Auto Insurance For Uber And Lyft Drivers In New York: What You Need To Know – In all markets except NYC, nearly all Uber and Lyft drivers have ride-sharing insurance provided and paid for by Uber/Lyft. Given that most rideshare drivers also use their vehicles for personal use, the best ways to think about insurance are as follows.

. Most of what she said was insightful and reasonable, but her calculations for carpool insurance were clearly understated. Let’s focus on Tasha’s statement about Lyft’s annual insurance costs.

Auto Insurance For Uber And Lyft Drivers In New York: What You Need To Know

Auto Insurance For Uber And Lyft Drivers In New York: What You Need To Know

As we’ll demonstrate below, this is confusing, and we’re not sure how this number was calculated. To be fair, many Wall Street analysts still don’t understand the true cost of ride-sharing insurance, as Lyft and Uber make it difficult.

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The primary way Lyft (and Uber) account for insurance costs is cost of revenue (i.e. COGS) and reserve accounting. The reason this happened at least between 2017 and 2019 has to do with Lyft having an insurance captive structure. Long story short, Lyft is not simply paying the insurance premium in the traditional sense, it also appears to be self-insured. This can be seen in the balance sheet below.

The green box shows that Lyft has insurance reserves (i.e. projected liabilities for future expenses) and matching assets (i.e. restricted investments) almost equal to the reserves.

How is this dynamic reflected in Lyft’s income statement? The simple answer to this is as follows:

If we use this approach, insurance-related COGS would be $1.1 billion in 2019, or 51% of Lyft’s total COGS. That’s 2.7 times ARK’s estimate of 19%!

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To test the above, we can also use Lyft’s imperfect disclosures in the notes to its financial statements regarding the cost of insurance in its cost of revenue.

Translating the above disclosures into the cost of insurance as a percentage of the increase in cost of revenue, here’s what we get.

This 54% is almost exactly the same as the 51% we calculated using the insurance reserve method. Additionally, Lyft’s own disclosure that “cost of revenue primarily includes insurance costs…” further analyzes this.

Auto Insurance For Uber And Lyft Drivers In New York: What You Need To Know

Finally, it’s also worth mentioning that we excluded amounts in Lyft’s “accrued and other current liabilities” account that also appear to be related to insurance costs.

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Lyft appears to have sold some of its insurance reserves — potential future payouts related to historical claims — to another company, Clarendon. It paid Clarendon $465 million, mostly from “restricted investments,” to take those liabilities off its balance sheet, which can be seen in Lyft’s Q1 balance sheet below. In the details of the note, it also appears likely that Lyft will have to incur additional expenses if those reserves “perform” less than expected. Another noteworthy aspect of this disclosure is that some of the Lyft sale claims appear to stem from events as far back as 2015! This will show you how long it takes certain carpool insurance claims to be fully litigated and paid out.

Q2 is an interesting period to analyze from an insurance standpoint, not only because of the aforementioned deals, but also because of the significant drop in travel due to the COVID-19 pandemic (Lyft’s active riders were down 60% in 2Q20, revenue down 61% vs. Q2 19). Logically, fewer trips could result in fewer potential claims (i.e. insurance costs should be variable in nature and tied to the number of trips). Lyft’s disclosure confirms that this is the case.

It’s hard to tell exactly how much of the decline is related to lower travel volumes and lower transaction volumes, but that will be something to track as the business recovery takes hold. However, as seen in the second quarter of 2020, insurance accounted for only 32% of the total cost of revenue, compared to 51% in FY2019.

Among Lyft’s October 1, 2020 disclosures regarding the introduction of additional insurance partners was a noteworthy announcement. Specifically, Lyft revealed that starting in 2021, it will take on a small number of insurance risks, rather than most, reducing the volatility of insurance costs. The statement is also notable because it highlights the proprietary systems and data Lyft has related to managing ride insurance claims and costs.

Uber Driver Insurance Lyft Driver Insurance

Uber’s insurance premium mechanism is essentially the same as Lyft’s (i.e. self-insurance structure using reserve accounting). However, comparing insurance costs as a percentage of cost of revenue to Lyft isn’t perfect given Uber’s global ride-sharing business and massive food delivery business.

