I want to believe P2P insurance can work, but right now it just doesn’t.

Part 2 of my reflections from InsureTech Connect 2016. Part 1 can be read here.

The startup community tends to rally around itself, sometimes without first applying a layer of critical analysis that would otherwise add to the conversation. This relentless positivity can be helpful, in terms of creating communities and support networks, but it can create an echo chamber of sorts where the validity of product, models, positioning, and technology go unquestioned.

During the second day of InsureTech Connect 2016, the dominant theme was peer-to-peer insurance (“P2Pi”). The day opened with a presentation by New York based Lemonade and later included a panel discussion with Friendsurance (the European poster child of P2Pi), a startup called So-Sure and a venture capital fund called Caanan Partners.

If you’re not familiar with how P2P insurance works, you can understand it broadly as 1) a high deductible insurance policy paired with 2) a self-insurance program, administered by a startup, to cover that high deductible. The idea is that small claims (like a fender bender) are covered by the funds pooled together by a peer group and large claims (like a totalled car) are covered by the umbrella policy that resides in the background. If there is money left over in the self insurance pool at the end of the year, those funds can be redistributed to policy holders as cash-back or as a discount against future policies.

P2Pi can be delivered using a brokerage model. This is the approach taken by Friendsurance; they create and administer the peer group and then broker a stop-gap policy on behalf of an incumbent insurance carrier. P2Pi can also be delivered using a carrier model, which is what Lemonade is doing, where the policy is actually issued by the company.

Arriving at Insure Tech Connect 2016, I had plenty of questions regarding the P2Pi model that I was hoping to have answered. Here’s some of them and, to the extent that I learned something on day 2, here are the answers.

How do you create a scalable way of building peer groups?

No one addressed this point to any level of detail and that’s a problem. It’s important to remember that P2Pi only works in an equitable manner if the peer group itself is made-up of individuals with similar risk profiles. If that’s not the case, then the highest quality customers in the pool are statistically guaranteed to lose over time. It isn’t easy to reliably and repeatedly evaluate the subjective risk presented by an insurance customer; it’s a challenge as old as insurance itself. Beside vague references to how data can be used to facilitate the creation of peer groups, none of the P2Pi startups present at Insuretech Connect provided much in the way of an explanation.

How do you market P2Pi to customers that probably don’t even understand vanilla insurance products?

In this very blog post, it took me 5 full paragraphs of context to get to a point where I felt comfortable introducing my own thoughts on P2Pi. Keep in mind that the target audience of this blog already has an above average level of knowledge of the InsurTech space. At my startup, Covera, we spend a lot of time thinking about and studying customer acquisition channels because customer acquisition is such a fundamental challenge in this industry. I do not envy the P2Pi startups that need to keep customer acquisition costs low while simultaneously educating their customers about P2Pi. Most of the P2Pi startups that I’ve seen have taken a price-focused approach to customer acquisition, which leads me to my next question.

Do P2Pi customers actually save any money?

In Theory, the law of large numbers should make a self-insurance pool unpredictable from a loss ratio perspective. This is important for obvious reasons; if the main motivation for customers to enter into a P2Pi contract is so that they receive some amount of their premium back at the end of the year, what does it mean if a startup is not able to deliver on that promise? So-Sure, who offer a phone insurance product, claim that you can “get up to 80% of your money back when you connect with those you trust & none of you claim”. There are a lot of “if & then” statements embedded in that premise. Dylan Bourguign, the CEO of So-Sure was challenged on this figure during the panel at Insuretech Connect and further diluted it by qualifying it as an average figure. I have not seen any concrete figures regarding the percentage of P2Pi customers who actually receive funds back at the end of the coverage terms (please post data below in the comments if you have it).

Does moving up the stack (by becoming a carrier) solve these issues?

One of the most anticipated launches of the year was Lemonade. When their minimalistic landing page appeared at the beginning of 2016, InsurTech geeks around the globe were excited to see how “the world’s first peer-2-peer insurance company” would overcome the issues set out above. All signs pointed to this being a serious venture: in 2016 one does not secure an AAA domain name like www.lemonade.com without some serious financial backers. News started trickling in about senior executives from incumbent insurance carriers jumping ship to join the startup. The well-publicized recruitment of a leading academic in the field of behavioural economics created a stir as observers debated how Lemonade was using consumer psychology to address moral hazards. When the company finally launched last week, it took me by surprise that none of the above issues were addressed. In fact, they didn’t need to be, because for all intents and purposes Lemonade has abandoned the P2Pi model altogether. They still group consumers together (Lemonade’s customers make charitable donations based on a cause of their choosing), but this is only a symbolic nod to the P2Pi model as it’s been previously advanced by Friendsurance, Guevara, So-sure, and others.

By no means am I trying to imply that Lemonade is not going to be a successful startup: they are a completely digital & full stack insurance carrier, and what is not to love about that? What I’m getting at is that if Lemonade wasn’t able to bring a scalable expression of the P2Pi model to market, who on Earth will? There aren’t many startups out there with the high performance team and deep financial backing of Lemonade. Outside observers cannot be blamed for concluding that product market fit for a pure P2Pi business isn’t realistic at the moment. I hope that Lemonade will be discussing the reasons why this is the case in the future. It could be related to some or all of the problems I’ve listed above, but it could also just be that the regulatory environment in New York wouldn’t allow for it at this time.

So while I would love to be proven wrong, it seems that, at least at the moment, peer-to-peer insurance is a model looking for a market.

Scott

About the Author: Scott Loong is the founder of Covera.co, a digital insurance brokerage that takes insurance renewals off of your to do list, forever.

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