Rental society — insuring the new economy
When I was younger, I remember buying my first car and renting my first apartment, as exciting as it was to have the independence, I knew my dream was to one day own my own house. It was the standard for someone my age to set a similar goal, work hard, and strive to achieve. My wife and I did everything we could to save and cut expenses. This was a stressful journey. (As I indicated in career progression in insurance, at the beginning of an insurance career you are still learning and looking to add value to your organization so the compensation was good but not great on the “Front 9”. If you are an aspiring insurance professional, don’t worry it does get better in the “Back 9”.)
Finally saving up enough for our first house. We were living the American dream. As an insurance professional, I bought my first homeowners policy and I was living my dream.
Times are Changing
Unfortunately for the millennial generation, this progression seems harder to achieve. The rising cost of a college education and with the student debt burden young adults are coming out of college with, it seems unlikely they will be in the same position as me at that age. Also the millennial generation seems reluctant to jump into home-ownership after growing up in the Great Recession — and seeing the stress it has caused many.
Has “The Dream” changed? Or are individuals not financially capable of “The Dream”? Probably both, but according to the Huffington Post, “As tuition prices continue to rise at both public and private universities, more than 60 percent of all students take out loans, and the average college graduate has more than $24,000 in debt upon graduation.” I think the stress of student debt is a huge burden that has changed The Dream.
This data shows it is unlikely a graduate will be focusing on the same things of my generation. Savings, marriage, house, kids…etc. According to Goldman Sachs, parenthood, marriage, buying a home and leaving the nest are all occurring later in life.
Nation of debt
This debt crisis isn’t exclusive to the millennial generation. According to the Debt Clock, the U.S. is over $19.2 trillion at the time of this article (and rising). This debt will have to be addressed either by repayment or inflation, I believe the latter is the approach we as a country have decided to take. However, this debt will have a cost on all citizens, businesses, etc. Thereby lowering either purchasing power or through increased taxes, compounding the issue the Millennial generation is feeling from student debt on everyone.
The global landscape isn’t much better as nations are struggling with debt, sluggish economies, and negative interest rates.
The two debt related issues above are two of many reasons why we have transitioned into more of a renter society. But this transition has some major impacts on asset ownership, asset protection, insurance, and the future of the global economy. These are some signs of our transition to a renter nation:
Inventory of used cars growing fast
The auto industry has continued to build at a rapid pace, however, the consumer has shifted as a greater percentage to a lessor vs. a buyer. The surplus of used cars is projected to grow as lessors are returning their cars after the lease is up. This is a sign of the shift, according to the Wall Street Journal, dealers are looking to address the used car inventory surplus with new interesting leases, for example Leasing a used car.
Millennials own less assets
Renting goods and services is a growing portion of the economy. According to Goldman Sachs, “It’s not just homes: Millennials have been reluctant to buy items such as cars, music and luxury goods. Instead, they’re turning to a new set of services that provide access to products without the burdens of ownership, giving rise to what’s being called a “sharing economy.”
Growth in the Sharing economy
These trends are just some of the trends that will shape the future economy. The changes that are occurring within the industry as well as the changes to the consumer are at a faster pace then ever before. In order to remain relevant, Insurance as a product must close the gap between insured and economic loss, otherwise face major disruption and competition.
The growth in sharing economy and decline in asset ownership will have a few major changes on the insurance industry and insurance consumers. The life and health industry will also be effected as individuals are starting families later in life, buying later in life or different forms of life insurance, health insurance purchases and the impact of the Affordable Care Act.
Some questions that will need to be answered is:
- When do I own the asset?
- When does my responsibility for the shared asset start/end?
- When is the asset transferred?
- Who is an employee? Who is an independent contractor?
- When does work start if you are a telecommuter? or working from home?
- How do I price the exposure when someone is using rental clothing, cars, etc.?
- Autonomous vehicles and the transition from personal auto liability to product liability?
- What are the differences between nations? How litigious will other nations become?
- What policy language will need to be crafted to address these changes?
- How is public policy changing?
All industries are looking for solutions to address this shift in consumers and the global economy. The insurance industry, as a direct aid to economic growth, is well aware of these issues and looking to come up with new solutions. For example, the Ride Sharing insurance endorsement, to help insure drivers who use their personal vehicles to make money as livery services.
But some of the solutions also take time for claims to occur, be reported, to play out in the court system, to understand the legal implications, and spot trends in civil actions. The implementation of new products using old data, may present some issues in the emergence or as the development of claims occurs.
Recommendation for consumers
Be active, stay informed, continue to understand risk management, and follow the news for changes in the regulatory or legal landscape. Regulators are always playing catch up with the market and are trying to craft new laws or policy around changes in the economy or technology. As a consumer, you may find you are under-insured or exposed to risk if you develop a passive strategy to risk.
Work with your broker or agent to help craft a good risk management program, loss control, insurance and risk financing tools.