This is not too surprising for people who are in the short-term / vacation rental market. If you regularly rent out your property short-term (when I lived in Santa Cruz, CA, a lot of people did), whether it's as a B&B, whole-property rental, boarding house, or anything similar, you typically need a completely different kind of insurance from regular homeowner's insurance. They exist, but are more expensive (unsurprisingly, since the risk of payout on the insurer's part is also higher).
The tricky thing with AirBnB, I think, is that a lot of people are in that market, but don't view themselves as "really" being in it. Even some people who are for all practical purposes running a full-time B&B don't see themselves as doing so, so they don't know about some of the standard stuff you have to do to safely operate in such a market.
The company was founded in 1919 by General Motors Corporation as the General Motors Acceptance Corporation (GMAC) to be a provider of financing to automotive customers. Over the following years the business has expanded to include insurance, online banking, mortgage operations, and commercial finance.
...
In 2006, General Motors Corporation sold a 51% interest in GMAC to Cerberus Capital Management, a private equity company. Also in 2006, GMAC divested a majority stake of GMAC Commercial Holdings, its real estate division, to a trio of investors — Goldman Sachs, KKR and Five Mile Capital Partners — thereby creating Capmark Financial Group Inc. Capmark later filed for bankruptcy and was acquired in part jointly by Leucadia and Berkshire Hathaway.
On December 29, 2008, the United States Department of the Treasury invested $5 billion in GMAC from its $700 billion Troubled Asset Relief Program (TARP).
...
On May 21, 2009, the U.S. Treasury announced it would invest an additional $7.5 billion in GMAC LLC, which gave the U.S. government a majority stake in the company.
On December 30, 2009, the U.S. Treasury department said that they would invest another $3.8 billion in GMAC because the company had been unable to raise additional funds in the private sector. This raised the total government investment in GMAC to $16.3 billion.
...
As of January, 2012, TARP had about $12 billion invested in Ally. The government stake represented a 74% ownership interest in Ally. In March, 2012, Ally failed the Federal Reserve's financial "stress test" for capital adequacy. The company said in a statement that the Fed's “analysis dramatically overstates potential contingent mortgage risk”. A possible outcome would be a requirement to raise additional capital.
On May 15, 2012, the company put its ResCap subsidiary into Chapter 11 bankruptcy after it failed to make an interest payment of $20 million on unsecured debt. ResCap had written off $22 billion in mortgages in 2009, 2010, and 2011 much of it subprime mortgages. The move was seen as attempt for the company to focus on its profitable core business of auto loans and direct banking (Ally showed a $2.72 billion profit in 2011 in its auto finance unit but had a $402 million loss at ResCap).
It seems pretty clear that mortgages and derivative instruments built on top of them are what really did them in, just like so many other banks.
That said, AFAICT the lending models for cars were no more sophisticated than those for houses. Lots of concern over individual borrower risks, but not much at all for an economic downturn that would sour many many loans at once and depress the value of the collateral at the worst possible time.
Not very likely. Insurance is a highly regulated business (at the state level, in the U.S.), and insurers need to satisfy regulators that they have the capital reserves to cover their customers' claims. It's not something that a small company can easily do.
I could see AirBnB reselling someone else's insurance perhaps. I agree it's less likely they'd run the actual insurance business themselves. Besides the capital and compliance parts, property insurance is also fairly labor-intensive, requiring a large organization to do it on a national basis (let alone international). Claims investigation is pretty fact-specific, requiring you to have staff on the ground more or less everywhere you sell insurance, who are able to interface with police departments, inspect properties, investigate fraud, litigate claims, etc. (And if you skimp on the claims investigation bit, you'll get eaten alive by scammers with false insurance claims.)
> I could see AirBnB reselling someone else's insurance perhaps.
If AirBnB and Uber want to "go legit," this would be a good way to do it: bargain with insurers for a discounted group rate, then require their "contractors" (i.e. employees) to be properly insured. They could even do the research on homeowner's insurance themselves, and make it nearly painless for employees to make sure they're obeying the law.
It's pretty standard for one company to be responsible for sales and claims, and another responsible for actually underwriting. The latter is much more regulated in most places (what you can invest in, what loss ratio you have to maintain, pricing, etc). AirBnB could probably do the first if they wanted to.
In which case, it seems like AirBnB and Uber could simply _call_ themselves insurance companies, sell a thing called insurance, and ignore all the regulations. They can say sorry later.
I doubt it, because they then couldn't walk around whistling Dixie and deny knowing that their business partners needed something that most don't have.