We estimate that insurance represented 20% of Uber’s cost of revenue in FY19. Notably, as shown in the chart below, Uber’s insurance costs have declined as a percentage of COGS, which may also be related to the company’s international expansion and the growth of UberEats and Freight (these businesses together accounted for 23% of Uber’s fiscal 2019 )income).

Unfortunately, we can’t really draw much conclusions from this, except that, similar to Lyft, insurance may be the main driver of Uber’s overall cost of revenue growth.

Auto Insurance For Uber And Lyft Drivers In New York: What You Need To Know

In Uber’s balance sheet, we see that the line item “Collateral held by insurance companies” has an amount of $1.2 billion (assets). If we look at the notes to the financial statements, we see that it has to do with one of Uber’s insurance partners canceling its ride-sharing policy.

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While the specifics of James River’s carpool insurance are interesting, there are two main reasons for the company to cut ties with Uber.

In Uber, we wrote a new type of risk that seemed lucrative… [but as Uber rapidly expanded into new geographies, added tens of thousands of drivers, and moved into other lines of business, the The nature has changed] … Frankly, in some years we mispriced the risk. We believe [AB5] will adversely affect the claims profile of ride-sharing companies. – J. Adam Abram, James River Executive Chairman and CEO

With respect to point AB5, we believe that James River is alluding to potential concerns about vicarious liability claims, as noted below on

Uber drivers are not considered company employees. This is a problem for individuals injured in Uber vehicles because employers are often indirectly liable for their employees’ actions. Instead, Uber drivers are considered independent contractors. That distinction allows the company to deny liability when its drivers are involved in an accident. In contrast to treatment involving employees, companies are generally not liable for the actions of independent contractors.

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In response to the news, Uber said James River is one of four insurance partners it is working with and will bring in another insurer.

James River is one of four insurers that Uber works with in the U.S., the others being Farmers Insurance Group, Progressive Corp. and Allstate Corp. James River insures [Uber] drivers in 20 states, Washington DC and Puerto Rico – Uber spokesperson Insurance Barriers to Entry

We believe the above analysis shows how large and complex the costs of carpool insurance can be. Since the beginning of 2020, Lyft has made major moves in the insurance business. Meanwhile, Uber lost a major insurance partner in late 2019. While insurance can get very complex, it is fundamentally size that defines the industry (i.e. a larger insurance base that helps spread risk and reduce the overall impact of each claim). Additionally, ride-sharing insurance (i.e. taxi insurance for non-commercially licensed drivers) is still a relatively new product and difficult to underwrite, as evidenced by James River’s experience.

Auto Insurance For Uber And Lyft Drivers In New York: What You Need To Know

We believe Uber and Lyft have two fundamental advantages over any potential new entrant to the North American ride-sharing market.

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Given that insurance accounts for a large portion of Uber’s and Lyft’s cost of revenue, even a modest reduction could have a significant impact on margins. It’s hard to say how much insurance costs will be reduced, but it stands to reason that both companies will continue to use scale and data to drive cost savings over time.

We think there are other scenarios that could lead to significant margin upside for both companies, including:

It goes without saying that if California’s Proposition 22 fails, it could cause Uber and Lyft to fundamentally rethink insurance risks in one of their largest North American markets (i.e., mitigate the aforementioned alternative liability claims).

We are long NYSE:UBER and NASDAQ:LYFT. Specifically, in this note, our goal is to outline why we believe insurance is a key barrier to entry for any potential new North American ride-sharing competitor. Additionally, given Uber and Lyft’s scale and unique experience with rideshare insurance, we believe both companies will continue to drive down costs through insurance partnerships, proprietary data, and potentially benefit from other broader industry trends.

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Why follow Hudson Far West? : Our investments, research and content are informed by businesses we create and operate Disclaimer: The opinions expressed by Hudson Far West (HFW) in Seeking Alpha are for general information purposes only and should not be construed as investment advice.

Analyst disclosure: I/we are bullish on LYFT, UBER. This article was written by myself and expresses my own opinions. I have not received compensation

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