Ever heard of P2P insurance? Learn how the concept that created Napster and Uber is impacting the insurance industry.
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 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.
- Guevara in the UK. The most prominent P2P car insurance site in the UK, where members pool part of their premiums together, with the opportunity to save up to 50% by keeping claims low.
- Lemonade in the USA. Now backed by insurance heavyweights Lloyd’s of London and Berkshire Hathaway National Indemnity, Lemonade plans to launch in the near future as a licensed insurance carrier rather than just a broker.
- Bought By Many in the UK. An insurance buying collective that negotiates discounts for members with unique insurance needs.
- Peercover in New Zealand. Where a group of friends needing the same type of insurance pool their money in an excess contingency fund.
- 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.
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 numbers 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.
Peer-to-peer lending is beginning to emerge in Australia, with local startups including:
- SocietyOne. Which has received backing from Rupert Murdoch and James Packer last year.
- OurMoneyMarket. Planning to launch in the near future.
- MoneyPlace. Also planning to launch officially soon.
- DirectMoney. About to be listed on the Australian stock market.
This is by no means an exhaustive list of startups 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.
So whats 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 has announced plans to launch soon in Australia, so perhaps this will provide a litmus test as to whether our insurance regulations are at all flexible with regard to P2P insurance.