The emerging digital economy is turning the services of many traditional sectors on their heads. Uber, the world’s largest taxi company, owns no vehicles. Facebook, the world’s most popular media owner, creates no content. And Airbnb, the world’s largest accommodation provider, owns no real estate.
Each of these billion dollar businesses has transformed their industries by tapping into a global trend known as the sharing economy, and insurance is not immune to this shift. One budding trend, which may offer some insight into the future of the insurance industry, is peer-to-peer insurance. Below we have a look at what peer-to-peer insurance is, its benefits and its current pitfalls.
Peer-to-what insurance?
Peer-to-peer insurance is a new form of insurance, driven by social media, which allows groups of friends to cover each other’s losses. It allows small groups of people to pool their premiums, insuring each other against smaller losses.
Under most peer-to-peer arrangements, large claims are still covered by traditional insurance, but the costs of smaller claims, which would normally be paid by an individual as part of a “deductible”, are shared amongst the group.
Peer-to-peer insurance has been made possible through platforms that manage the administrative burden of creating insurance pools, and connecting policyholders. The pioneers in this space are Friendsurance, a platform that allows people to pool their resources and manages the administrative burden. Since launching in 2010, they have raised millions in funding and have since had competitors launch in France, New Zealand and the UK.
Why go peer-to-peer?
People join peer-to-peer insurance to lower their costs. Additionally, when the group doesn’t submit a claim, part of the premium is returned to them. This is the biggest saving.
For example, say a book club decides to take out household insurance together as a group. They pay $70 every year to insure $10 million worth of damages. If they don’t make a claim for the entire year, they could get up to 40% of their premium back. The members of the club would be less likely to submit a claim for a small amount of damage, such as a broken teapot. Friendsurance founder Chris Logan argues that community platforms like this can reduce fraud (as policyholders are claiming from their peers) and increase transparency (as the way premiums are spent is clearer).
What are the disadvantages?
Many people are concerned about whether their existing policies are compatible with peer-to-peer insurance; the extra complexity can act as a barrier to those who value convenience and simplicity. Despite the cost savings, consumers are generally loyal to their insurers and are cautious about changes to their insurance. Without widescale adoption, peer-to-peer insurance may not gain the critical mass required to function on a broad scale.
Further, like peer-to-peer platforms in other sectors, shared insurance schemes bypass traditional regulation. The regulatory framework around insurance is complex for a reason, and is designed to manage risk across an entire economy. Peer-to-peer insurance is still new, and no one wants to be a test case if something doesn’t work out.
Is this the insurance of the future?
The distribution of risk, capital and increasing consumer choice means that insurance companies face a more competitive environment, but also have more tools to make their offerings more efficient. Only time will tell which model will be successful, but as long as premiums go down and customers still have peace of mind, we’re excited about what that future holds.
