and paying out over a billion in claims, James River Insurance’s industry ratings would remain unchanged, according to rating agency A. M. Best
Uber and related losses were balanced out by a 72 percent increase in its non-commercial auto insurance policies.
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