We analyze the question of risk bearing in the emerging market of the Internet of Things. While this field is currently part of the ongoing research in respect to technical aspects as well as cyber insurance coverage on the firm level, the actual risk attribution for the implementation of intelligent objects on the household level is a neglected topic so far. Given the fact, that a majority of innovations in this field is driven by startup companies with limited financial capacities, we emphasize their behaviour in terms of risk taking in this novel field of business. We expect that startups currently do not internalize their exposure to third party losses associated with the development and provision of interconnected applications and devices. Due to their limited equity base, they leave the loss exposure to the end consumer. To illustrate this behavior, we adjust a model introduced by Olovsson (1992) to consider various levels of risk bearing under consideration of the development stage of the company. We show that especially young startups have no incentive to cover risks associated with the offered solutions. They externalize these risks. With increasing market value and maturity of the form however, these companies are opposed to a growing incentive to internalize loss coverage resulting from their products, because of reputational risks associated with negative company news. This behaviour however challenges the insurance industry with an exposure to cumulative losses if consumers make use of Internet of Things solutions from startups. Hence we conclude that regulatory requirements will need to be adjusted in order to protect consumers and finally the insurance industry from free riding incentives, startups currently can participate in.
World Risk and Insurance Economics Congress Munich 2015
- Andreas Haas, Markus Haas and Markus Weinert