Also, how do you underwrite insurance and remain ignorant of whether or not operating as a AirBnB "host" is legal?
They really should, just like Uber should get insurance for their drivers. Even if you ultimately have the end providers bearing the premiums, Uber and AirBnB are in a much better position to negotiate premiums and coverage at scale.
The main issue with insurance is the credit risk, people may not pay up on claims. It is easier if combined with savings and the amounts are capped. Lloyds of London used to be P2P, with the names who underwrote the market being individuals but they were bankrupted by asbestos claims.
The reason they are centralized dinosaurs is to ensure they are large enough to cover claimants in the case of disasters. They need to be large to mitigate risk. Even as large as they are, they sometimes still fail.
Insurance is pretty basic, unglamourous work. Do you think a system of insurance startups, going bankrupt every time there's a large series of claims, is the way to go?
You can be a small insurer and survive disasters. That's what the reinsurance market is for. Otherwise, local insurance companies would go bust every time there was a geographically localised disaster.
Maybe? More likely it's packaged up into a derivative product which can then be spread among any size of institution. There's nothing fundamental about the reinsurance market that requires massive companies; that's the genius of it.
nothing to do with airbnb, but these guys: https://en.wikipedia.org/wiki/Lloyd%27s_of_London spring to mind when you say 'disrupted'. - It is on the surface almost a communal effort, with profit and loss being spread over the members. Read a little more though and see the allegations of malfeasance and fraud we've all come to expect with a large corporate entity.
I bet the reason is that most airbnb hosts haven't been checking or asking for riders, since they're violating local ordinances anyway, and riding in a rather grey area. The risk is small, so most have just been eating it. So who has been checking?
People who have had repeated problems that have some specific ongoing source or reason due to something about their property or the way they conduct themselves. If so, these people are certainly about to file a claim. This means this is a terribly toxic pool of people, i.e. not the whole airbnb community. if this is true, airbnb has a really easy solution: just offer its entire customer base to an insurer, which solves the problem that most of its customers haven't been signing up for special coverage.
This is actually close to what it's doing, though with the difference is that it sounds like it's being white-labelled. Maybe there is no national insurance company that can accept every airbnb in every market, which is why airbnb doesn't use the name of one for its own program.
Why? Owning and home and living in it present different risks than owning a home and renting it out. Likewise, driving a car for personal use is different than driving it for hire.
Home owners and car owners need to be upfront and honest with their insurance companies.
That's true, but Uber/Lyft is not sharing a car -- you're being paid to take someone from point A to point B. You're not letting them take your car, use it, and then bring it back.
I understand your point, but why even mention Uber when the parent specifically said "car sharing"? Likewise, why does the parent bring the topic of "house sharing" when Airbnb is clearly renting, and not sharing?
I just feel that too often we are putting professional services and sharing on the same bag, which I find a bit alarming.
Get steamrolled by who? Insurers are in the business of mitigating risk by paying out on unforeseeable losses. There are more than enough people who purchase private non-commercial insurance for them to make a profit, why should they or the insurance companies' shareholders subsidize the people who want to engage in commercial activity but don't want to pay the costs of doing things to commercial standards? You don't get isnurance because of the low risk of bad things happening, you get it because of the potential liabilites on the rare occasions when they do.
Say someone is at an AirBnB, falls down the stairs, breaks his/her neck, and is paralyzed. AirBnB's million dollars of coverage may not be enough to meet the medical costs of such an injury, to say nothing of other damages. So the injured party's lawyer and/or medical insurers will go after the host's homeowner's insurance or else after the host's property or income stream.
Hotels aren't expensive because all hotel owners are greedy people intent on bleeding their customers dry (although such owners exist); to a large extent they reflect the significant costs of doing business.
There are insurers who accommodate these customers - lots of them: who do you think is insuring hotels and regular Bed and Breakfasts? The problem, as ever, is people wanting the benefit of commercial use insurance without the pain of paying commercial use insurance rates.
Ms. Pfeffer eventually found a solution, but it wasn’t easy. And this is mostly the fault of the insurance industry, which doesn’t always want to answer questions about this sort of activity, whose agents aren’t always as knowledgeable as they should be and whose own policy language can be incredibly confusing.
This isn't the "fault" of the insurance industry. Homeowners insurance policies mitigate the standard risks of residences. They don't cover hotels, which have wildly different risks due in part to the radically different incentives and risk tolerances of hotel room occupants.
