If ever there were an industry that was open and ready for radical disruption, it’s the insurance sector. That’s one reason why so many new, nimble insurance companies have sprung up in recent years with completely different business models. Of them, in my opinion, the peer-to-peer model is one of the most promising and, quite frankly, realistic.
Why? Because the insurance behemoths commonly sell expensive policies that are ‘cookie cutter’ in nature. But, suppose you were a concert violinist who owned a multi-million dollar Stradivarius violin. You would have to find a specialized insurance agency who could come up with a customized policy for your precious instrument. The concept of peer-to-peer insurance is that (continuing with the violin example) you find musicians and rare instrument aficionados around the world who all have the same specialized insurance needs that you do. You form a crowd-funding community based on trust and a common theme. The more people who pay an initial insurance premium, the smaller the premium. What binds all peer-to-peer set-ups together is that if you don’t make a claim during the course of a year, you receive a cash bonus. According to the peer-to-peer company Friendsurance, there have been cases recent years in which 94 percent of participants received some sort of year-end cash bonus.
The system works, according to experts, because crowd-funding ensures that people form like-minded digital communities. In China, families deal with an issue fairly exclusive to that country: child abduction. So families with small children have used a peer-to-peer agency known as TongJuBao to form a large group of policyholders who focus on that one social issue. Policyholders in most peer-to-peer insurance companies say that one of the greatest benefits is that the set-up discourages fraud and therefore premiums don’t skyrocket to help defray the cost of fraudulent claims.
Moreover, some peer-to-peer insurance policies that are set up to insure more basic things (home and auto) forgo any relationship with an established insurance company. If they make their calculations correctly, funds from the large pool of policy-holders can cover claims. That’s cutting out the middleman, which is what is truly disrupting the traditional insurance industry. In fact, the tag-line for the peer-to-peer company Lemonade, which claims to have received US$ 13 million in seed capital in 2015, is: ‘Forget Everything You Know About Insurance: We’ve redesigned insurance from the ground up to make it honest, instant, and delightful.’
It’s fair to say that the peer-to-peer insurance business model is based on trust and leveraging digital tools to safeguard its policyholders. Interestingly, the modern insurance industry has its roots in almost the same beliefs. At the height of the Industrial Revolution, manufacturing companies in the northeastern United States took advantage of a new invention: steam power. But in the early years of steam boilers (the 1850s) the technology was not without its glitches. Steam boilers were prone to exploding every now and then. So the owners of manufacturing plants were among the first crowd-funders in the modern era. They got together and formed a peer-to-peer insurance company that would protect their plants from costly steam boiler explosions. In some ways, therefore, the latest digital peer-to-peer insurance sector is a return to what insurance companies used to do: be customer-focused and, by extension, respond to the specialized needs of their policyholders.
Pankaj Kulkarni is the Head of Insurance at Infosys. For more posts by him, visit Infytalk.
