Lyft allots $863.7 million to a subsidiary for restricted reinsurance trust investments used to protect the company against liability claims. The disclosure is found in one short section of the S-1 initial public offering (IPO) document filed by Lyft with the U.S. Securities and Exchange Commission on March 1, 2019. The securities filing sheds some light on the challenges of insuring against auto-related risks and lowering costs in the ride-hailing business.
Lyft faces a large variety of auto-related risks the instant a Lyft driver logs in to notify potential passengers of their location and availability on the Lyft app, throughout the trip, and until the rider has been dropped off at his or her destination. As opposed to operations-related risks which are faced by nearly all businesses regardless of industry, these industry-specific auto-related risks may include bodily injury, property damage, uninsured and under-insured motorist liability.
Insuring against these auto-related Lyft insurance risks through a third party could be an excessively costly expensive for the company. The reason the cost of purchasing a third-party insurance plan would be so high is primarily two-fold.
First, Lyft provides approximately 2 million rides a day as of late 2018. Because the company is engaged in such a massive volume of daily rides, the likelihood that a risk will become a reality is increased. Thus, the company needs to insure against a prohibitively large risk price tag. Most insurance companies, however, tend to cap their available coverage for a single client at $100 million.
Second, there simply isn’t enough data on ride-hailing businesses. Older industries have storied histories supported by performance reports that can be compiled to ascertain the probability that a risk will occur. The ride-hailing industry is a new one without a track record that insurers can use to accurately measure and price insurance plans to be offered to companies like Lyft or Uber. This leads many insurers to avoid offering plans for those companies all together, while other companies will offer very expensive plans to make up for the uncertainty inherent in the new and disruptive business model.
A study reported in the Journal of Insurance Regulation notes that approximately one in three S&P 500 companies utilized captive insurance units in 2016. Lyft’s closest competitor, Uber Technologies, and similar companies like the home-sharing app Airbnb, are among those companies that have captive insurance subsidiaries.
Lyft reinsures nearly all its auto-related risks as a cost-mitigation mechanism. The company first purchases plans from third-party auto insurers and then sells reinsurance policies to those insurers through its subsidiary, Pacific Valley Insurance Co. In doing so, the company deposits the funds raised from premiums collected from third-party insurers into third-party trust accounts. It then uses funds from those trusts to pay for claims as they arise. Additionally, by obtaining insurance policies from third-parties, the company complies with the minimum insurance requirements set by various state insurance regulations.
The Lyft insurance strategy does include the purchase of third-party insurance policies for a large range of operations-related risks such as “employment practices liability, workers’ compensation, business interruptions, cybersecurity and data breaches, crime, directors’ and officers’ liability and general business liabilities.” In anticipation of other operations-related risks, the company cannot or may explicitly choose not to acquire any insurance at all or enough insurance to adequately cover such risks.
In the IPO filing, the company explained that its current structure, expertise in the ride-hailing industry, and the data it has collected on its app provide Lyft with the unique ability “to capture the expected savings from the investments we are making to reduce insurance claims and expenses.”
Lyft also explained that it bears the responsibility for any auto-related or operations-related claims that exceed the company’s coverage limits. The company acknowledged that, while its reserves are reviewed by an independent actuarial firm, actual losses may deviate from the company’s expectations due to numerous external factors ranging from the time a claim remains open to rising healthcare costs to changes in law or instances of insurance fraud.
The company could be adversely affected if claims exceed the Lyft insurance coverage limits or its expectations based on the data it has collected, if the insurance providers fail to pay claims, if a claim arises for which the company is not insured, and in other instances. In the event that the company’s reserves are insufficient, it may be required to increase those reserves, resulting in an increase to the company’s net loss during that period.
Lyft Insurance Panel Counsel Consideration
Insurance defense law firms that hope to gain work as Lyft panel counsel candidates will want to familiarize themselves with the many Lyft insurance strategy details contained in the IPO filings. Some of the Lyft insurance defense work may also be available through the firm’s reinsurance companies.
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This article is provided for educational purposes only. The information reported is believed to be accurate but is not guaranteed. This is not to be interpreted as legal advice or an opinion in regard to any topic discussed (we aren’t lawyers!).