ALEC’s Cara Sullivan had a good post earlier this week on the American Legislator blog about the importance of balancing consumer protection with innovation in the ride-on-demand services (frequently called ride-sharing) that are a driving force (pardon the pun) within the peer production economy.

Sullivan is right that insurance provides an important consumer protection, but I think the tradeoff between innovation and consumer protection is not as black and white as she suggests. A few observations about ride-sharing and insurance:

  1. What exists right now is terrible. In many American cities, taxis are disastrous. Here in D.C., when we had a zone system, drivers were notorious for abusing it, such as often only picking up passengers on one side of a street to get a higher fare (the U Street corridor was a common place to see this happen) or ripping tourists off. Today, D.C. cabbies are required to take credit cards, but their systems keep mysteriously breaking; at best, the odds are even you’ll  be subject to verbal abuse for wanting to pay with plastic. God help you if you want to go to Northern Virginia after dark. New York taxis are a bit better, but New Orleans’ are far worse. All of which is to say, the last thing that policymakers and regulators should be doing is looking to shoehorn new business models into the existing regulatory structures that have given us at best mediocre transport.
  2. You’re not as insured as you might think. In New York City, taxis only have to carry $100,000/$300,000 of liability insurance. That may sound like a lot, but it’s less than many regular drivers carry. In D.C., taxis are only required to carry $25,000/$50,000 policies. That’s actually less than regular drivers in Maryland are required by law to carry. You might think the highly-regulated taxi market would have high insurance requirements. You would be wrong.
  3. The market is already beginning to solve the problem. Uber insures drivers to the tune of $1 million; Lyft has a similar policy. Ride-sharing companies are working with regulators and insurance companies to identify best practices and help flesh out some of the murky areas in this emerging market. It’s unclear how exactly this will shake out, but there is a market-driven process underway; regulators should let it play out as much as possible before passing rules that restrict innovation in the insurance space.
  4. Insurance trumps regulation. Insurance can play a much deeper role in ride-sharing than simply protecting consumers against accidents: it can be a source of regulatory innovation. By setting insurance requirements for ride-sharing firms (which should be equal to the insurance requirements for taxis) and letting firms and insurers work together to determine how best to protect consumers, incentives are better aligned; firms have incentive to lower their insurance premiums, insurers reduce their potential exposure and consumers are better protected as a result. For instance, background checks of drivers may be either a very effective or a completely ineffective method of screening out potential bad actors. Insurers are better placed to figure that out than regulators, and regulatory rule-making precludes market innovation.
  5. Reputation is a strong motivator. Unlike with taxis, where both drivers and passengers are unknown to one another until a ride is underway, most ride-sharing firms allow passengers to rate drivers and vice versa. This helps screen out the dangerous, the directionally challenged and the just plain rude. If drivers want to keep driving and passengers want to continue to get rides, they both had better mind their Ps & Qs. Similarly, Uber, Lyft, Sidecar and other firms have brands they wish to maintain. In most municipalities, taxis are essentially commodities, and to the extent that fleets are even branded, passengers are unlikely to have a preference for Yellow Cab over Blue Cab or vice versa.
  6. Be realistic about regulators. Finally, it’s easy to fall into the trap of assuming that regulators have either the incentives or knowledge to regulate these markets effectively. As we’ve seen from the ongoing regulatory battles across the country, too many regulators have been captured by the industries they are supposed to be regulating. In thinking about how regulators operate, a little public choice goes a long way.

One final note: the major innovation in this industry is a business process innovation, not a technical one. Policymakers do well to consider these new firms as expansions of existing markets enabled by technology rather than something wholly sui generis.