This whole article is premised on the idea that it shouldn't be hard to figure out which homeowner's policies can be abused to cover ad-hoc hotel businesses. I'm alarmed that there are policies that do work that way; if I were a Liberty Mutual customer, I'd be painfully aware that my premiums took into account the idea that I might rent out my own house that way.
I sort of adore Airbnb and have never had a bad experience with it, but everyone in the Airbnb ecosystem appears to be relying on denial in one way or another.
If a Liberty Mutual policy's premiums specifically take said activity into account, their actuaries must have considered that activity in the process of putting it to paper, yes? At which point (it seems to me) calling it 'abuse' is begging the question.
If (and I think this more likely) Liberty Mutual, Ms Pfeffer, or both have failed to correctly consider the implications of their contract, then this becomes a question of civil law (perhaps of reasonableness?) that's difficult to answer without access to said document and a good legal opinion.
The possible implications for the homeowners insurance industry (and for the Airbnb ecosystem) might be interesting, but meaningfully (if tacitly) assigning fault is outside the practical scope of a public discussion, don't you think?
1) Insurance companies mitigate a lot of risks that are a lot rarer. It's pretty common to do a short-term rental, rent out a room to a roommate. Doing the occasional Airbnb rental is essentially the same thing.
2) Insurance companies should have a straightforward answer to a reasonable question. Not covered, covered if rental income < $15,000 , needs a rider, etc. Of course, at some point you're operating a B&B and you need to get commercial insurance, and they should be able to tell you at what point it would be considered a business.
3) If Airbnb's secondary coverage is predicated on a primary coverage that is not standard or impossible to get, then yeah, it's denial. If it's predicated on a normal homeowner's liability policy with a standard rider, seems pretty reasonable. Maybe I'm missing something.
4) If the liability is hard to predict now that Airbnb is as big as it is, there probably haven't been that many claims.
The commonality of a short-term rental isn't the issue. What matters is that the liability changes massively as soon as you charge someone money to come into your home, rather than inviting them as your guest.
- Chubb is an upmarket company - $15k revenue limit
- Liberty Mutual is a mass-market company - 'occasional' rental, cannot be 'engaged in business' - rather vague
Problem is the vagueness, and the Chubb and Liberty Mutual agents contradict the firm's spokespeople, which is kind of their fault. They should get it together when it comes to Airbnb. Pretty common, easily insurable use case with a known claim history.
Of course, if you want to run a hotel business, you need a commercial policy, and many if not the vast majority of Airbnb-ers skirt the rules.
So yeah, when you do that, there is a massive change in liability, and yeah, if you don't get the right insurance there's denial.
If somebody trips and falls and sues you, or burns down your place, and the insurance company says you were running a hotel business and denies your homeowner's claim, you're screwed. I don't know what Airbnb's umbrella does for you then.
Yea, this article is bullshit. It says "The agent made some noises about installing fire escapes from every bedroom and buying a commercial policy that might have cost more than her annual rental income, but that was out of the question." In other words, "the insurance company was super fucking clear in answering her questions, but she really didn't like their answers so pretended it was confusing".
So insurance companies don't like it when someone carries out commercial activities (with increased risk) on a residential policy...
Makes sense. To be fair, (in theory at least), the increased risk is spread among the remaining residential insurance payers who are not engaging in commercial activity. So once again, (as with taxation), borderline legal, er, I mean "innovative sharing" activity is imposing a financial cost on the rest of society.
It seems like an enterprising insurance agent who understood this issue could do brisk business in writing new insurance policies by papering the town with postcards saying some variant of "Don't want your homeowner's insurance policy cancelled for using Airbnb? Give us a call -- we'll introduce you to a more appropriate policy."
If you wanted to pitch a company on something you could build for them, the above activity suggests a fairly straightforward one-day consulting engagement which you could credibly promise as being worth thousands of dollars.
I have less confidence that renter understand their needs. Getting "AirBnb" marketed insurance would be an uphill battle of mind share. Too much of the AirBnb competitive advantage is based on avoiding legitimate business expenses, like hotel taxes and liabilities.
It would require a high profile case of an uninsured renter losing big on a civil lawsuit to change renter's approach. Too many think they are not businesses. They do not understand they've left the warm and safe world of coddled house owners and entered the cold and uncertain land of liability and responsibility. This is no longer the land of mortgage subsidies, mortgage issuance.
