By: Pratik Menon, Consultant, CSTG - LTI

In ancient Greece, the concept of burial societies was prevalent – people pooled their resources to pay for each other’s burials. The concept of Peer-to-Peer (P2P) Insurance is also based on a similar premise. So, what is P2P? P2P is a phenomenon where similar peer groups such as business owners, Uber drivers, etc., come together to absorb each other’s risks. It involves contribution from everyone to insure each other’s losses.

The basic flaw of legacy insurance is that people pay high amounts of premiums every year, and although they do not suffer any losses, they also do not get any return. These P2P insurance companies need not have traditional insurers’ legacy IT structure, helping them build more customer-focused, less expensive, sleeker and data-driven insurance systems. The insurance industry is queued for disruption, and P2P is the fodder for that disruption.

Insurers can explore P2P insurance in different lines of businesses. One of the pioneers in P2P insurance, Lemonade, has revolutionized property insurance, by making homeowners’ and renters’ insurance available in a day. In a metropolis like New York, where it is difficult to get even an online quote for insurance, the Lemonade app helps you get a quote in less than 3 minutes. In car insurance, Carpool, a Thailand-based P2P insurance broker proposes to give an opportunity to good drivers in order to form insurance groups on their own, where deductible is contributed by members to the shared pool.

Advantages of Peer-to-Peer Model

• Less Fraudulent Claims
  Peer group members know each other and are willing to invest their money based on trust, which portrays faith in one another’s ability to keep losses to a bare minimum, thus being beneficial to everyone.
• Eschewal of Traditional Brokers
  Peer group members rely on each other for risk management, prevention of losses and to sell insurance, which enables them to stay away from traditional agents and brokers.
• Reduced Premium or a Dividend
  Any amount left in the pool at the end of the year, for all the individuals with no claims, is given to them in the form of a dividend or reduced policy premium for the next policy period.
• Backup of Traditional Insurer
  If the claim amount is exorbitant, then traditional insurers cover up these losses, which safeguard the insured’s requirements.
• Shared Responsibility
  Business owners and consumers assume shared responsibility and make decisions on the group’s risk selection, risk management, underwriting and marketing, with appropriate guidance from the insurer’s management teams.
• High Degree of Transparency
  Peer groups leverage social media and various other networking technologies in order to create a less expensive insurance infrastructure.

Disadvantages of Peer-to-Peer Model

• Maintenance of Close-Knit Group
  A large social circle in this generation of social media has resulted in the challenge of maintaining a close-knit group. These large groups have a complicated risk profile, which ends up looking like a traditional insurer.
• Insurance Regulatory Compliance
  Insurance Regulatory Compliance lacks complete clarity, and there are numerous actuarial uncertainties and challenges with respect to risk management and underwriting practices.
• Adoption of P2P Model
  The dominance of traditional insurers is powerful, and people would be hesitant in adopting the P2P model.

Future Prospects
Blockchain: The P2P insurance model has moved out of the traditional premium payment mode, and into a digital wallet, where members of the group deposit their premium in an escrow type of an account, used only when a claim is made. This ensures that none of the peers carry out an exposure greater than the premium amount deposited by them into their digital wallets. In a scenario of no claims, all digital wallets get to keep their money. Furthermore, all payment transactions in this model are conducted using bitcoin to reduce transaction costs. Teambrella is the first P2P insurer to use bitcoin in this insurance model. Another InsurTech company harnessing Blockchain technology is VouchForMe. They enable clients to share their existing deductibles with friends and family members.

Customers and investors will have more ways to participate in insurance going ahead, and P2P will be a key component in that. Tweaking in different models would be required post the high bar set up by the P2P insurance model for trust, customer expectations and transparency.

Conclusion
Traditional insurers would be dominant in the industry irrespective of the transparency that P2P model brings to the table. They won’t try to emulate P2P models; however, they can have subsidiaries that could serve niche segments by adopting P2P models. This would help them diversify their customer base.

The P2P model has the potential for stupendous growth if the right means are adopted to disrupt the traditional insurance model. Masses need to be educated regarding its potential, which will require investment in terms of money and people. The constant change in the insurance industry resulted in the emergence of this age-old model. However, even a crystal ball will not be able to confirm the future of the P2P model in this ever-evolving industry.