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Peer to Peer Insurance: Reconstructing Notions of Affinity

Before the advent of underwriting in London’s coffee houses in the 16th century, civilizations used various mechanisms to provide financial protection within their communities. The concept was very simple—pool in the money from users sharing the common risk and pay to the unfortunate ones in case of a mishap. The more the merrier. That is how the whole insurance business started.

Over a period of time, the concept has remained the same, but the business models have evolved. With the emergence of various business models, the need for offering insurance at cheaper rate has taken precedence. Peer-to-Peer (P2P) insurance is one such business model, which not only offers insurance at a much inexpensive rate but also reduces the possibilities of fraudulent claims.

In 2010, the founders of the “FinTech” company, “Friendsurance,” realized that insurance is expensive and lacks transparency—people pay high premiums each year and get nothing in return, barring the occasional incidents of claims. That is why “Friendsurance” developed a revolutionary P2P insurance concept, which rewards small groups of users with a cash-back bonus at the end of each year they remain claimless. Since then, the low-cost, high-efficiency P2P business model has spread to a number of other segments that had long been the province of banks and other financial institutions.

How does it work?

In this model, insurance policyholders sharing common risk form small groups online. A part of the insurance premiums paid flows into a group fund, the other part goes to the insurer. Minor damages to the insured policyholder are firstly paid out of this group fund. For claims above the deductible limit, the regular insurer kicks in. When there is no insurance claim, the policyholder gets his/her share refunded from the group pool or credited toward the next policy year. If the group pool happens to be empty, a special insurance comes into force.

The group can be set up by the policyholders, forming a social network somewhat like Facebook. The only requirement is that all group members must have the same type of insurance. Examples are liability insurance, household contents insurance, legal expenses insurance and electronics insurance. The peer-to-peer insurance concept involves no extra costs other than the special insurance. The providers are financed through brokerage commissions of insurance companies.

Why do we need it?

It has been observed that the peer-to-peer insurance model not only strengthens the sense of responsibility toward the group but also helps in minimizing the number of fraudulent cases while achieving the overall objective of reducing the premium rates and thus enhancing the customer experience.

The aim of the P2P model is to save money through reduced overhead costs, increase transparency, and reduce inefficiencies. P2P insurance may refresh the concept though, through digital technologies and can enhance the overall claim settlement experience.

Who are the leaders?

Following the example of “Friendsurance”,, “Lemonade” in US, “Inspeer” in France, “PeerCover” in New Zeeland, and Guevara in UK also started offering P2P insurance. Lemonade has recently claimed to raise a massive sum of money $34 million.

Business drivers

The benefits suggested by the P2P model are enough to attract the attention of the insurance companies and the customers alike. Insurance companies face a great deal of regulation at the local, state, and federal levels and must raise a lot of capital to back their policies. P2P model can help the insurance companies to achieve this by way of cutting down on the customer acquisition and claim settlement cost.

On the other hand, many think that the insurance sector is ripe for new business models that bring operational efficiency to what could be considered a bloated, bureaucratic industry with high overhead costs. P2P model will bring in the necessary transparency to archive the higher customer satisfaction.

Looking ahead

The P2P model appears to be gaining lots of attention however, it has some limitations. Some industry experts opine that it is just another name given to the age-old concept of mutual insurance companies or the affinity based insurance and offers nothing new. Rather than a new business model, it can be looked upon as a new channel of distribution.

There is also an ambiguity in terms of how the pricing should be done besides the fact that there are no clear regulatory guidelines as of now.

Another limitation of this model is it is only suitable for homogeneous risk profiles and low severity, high frequency claims, where it becomes a manageable and sustainable bet for stakeholders.

The P2P story is far from over. Whether this model will disrupt the insurance landscape or not, only time will tell. It will certainly develop where market conditions will allow. However, it will be interesting to follow the change in the insurance distribution landscape as this model evolves ahead.

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