The traditional employer-employee relationship is being replaced by the emergence of an alternative workforce – temporary, on-call contract workers, freelancers, independent contractors and gig workers – that leaves no generation untouched. The alternative workforce is expected (according to governments and organisations such as the World Economic Forum) to increase dramatically over the coming years due to a combination of factors, including firms’ cost pressures, technological adoption, and changing workplace cultures.
The alternative workforce differs from traditional employment in terms of both level and security of income and, consequently, access to some aspects of social security or insurance protections (World Employment Confederation, 2016). Whilst the alternative workforce is not new, novel developments are the scale it is reaching and its extension to all income levels. The greatest challenge the alternative workforce presents incumbent financial services firms with is income volatility. Many incumbents have not evolved their products fast enough to keep pace with this trend. This challenge is exacerbated by the fact that Millennials – for whom the share of the labour force in alternative contractual relationships is the largest of all generations – will represent the highest segment of the global workforce in the next decade (FT, 2018).
In “Rise of the alternative workforce: How banks must respond”, we examined how incumbent banks should use two innovation levers: product (i.e. credit and savings products) and pricing (i.e. usage-based pricing). Turning to incumbent insurers, the Deloitte-Lloyd’s of London report “Squaring risk in the sharing age”, examined how they should use the product innovation lever to meet the demands of the alternative workforce. In this blog, we turn to how incumbent insurers need to innovate in terms of pricing strategy in order to meet the demands of the alternative workforce.
Trend – Rise of the alternative workforce
The composition of the workforce is changing dramatically. Research by Deloitte (Deloitte, 2018) found that only two fifths of survey respondents – across 11,070 business and HR leaders – reported that their organisations are primarily made up of salaried employees; and that employers expect to increase dramatically their dependence on contract (50%), freelance (23%) and gig workers (13%) over the next few years (see Graph 1 (Deloitte, 2018)).
Although segments of the alternative workforce differ, some general observations can be made about their characteristics. In terms of level and security of income, the alternative workforce earns, on average, less than its traditional full-time employed counterparts and has a more volatile income. In terms of protection, the alternative workforce benefits from less social security and employer provided protection such as life insurance, health insurance, pension schemes, and is often without insurance to fully cover claims regarding their business dealings, e.g. lawsuits property damage. As such, the alternative workforce is more exposed to risk than the traditional workforce.
Implication – How incumbent insurers must respond
The most frequent challenges that alternative workforce customers face in terms of insurance include: being underinsured, underestimating their own risks, and lacking a sufficient level of understanding on how insurance products could apply to them (FT Adviser, 2017).
Specifically, a Deloitte and Lloyd’s of London YouGov Survey in 2018 identified that on average, among adults who have sold/lent products and services in the sharing economy in 2015 to 2018, across the US, China, Germany, the UK, France and the UAE, only:
- 24% took out life insurance;
- 18% took out a pension; and
- 29% took out health insurance.
Although many^1 alternative workforce customers involved in the sharing economy do hold some type of traditional personal insurance (e.g., homeowners, renters, auto), these often fail to cover the distinctive array of business risks incurred. Indeed, it can be difficult for incumbent insurers using traditional coverages to apply these to users of shared platforms due to the blurred lines between personal and commercial insurance.
A key challenge to fill these gaps of providing insurance products that are tailored – and suitable – for the sharing economy customers will be pricing innovation through a move away from pricing based on traditional actuarial models based on stable and full-time employment assumptions. Indeed, pricing innovation can drive incumbent insurers’ profitability and ability to compete (i.e. by understanding the gig workforce customers’ specific needs and willingness to pay so as to offer products at lower prices or at higher margin).
The same survey found a minority wanted insurance against the risks of selling or lending goods and services in the sharing economy provided automatically by the websites that facilitate these transactions. The most commonly reported of these risks were losing a possession, not being paid and falling ill. In Germany 29% wanted this insurance. In other surveyed countries demand was lower:
- France - 18%
- US - 18%
- UAE - 21%
- China - 23%
- UK – 24%
In addition, willingness to pay for this was generally low. For example, in Germany 36% would not pay more than €50 per year. This indicates that affordability is key for insurance tailored to alternative workers. That said, this low general level of willingness to pay could be fine-tuned by further understanding gig workforce customers’ specific needs and where pockets of higher willingness to pay exist.
As a result, incumbent insurers could opt for usage-based pricing so as to fine-tune their pricing per product as opposed to across products and increase take up of cover. Where cover is switched on or off depending on whether a gig worker is working (as per an app or website used to book work), one key advantage of usage-based pricing is that it offers incumbent insurers a degree of financial predictability. This ability to price usage in near real-time, in turn, helps to combat fraudulent claims and/or undercharging. This is important given the relatively sporadic nature of gig work and therefore the characteristics of the alternative workforce customers. The bottom line is that usage-based pricing is a way to develop profitable products that also enhance customer relationships.
Pricing innovation – like product innovation – is not immune to conduct risks, in particular in terms of customer vulnerability. To mitigate against customer vulnerability, incumbent insurers will need to ensure that price differences between product variations are justifiable and that usage-based pricing does not lead to unacceptable price discrimination against the gig workforce customers.
1 - Estimated on the basis of the alternative workforce customers who do not have insurance (Deloitte and Lloyd’s of London YouGov Survey, 2018). Total sample size was 8,527 adults. Fieldwork was undertaken between 8 and 22 February 2018. The survey was carried out online. The figures have been weighted and are representative of all adults (aged 18+) in each country.)