New Study Presents Strategies for Improving Transportation Network Company Insurance

Transportation network companies (TNC)—commonly referred to as “ridesharing” companies—have changed the face of the transportation industry over the last decade and a half. Uber first entered the “ridesharing app” scene in 2009, with Lyft and others following. This business model has disrupted a long-stagnant industry, spawned innovation, and made transportation by automobile more accessible to the masses. Yet companies in this space increasingly face hurdles, particularly as they relate to insurance and liability costs.

A new study by insurance expert and R Street Institute policy director Jerry Theodorou delves into the complex factors that create insurance challenges for the TNC sector. He identifies the issues that have made TNC insurance so complicated and lays out policies that, if implemented, can stabilize TNC insurance in ways that will benefit rideshare drivers, customers, insurers, the companies themselves, and their shareholders. A key issue in the TNC industry is that pricing insurance business rates commensurate with risk has proven challenging. TNC insurance is a commercial product, and factors that drive losses in this industry are similar to those that drive commercial auto losses.

One major factor is “social inflation,” a form of legal system abuse that R Street scholars have both written and testified on, driving larger courtroom awards, judgments, and settlements. In addition to this, several other factors contribute to loss trends. Increased involvement by attorneys in auto claims, which data from numerous sources cited in the study show to be on the rise, drives up average claim severity and the amount of time that passes until a claim is closed. Another factor is rising loss severity, enabled by attorneys learning the limits of insurance policies and structuring their demands as close to policy limits as possible. Problems around payment patterns are also an issue because, over the last decade, the duration of claims payments has stretched out over more years, resulting in higher costs before claims are closed.

Increased attorney advertising also plays a role and drives higher awards—including verdicts above $10 million, as detailed in a recent R Street webinar. Some plaintiff attorney firms receive funding from investment firms, which act as third-party litigation funders that bankroll litigation. Another problematic practice is pocketing “phantom damages.” Half of U.S. states allow full recovery of these funds, which represent the difference between medical services billed versus the lower amount actually paid to medical providers. Yet another contributor to inflated awards is regulatory inertia, which R Street analyzes extensively in its Insurance Regulation Report Card. In particular, timeframes to approve a rate filing for private passenger automobile insurance can range from just over two weeks to almost a year depending on the state.

Last but not least is the pervasive and growing problem of insurance fraud, one of the largest categories of white-collar crime, which costs $308.6 billion annually. An eye-popping fact Theodorou highlights is that if insurance fraud were eliminated, policyholder premiums would drop by approximately 10 percent. But this type of fraud is on the rise, especially staged automobile accidents executed by large criminal fraud rings. The problem is exacerbated by the fact that, according to a recent survey, people aged 45 and younger are more accepting of insurance fraud, as many believe it is a victimless crime.

The study explores all of these factors and pairs them with potential solutions. One useful intervention is to narrow the wide gulf in many states between required minimum liability limits for insurance policies and uninsured motorist and underinsured motorist (UM/UIM) limits, which represent the amount of money an insurance company will pay out if a policyholder is in an accident with a UM or UIM. Another strategy is to eliminate the “collateral source rule,” which permits injured parties to collect from their health insurer as well as from another source (in effect, double dipping). The recent rollback of this rule in Louisiana serves as a good example for other states to follow. It is also important to address phantom damage abuse—a tort reform issue currently debated in many states.

A key reform that other states can adopt is the “Maryland model,” which requires all payers to be charged the same rate for the same service at the same hospital. This applies to all payers—whether private, commercial, Medicare, Medicaid, or self-paid—and eliminates surprise billing. The model ultimately benefits TNC insurers by creating greater stability and predictability. Consequently, Maryland has relatively low health insurance premiums and the lowest costs for unintentional injury deaths.

Another area ripe for reform is occupational accident insurance (Occ/Acc), created for independent contractors who are ineligible for traditional workers’ compensation insurance. In recent years, this type of insurance has expanded to cover the gig economy, which includes rideshare drivers. Only workers classified as employees are eligible for workers’ compensation, so Occ/Acc provides insurance access for drivers and other contractors. As always, reforms that deter “ambulance-chasing” lawyers can also be helpful. A number of states have limited or outright banned the practice. Others, however, make it extremely easy, and reforms in these places would be beneficial.

Further, Theodorou’s study looks at the history behind certain regulations and notes that, on average, 14 percent of drivers lack insurance. UM/UIM is related to “no-fault” insurance, which was first introduced in the 1970s with the goal of instilling fairness and giving policyholders more benefits at a lower cost. Unfortunately, unintended consequences have included higher auto insurance prices and an increase in drivers who do not buy insurance at all. This prompted the state of Michigan, where no-fault insurance was initially introduced, to adopt a reform package in 2019. Detailed in the study, these reforms reduced Michigan’s average cost of auto insurance from $2,611 to $2,133 per year and moved the rate of uninsured drivers in the state from 25.5 percent to 19.6 percent in just three years.

Ultimately, noting that commercial automobile liability insurance has been the worst performing insurance line for close to a decade, Theodorou encourages TNCs to stay informed about trends in this industry as they pursue reforms. He concludes by explaining that some combination of the solutions laid out in this study can serve as a roadmap for TNCs and their drivers in the movement toward more reasonable and reliable insurance rates.