How Peer to Peer will Affect insurance:

What is peer to peer insurance?

In a small number of cases, a single mistake can bankrupt a business. Consider the one Doctor in a thousand who are sued for malpractice, by a patient following, an unsuccessful operation. They could be ruined by the lawsuit. In fact, the very fact, that, despite all of their hard work and good intentions, a single mistake could ruin their lives, might well cause people to avoid becoming a doctor in the first place. Insurance makes the risk manageable, splitting the cost of the risk across hundreds of Doctors. When one makes a mistake, no one goes out of business.

This sort of ‘splitting the risks of doing business’ has caused insurance to come to underpin almost every business you deal with. And insurance has been keeping pace with changing trends. Now, you can ensure everything from the big things, like your home against flood, to small things, like your iPhone for a week.

The ‘next frontier’ of insurance is ‘peer to peer’ insurance, an innovation in insurance products which could lower the cost of your policy but still avoid you taking on too much risk.

See also...Peer to Peer Insurance

How does Peer to Peer insurance work?

Also known as ‘social insurance’, Peer to Peer insurance is a way of getting the benefits of a policy without suffering some of the problems.

Insurance companies are out to make money. When you file a claim, it impacts their profitability. You two started out wanting the same thing, but when it comes time to file a claim, you’re on opposite sides.

You’ve probably experienced yourself when you try and make a claim – some insurance companies will fight tooth and nail to avoid paying. It stands to reason: When something goes wrong, it’s in your interests as a policy holder to get paid as much as possible and in their interests as the insurance provider to stop the payment. Peer to peer insurance avoids some of that conflict.

The best way to think about Peer to Peer insurance is that it’s a lot like you offering money which ensuring your friends, family and people like them. When it comes time to file a claim in a Peer to Peer policy, you know you’re claiming the money back from someone just like you. That makes people far less likely to ask for more money than the damage they’ve really sustained.

There are other good things about Peer to Peer policies, too. There’s no need to generate a large profit in the way that regular insurance companies have to. Also, the group of ‘family members’ who ensure you are ‘reinsured’ That means that the total value of all policies in the group cannot be exceeded. In simple terms, your friends and family won’t lose money ensuring you – someone else backs off their risk. There are some clever calculations in the background that means this all works out for everyone involved.

Why will Peer to Peer insurance disrupt the regular insurance market?

Peer to peer insurance is part of fintech, a group of technology companies which are looking to exploit the enormous profit pools that financial institutions of the world have used to their advantage for decades, empowered by the internet. Which brings us to why it’s important.

Any start-up which successfully addresses a market, with profits the size of the insurance industry is going to be successful.

See also...The FinTech Effect on the Insurance Industry

Summing up the benefits of Peer to Peer insurance

The reason peer to peer is going to make such a dent in the insurance market is because it provides more information about the real risks involved in ensuring something or someone, for both sides. That enabled a more accurate calculation of the costs of the risk that each party is adopting.

It’s a tough market to get in to and it’s not without challenges which will need to be overcome. It represents a problem for financial regulators, for example. This is a very different model to what they are used to.

That said, in the event that these start-ups do well, they may be acquired as brands by the bigger players in the financial markets or those players might start their own. Either way, Peer to Peer insurers are new entrants looking to cash in on redefining an age-old industry and, in our view, they are going to change the world for the better.

Called by some people to people insurance, rather than peer to peer insurance, not only does Peer to Peer insurance provides a reputational disincentive to cheat the systems at both end, and remove monopoly profits from the industry, it offers a better, fairer, cheaper product to the people who are prepared to consider buying it.

About the author

Arnold Smith

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