Peer-to-Peer (P2P) insurance is just one of a range of collaborative consumption products currently revolutionising the financial industry. This guide looks at what it is, how it works, who benefits and why Australia is one of the few countries that hasn’t yet fully embraced it.
- How it works. P2P insurance is the latest form of social collaboration where, instead of loans or investments, the product being shared is insurance. In its simplest form it’s a group of like-minded individuals (often friends, family or work colleagues) who pool their money together to share risk, instead of paying a traditional insurer to take on their risk individually.
- Who started it. The concept was pioneered by German website Friendsurance, which allows members to share deductible (excess) costs amongst themselves, with the site acting like a broker between members and insurance companies, who cover the larger claims. Members gamble that the money they contribute to the group’s combined excess costs will be less than the excess they would pay individually on a claim, and in most cases this is true, with the group being refunded any monies left over.
- The thought process behind it. The underlying concept behind P2P insurance is that because the group is made up of like-minded peers, they are less likely to make exaggerated or fraudulent claims that would adversely affect the group. This relates to what is called “the moral hazard”, the theory that if an insured person doesn’t bear the financial consequences of their actions, they do not act with the same level of caution as someone who does. Because the members are acting in the best interests of the group, they are less likely to make claims and costs are cheaper as a result.
P2P insurance can take a number of different forms:
- The Friendsurance model, where the P2P site acts like a broker between the members and the insurer, with the insurer paying out larger claims and small claims being covered by the group pool.
- The model where group buying power is used to purchase cheaper insurance, without the built-in overheads and administration fees charged by traditional insurers.
- The model used by French P2P site InsPeer, where family groups pledge a small amount each to cover claims for any one user and the remainder of the pool is used to purchase cheaper insurance.
- The brokerage model used by UK site Bought By Many, where the site works with insurers to develop policies and negotiate discounts for users with specific insurance needs and earns money through commissions.
- The model used by UK P2P site Guevara, where the site earns a profit from a flat fee per member, thus having an incentive to attract more members rather than to raise premium rates to increase profits.
- Its origins. Before crowdfunding, the peer-to-peer concept was purely in the realm of computers. As opposed to the client-server model, a peer-to-peer network is one where all computers contribute to and have access to the same resources, without the need for central coordination. This allows them to achieve more than they each could individually while benefitting the group as a whole.
- How it became popular. The P2P concept was brought into general use by file sharing site Napster, which allowed users to both contribute and benefit from the system through the mutual sharing of data. Since then, this has been followed by a rash of other P2P applications where users can rent, lend and share goods and services online, including names such as eBay (online marketplace), Airbnb (private accommodation rentals), Uber (peoples’ taxi) and Lending Club (peer-to-peer loans).
- Why it works with insurance. The fact that P2P has now come to insurance should not surprise anyone, given that risk is a commodity like anything else that can be reduced by sharing it around. Today’s global sharing economy is worth over $15 billion and as new products like insurance are added to the mix, it is predicted to grow to around $335 billion within the next decade.
Some of the major players in the current global P2P insurance market include:
- Friendsurance in Germany. Pioneer of the P2P insurance concept, it allows groups to pool insurance premiums together and offers an annual no-claims reward.
- Lemonade in Europe and the USA. Using a tech-centred approach around underwriting, Lemonade is fully regulated and reinsured by some of the most trusted names in insurance.
- Many Pets in the UK and Sweden. A pet insurance buying collective that negotiates discounts for members with unique insurance needs.
- Bought By Many in the UK. An insurance buying collective that negotiates discounts for members with unique insurance needs.
- TongJuBao in China. A peer risk-sharing site that provides cover for social risks not covered by others, including marriage insurance and missing child insurance.
- Nexus Mutual. A blockchain-based P2P platform for individuals to insure smart contracts and protect against exchange hacks.
- So-Sure in the UK. An online P2P mobile phone insurance platform that now also offers contents insurance.
Peer-to-peer lending has become a permanent fixture in the Australian finance scene with some of the biggest names including:
- SocietyOne. Since launching in 2012, SocietyOne has connected borrowers and investors to over $600 million worth of loans.
- OurMoneyMarket. A marketplace lender that offers competitive rates to those with good credit history.OurMoneyMarket. Planning to launch in the near future.
- Marketlend. An online peer-to-peer lender for a range of secured and unsecured business loans up to $10 million.
- MoneyPlace. Offers personalised interest rates with the lowest rates applied if you have an excellent credit history.
- DirectMoney. Australia's first P2P lender to be listed on the Australian stock market until it rebranded as Wisr in 2018 and ceased peer-to-peer lending.
This is by no means an exhaustive list of companies that are getting involved in P2P lending. A range of Australian entrepreneurs are seeking funding in other financial areas from P2P payments to P2P currency.
While some insurers feel threatened by the incursion of P2P insurance into the traditional marketplace, others see opportunities to tap into this growing movement and reach market sectors that they have been failing to connect with.
Some of the positive effects P2P has had on insurers are:
- Those working with P2P insurance brokers are benefiting from an increasing number of customers who may have been formerly disillusioned with insurance and are now returning to the marketplace.
- P2P insurance is revealing new gaps in the market that traditional insurers may not have been covering (eg, the special needs insurance provided by Bought By Many in the UK).
- P2P startups are revealing areas that traditional insurance may not be adequately covering for their users (eg, home insurance in the case of Airbnb and auto insurance in the case of Uber), meaning specialised cover is required.
Some traditional insurers may be hesitant to embrace the opportunities that P2P insurance offers because of the difficulty in pricing the unknown. But this too is changing, as P2P sites are creating ever more detailed digital footprints of their users. Along with feedback and reviews, many now require background checks, security deposits and medical or credit histories from those representing their brand, making underwriting possible.
So, what's stopping P2P insurance in Australia?
We have very strict regulations that govern our insurance industry. For instance, one of those regulations states that a business cannot act as a sales agent for an insurer, which makes it impossible for P2P insurance sites to operate legally.
Is this roadblock likely to be overcome?
German P2P insurance provider Friendsurance started small with an insurance product for protecting bicycles and their riders in 2017 while Sydney-based Huddle Insurance launched in 2016 with a peer-to-peer model initially. We are still yet to see an Australian P2P insurance provider but perhaps these attempts will provide a guide for future offerings.
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