The digital revolution is making waves across every part of the financial ocean, and insurance is no exception.
The insurance industry launched in the 1600s when English sea-faring merchants started paying banks to cover them in case of shipwreck. That model hasn’t changed much since.
People pay large insurance companies the same sorts of premiums to protect their assets—whether they’re boats like in the days of old, or laptops and apartments today.
If the ship returns safe from its journey—or in a more realistic and modern case, if the laptop stays safe and unbroken—the insurance company keeps the premium.
The peer-to-peer model has taken hold in other industries, primarily through social lending, with companies like Prosper and LendingClub organizing unsecured personal loans for consumers. But the recent introduction of this model in insurance has arguably been the first ever major disruption to the traditional market.
Peer to peer insurance digitally joins together people with similar insurance needs, who then pay into one insurance pool.
They can also be leaner and more transparent than traditional insurance companies, allowing them to offer lower premiums for the customers.
How traditional insurance works against you
The main advantage of peer-to-peer insurance companies is that they’ve changed the incentive structure inherent in the traditional insurance model.
Here’s an illustration of what I mean by “traditional insurance model”:
Joe and Lina rent an apartment and want to make sure their assets are protected in case of burglary, fire, or any other unexpected event. They go to one of the major insurance companies and pay them a monthly premium to get coverage.
Now let’s say disaster strikes, and Joe and Linda get burglarized.
When Joe and Linda go to file their claim and collect their payout, their insurer might fight them. Their insurer is, in fact, incentivized to make it difficult for Joe and Linda to get their money back.
Every dollar the insurance company pays Joe and Linda, after all, comes right out of its bottom line. The company might put up large bureaucratic hurdles to ensure they don’t get paid.
More than likely, it has worked large deductibles into Joe and Linda’s plan so that it won’t need to pay out the true value of the assets. In other words, it’s incentivized to not pay the customer.
Peer-to-peer insurance flips the script
P2P insurance companies guarantee that they will pay back any money left over in the pool directly to the customers (or to charity).
If Joe and Linda were to have picked a peer-to-peer insurance company, that company would have had no incentive not to honor their claim. Whether or not it pays the customer, its bottom line won’t be affected at all.
This difference has major impacts on the way these companies present themselves.
P2P insurers around the world have made the process of filing a claim, and getting paid out, much more accessible than it has ever been.
Customers of P2P companies can often find themselves filing claims online or even on an app, and have their claims honored within minutes.
Evolution of peer-to-peer insurance
P2P insurance companies have evolved through three waves.
- Wave 1: The distribution model, where small groups with similar risk levels self-insure their deductibles to lower their premiums.
- Wave 2: The carrier model involves the same small groups sharing the risk of insurance by paying premiums jointly. If there is money left unclaimed by the end of the year, members get to share the remaining funds as a payback.
- Wave 3: Self-governing P2P insurance brings the process closer to the ideal of mutual insurance. Each participant pays a certain amount into a digital wallet using blockchain insurance. When a claim is made, each member pays a certain amount towards it. If no claims are made, then the money contributed is returned to the member. Insurance claims that are too great to be covered are underwritten by reinsurance to cover multi-million dollar claims.
Advantages of P2P insurance
P2P insurance companies claim that they can lower your insurance premiums. By stripping down the costs of running a large company, nimble insurance startups have fewer extra costs so they can charge less for your premium.
For example, Lemonade renters’ insurance for an apartment in Manhattan, New York City begins at five dollars per month, instead of almost nine dollars a month from Jetty insurance. That’s an extra $48 a year; not a large difference, but one that could be significant if you’re counting every penny.
Getting insurance through a traditional broker can take a while. You’ll need to submit an inventory of your valuable possessions and wait while the company assesses your level of risk. There are many forms to fill out, often full of technical jargon.
P2P insurance companies are born in the digital age, so the process is streamlined. You’ll answer a few clear questions online and receive your quote in minutes. You can make payments online so that your coverage is up and running the same day.
There has been concerns that P2P insurance companies won’t have the funds to make major payouts. P2P companies mitigate this by purchasing additional insurance from major banks. Companies such as Lemonade pay 20 percent of their revenues or more to “reinsure” their funds. This guarantees that they will be able to make good on the claims of their customers.
Ease of use
I already referenced the different incentive structure inherent in the P2P model. But here I’ll expand on what that actually means for users.
P2P insurers have streamlined the process of payouts. In some cases, customers can take pictures of damage, fill out very basic information, and upload that onto an app.
Payouts are made in just a few minutes. This benefit cannot be overstated, especially for anyone who has ever had to file a claim and go through the bureaucratic process of dealing with traditional insurers.
What are the obstacles to P2P insurance?
Insurance is heavily regulated at the state level, so young P2P companies struggle to navigate various legislative issues.
Lemonade, currently offers its full suite of products in 21 states (+D.C). The rollout to the rest of the country will likely take years.
Leading P2P insurance players
The modern P2P insurance model is young, so there are still only a handful of large P2P insurance companies around the world. Friendsurance in Germany, Tong JuBao in China, and Guevara in the UK are all expanding due to their ability to offer lower premiums than competitors.
In the US, the first P2P insurance company and still the only major player is Lemonade. We checked them our ourselves so if you’re interested you can read our full review here. The company uses AI to produce fast and competitive blockchain insurance quotes, covering property and casualty insurance in the form of renters and homeowners insurance.
Lemonade’s biggest selling point is its transparency. It takes a 20 percent flat fee off your premium to pay for salaries and running costs and another 40 percent to cover reinsurance. The remaining 40 percent is used to pay claims, and anything left over at the end of the year goes to a charity chosen by customers.
Peer to peer insurance has already disrupted the insurance marketplace and offers better premiums and policies for insurance buyers everywhere.
Though their market share is still small, it’s likely that P2P companies will grow in the coming years. Although there are still challenges ahead, there’s every reason to believe that P2P insurance is here to stay.