These renters are often pathological customers for their suppliers. People who've rented an apartment and are sub-leasing to strangers. Utility customers not paying commercial rates for garbage collection. They are re-selling residential internet against TOS. Just about ever form of price discrimination businesses have setup to favour home owners is getting abused in Airbnb hotels.
Airbnb renters are going to need convincing before they increase their cost basis.
Entrenched interests refuse to budge on issues related to evolving markets. Smaller, more nimble, more open-minded companies see opportunity and take market share. Eventually entrenched interests either lose market share (no longer as entrenched as they once were) or they catch up.
48 comments
[ 5.3 ms ] story [ 116 ms ] threadThe tricky thing with AirBnB, I think, is that a lot of people are in that market, but don't view themselves as "really" being in it. Even some people who are for all practical purposes running a full-time B&B don't see themselves as doing so, so they don't know about some of the standard stuff you have to do to safely operate in such a market.
For that matter GM has offered insurance deals before: http://www.autoblog.com/2011/07/10/free-car-insurance-from-g...
From wiki:
The company was founded in 1919 by General Motors Corporation as the General Motors Acceptance Corporation (GMAC) to be a provider of financing to automotive customers. Over the following years the business has expanded to include insurance, online banking, mortgage operations, and commercial finance.
...
In 2006, General Motors Corporation sold a 51% interest in GMAC to Cerberus Capital Management, a private equity company. Also in 2006, GMAC divested a majority stake of GMAC Commercial Holdings, its real estate division, to a trio of investors — Goldman Sachs, KKR and Five Mile Capital Partners — thereby creating Capmark Financial Group Inc. Capmark later filed for bankruptcy and was acquired in part jointly by Leucadia and Berkshire Hathaway.
On December 29, 2008, the United States Department of the Treasury invested $5 billion in GMAC from its $700 billion Troubled Asset Relief Program (TARP).
...
On May 21, 2009, the U.S. Treasury announced it would invest an additional $7.5 billion in GMAC LLC, which gave the U.S. government a majority stake in the company.
On December 30, 2009, the U.S. Treasury department said that they would invest another $3.8 billion in GMAC because the company had been unable to raise additional funds in the private sector. This raised the total government investment in GMAC to $16.3 billion.
...
As of January, 2012, TARP had about $12 billion invested in Ally. The government stake represented a 74% ownership interest in Ally. In March, 2012, Ally failed the Federal Reserve's financial "stress test" for capital adequacy. The company said in a statement that the Fed's “analysis dramatically overstates potential contingent mortgage risk”. A possible outcome would be a requirement to raise additional capital.
On May 15, 2012, the company put its ResCap subsidiary into Chapter 11 bankruptcy after it failed to make an interest payment of $20 million on unsecured debt. ResCap had written off $22 billion in mortgages in 2009, 2010, and 2011 much of it subprime mortgages. The move was seen as attempt for the company to focus on its profitable core business of auto loans and direct banking (Ally showed a $2.72 billion profit in 2011 in its auto finance unit but had a $402 million loss at ResCap).
* Which would have the fortunate side-effect of encouraging its parent to develop safer cars
That said, AFAICT the lending models for cars were no more sophisticated than those for houses. Lots of concern over individual borrower risks, but not much at all for an economic downturn that would sour many many loans at once and depress the value of the collateral at the worst possible time.
If AirBnB and Uber want to "go legit," this would be a good way to do it: bargain with insurers for a discounted group rate, then require their "contractors" (i.e. employees) to be properly insured. They could even do the research on homeowner's insurance themselves, and make it nearly painless for employees to make sure they're obeying the law.
You can't use that word. You have to call it "protection sharing".
Also, how do you underwrite insurance and remain ignorant of whether or not operating as a AirBnB "host" is legal?
The reason they are centralized dinosaurs is to ensure they are large enough to cover claimants in the case of disasters. They need to be large to mitigate risk. Even as large as they are, they sometimes still fail.
Insurance is pretty basic, unglamourous work. Do you think a system of insurance startups, going bankrupt every time there's a large series of claims, is the way to go?
The risk is still being off-loaded to massive reinsurance companies.
People who have had repeated problems that have some specific ongoing source or reason due to something about their property or the way they conduct themselves. If so, these people are certainly about to file a claim. This means this is a terribly toxic pool of people, i.e. not the whole airbnb community. if this is true, airbnb has a really easy solution: just offer its entire customer base to an insurer, which solves the problem that most of its customers haven't been signing up for special coverage.
This is actually close to what it's doing, though with the difference is that it sounds like it's being white-labelled. Maybe there is no national insurance company that can accept every airbnb in every market, which is why airbnb doesn't use the name of one for its own program.
