Peer to Peer Insurance:
Is the hot buzz word in the insurance industry press relating to a structural change to insurance, which a certain number of policyholders “peers” pool together. In the event of any claim they support each other financially. If there is no claim, the insurance premiums are reduced.
I am very excited about the introduction of Peer to Peer Insurance into the US consumer insurance sector. It provides consumers a slightly new way to pool capital to insure risk and potentially, if peered correctly, produce savings for those who control their risk appropriately.
But to be clear, pooling capital and insuring risk has been around for centuries, the “new way” of pooling risk is using a technology platform to bring parties together.
In the 17th century, London’s importance as a trade center led to an increasing demand for ship and cargo insurance. Edward Lloyd’s coffee house became recognized as the place for obtaining marine insurance and this is where the Lloyd’s that we know today began. Lloyd’s started over 200 years ago – was formed using small risk pools to insure cargo ships so that merchants would be protected from ships failing to reach their destinations.
This is similar to how US mutual insurance companies or group captives were formed over the last 100 years, however, now the theory about Peer to Peer Insurance is with the improved technology the expenses, fraudulent claims and overhead can be reduced and savings passed onto the consumer.
The other premise is that traditional insurance model and value chain has too many intermediaries (agent/broker, carrier, reinsurance broker, reinsurer, capital, etc.) and expenses associated with it that are non beneficial for the consumer. The question has been raised, if you were going to start the insurance industry today – would you set it up in the current model/value chain?
To answer that question, the introduction of Peer to Peer insurance platforms as well as other new InsurTech to disrupt the value chain.
In 2010, this brokerage version peer-to-peer-insurance-model was first introduced in the German insurance market under the brand Friendsurance. In 2016, at least three peer to peer insurers are announced to launch in the US. Lemonade in New York, Jointly and Ledger Investing both in California.
Today’s technology, the ‘Great Recession’ and consumer shifts are changing the dynamics in the industry. The growing transition to the shared and rental economy have changed how consumers and millennials view asset ownership – therefore have also changed how insurers are required to insure these assets. This is a slightly different topic but relevant in the fast changing technology driven world we live in.
The Peer to Peer Insurance model:
Peer to peer insurance companies will be formed by insurance brokers or “facilitators” in the model below. A group can be set up directly by the policyholders via social networks, like Facebook. Consumers will join a pool and it has a reinsurance backstop, as defined by the groups risk tolerance.
The ability to scale this platform will be increasingly easier as consumers become aware – but the ability to get consumers interested, aware, or understand the benefits will require a significant marketing budget to compete against the already entrenched traditional insurance industry.
The Insurance industry already spends a tremendous amount of money to stay relevant to consumers with events like the Zurich Classic, Farmers Open, and sponsorship from the NCAA – March Madness to Yankee Stadium.
This is why I think Peer to Peer companies will have to embrace the current model and engage the broker and agent channel, unless they are prepared to match the Billions of dollars of Insurance industry marketing budget.
This model will require continued growth, otherwise how do you continue to grow the ‘facilitator fees’ for your investors?
What this means for me the customer:
If you are an InsuranceShark, I think the Peer to Peer Insurance model is something to seriously consider. If you are a individual or small business who understands risk management, risk financing, loss control, etc. – you will be able to effectively navigate these new platforms. InsuranceShark intends on giving each follower the tools to effectively pair their risk with capital on the Peer to Peer platforms.
If you are “Average Joe without InsuranceShark” it might not be so easy, this is one of the main reasons why InsuranceShark feels the need to inform consumers.
I like to make the comparison of being on Lending Club or Prosper trying to make Peer to Peer loans, when there are hedge funds also sourcing the same business. The hedge funds algorithm or credit model is going to be quicker and more efficient than you using the A-G lending score from the platform.
If you don’t have the right tools or information, you will be getting less Risk adjusted returns than the other Sharks in the market. In areas like casualty insurance or lending where there is a tail associated with the duration of risk, without the appropriate Risk adjusted returns or margins – you may not be appropriately pricing the risk. Therefore, losing money and not knowing it.
Same goes for Peer to Peer Insurance, you want to be effectively protected but a the least cost possible. If bad or high risk is pairing with naive capital in pools – as an insurance customer I would want to know how to avoid this risk.
Future Role for Insurance professionals:
Although there are tremendous predictions about the disruptive potential for this technology, I am optimistic that there will still need to be risk consultants or customer advocates in this process. See our discussion around The Future of the Insurance Broker and Agent.
I think there will be a great role as the platform or facilitator can only do so much to pair risk to protect the consumer. The future will combine loss control/risk engineers with insurance agents and brokers. I have started working with others on a post and future book titled, “How to become a Peer to Peer insurance consultant”.
If you would like to hear more about the book or pre-order please Contact Us.
Some additional questions:
- Will autonomous vehicles takeoff before Peer to Peer insurance can scale?
- Will the personal liability market decrease as a result?
- Are they competing in a shrinking part of the insurance pie?
- Life and Health insurance on the future product offerings?
- How are traditional insurers preparing for this new technology?
- What will be the impact to reinsurers?
- How will the insurance value chain evolve? Who will get left behind?