Home owners and car owners need to be upfront and honest with their insurance companies.
I just feel that too often we are putting professional services and sharing on the same bag, which I find a bit alarming.
Say someone is at an AirBnB, falls down the stairs, breaks his/her neck, and is paralyzed. AirBnB's million dollars of coverage may not be enough to meet the medical costs of such an injury, to say nothing of other damages. So the injured party's lawyer and/or medical insurers will go after the host's homeowner's insurance or else after the host's property or income stream.
Hotels aren't expensive because all hotel owners are greedy people intent on bleeding their customers dry (although such owners exist); to a large extent they reflect the significant costs of doing business.
This isn't the "fault" of the insurance industry. Homeowners insurance policies mitigate the standard risks of residences. They don't cover hotels, which have wildly different risks due in part to the radically different incentives and risk tolerances of hotel room occupants.
This whole article is premised on the idea that it shouldn't be hard to figure out which homeowner's policies can be abused to cover ad-hoc hotel businesses. I'm alarmed that there are policies that do work that way; if I were a Liberty Mutual customer, I'd be painfully aware that my premiums took into account the idea that I might rent out my own house that way.
I sort of adore Airbnb and have never had a bad experience with it, but everyone in the Airbnb ecosystem appears to be relying on denial in one way or another.
If (and I think this more likely) Liberty Mutual, Ms Pfeffer, or both have failed to correctly consider the implications of their contract, then this becomes a question of civil law (perhaps of reasonableness?) that's difficult to answer without access to said document and a good legal opinion.
The possible implications for the homeowners insurance industry (and for the Airbnb ecosystem) might be interesting, but meaningfully (if tacitly) assigning fault is outside the practical scope of a public discussion, don't you think?
2) Insurance companies should have a straightforward answer to a reasonable question. Not covered, covered if rental income < $15,000 , needs a rider, etc. Of course, at some point you're operating a B&B and you need to get commercial insurance, and they should be able to tell you at what point it would be considered a business.
3) If Airbnb's secondary coverage is predicated on a primary coverage that is not standard or impossible to get, then yeah, it's denial. If it's predicated on a normal homeowner's liability policy with a standard rider, seems pretty reasonable. Maybe I'm missing something.
4) If the liability is hard to predict now that Airbnb is as big as it is, there probably haven't been that many claims.
- State Farm is a mass-market company - no Airbnb
- Chubb is an upmarket company - $15k revenue limit
- Liberty Mutual is a mass-market company - 'occasional' rental, cannot be 'engaged in business' - rather vague
Problem is the vagueness, and the Chubb and Liberty Mutual agents contradict the firm's spokespeople, which is kind of their fault. They should get it together when it comes to Airbnb. Pretty common, easily insurable use case with a known claim history.
Of course, if you want to run a hotel business, you need a commercial policy, and many if not the vast majority of Airbnb-ers skirt the rules.
So yeah, when you do that, there is a massive change in liability, and yeah, if you don't get the right insurance there's denial.
If somebody trips and falls and sues you, or burns down your place, and the insurance company says you were running a hotel business and denies your homeowner's claim, you're screwed. I don't know what Airbnb's umbrella does for you then.
Makes sense. To be fair, (in theory at least), the increased risk is spread among the remaining residential insurance payers who are not engaging in commercial activity. So once again, (as with taxation), borderline legal, er, I mean "innovative sharing" activity is imposing a financial cost on the rest of society.
If you wanted to pitch a company on something you could build for them, the above activity suggests a fairly straightforward one-day consulting engagement which you could credibly promise as being worth thousands of dollars.
It would require a high profile case of an uninsured renter losing big on a civil lawsuit to change renter's approach. Too many think they are not businesses. They do not understand they've left the warm and safe world of coddled house owners and entered the cold and uncertain land of liability and responsibility. This is no longer the land of mortgage subsidies, mortgage issuance.
These renters are often pathological customers for their suppliers. People who've rented an apartment and are sub-leasing to strangers. Utility customers not paying commercial rates for garbage collection. They are re-selling residential internet against TOS. Just about ever form of price discrimination businesses have setup to favour home owners is getting abused in Airbnb hotels.
Airbnb renters are going to need convincing before they increase their cost basis.
Entrenched interests refuse to budge on issues related to evolving markets. Smaller, more nimble, more open-minded companies see opportunity and take market share. Eventually entrenched interests either lose market share (no longer as entrenched as they once were) or they catch up.