A Primer on P2P Insurance and Its Future in India
Peer-to-peer (P2P) lending is something we have heard a lot about in India, but there is something called P2P insurance which has recently started picking up across the world. While India is yet to witness its first P2P insurance product/player, we have the likes of Friendsurance, Yulife, and Lemonade who have attracted the fancy of some of the largest VCs in the world.
But What Is P2P Insurance?
Let me begin with a story. Back in the 17th century, British merchants came up with the idea of collectively insuring their goods to protect themselves in the event of a shipwreck. Each person would note down the goods they wanted to be insured. P2P insurance is a throwback to that time.
In P2P insurance, people form a group and pool certain resources to tide over any contingency that might affect any of the members. It’s worth noting that these members have something in common to safeguard themselves against. Now, since each group may have its own requirements, the group itself determines the rules of how to conduct the operations.
Let’s say we have a group of women, formed to cover legal expenses for any of them in the event of a divorce. An insurance company would not cover such a claim, but the group may know the state of each other’s married lives and agree on the need to be prepared for such a contingency.
The group will structure how the claims will be raised, the upper limit of the claim amount, how it will be processed, and what will be covered in the claims. In addition, they will decide the course of action in case any money is left in the fund. Everything is dependent on the members.
Think of it as group insurance, where the rules of the game are not drafted by insurance companies but the members themselves.
Additionally, in case the claims exceed the pooled amount, a reinsurer would cover that to an extent for a share of insurance premiums.
Does Such a Model Even Make Sense?
To many, it may.
Traditional insurance works within a set framework which limits the flexibility to create products that cover all sorts of contingencies. P2P insurance removes this rigidity. It allows people to insure themselves against contingencies that might be unique to a particular group.
The individuals in a group likely know each other, which in turn protects the group by ensuring that nobody lies about their situation. Therefore, this structure addresses the problem of information asymmetry being skewed in the favor of the one disclosing it. It also takes care of the undue burden of higher premium cost because of adverse selection.
Social stigma and past relationship with the person would keep the delinquents in check and may result in lower premiums.
To elaborate further, the early prototype of P2P insurance in the 21st century was created in Germany when the insurance companies wanted to curtail fraudulent property claims.
A corollary to the previous point is that insurance companies might not want to cover people with a certain demographic profile who might increase the risk of a claim. These people are left to fend for themselves.
Even claim processing–which has been a pain point globally–is easier, as there are fewer procedures involved.
What Are the Nuances in P2P Insurance?
As discussed, the open structure of P2P insurance makes it similar to a blank canvas where people can draft the rules that work for them. But that is not how it has played out till now. Across the world, various P2P insurance companies collaborate with traditional insurance companies to provide long tail insurances. However, the money is pooled from a closed affinity group and then repaid when the claims are not made.
The rules for repayment and making claims can be redefined from traditional insurance companies but the extent of diversification in the policies is still to be determined. Since insurance is a highly regulated industry, upcoming startups cannot let individuals draft their own policies easily. That is not to suggest that there are no companies which are currently doing that. Teambrella based out of Russia is pretty close to being an authentic full-fledged P2P insurer.
Some of the other existing companies are:
Friendsurance (Germany and Australia): It led the first wave of P2P insurance in the 21st century. It ties up with insurance companies and offers their predefined products. The customers can choose the policy and create a group. A portion of the premiums is given to the insurance companies and another is kept by Friendsurance in a ‘cashback fund’. The claims are then paid via the fund and any remaining money is repaid to the premium holders. On average, 80% of the premium holders get 30% of the premium paid back.
PeerCover (New Zealand): It allows users to join or create a group and pay a fee upfront. Here, the peer group is the judge and if the claims are deemed to be fair, users can receive up to thrice their balance to cover their claims.
Bought by Many (UK): It works with insurers to develop policies and negotiate discounts for users with long-tail insurance needs (e.g. pet insurance for rescue dogs and health insurance for cyclists) and earns money through commissions.
insPeer (France): insPeer allows users to form small groups of family members with the exposure limited to €100 pledged to cover claims for any one user, and €1,500 across the platform to reduce auto, motorcycle, and homeowner insurance premiums. insPeer takes a 10% cut from each claim paid.
Teambrella (Russia): This insurance provider uses bitcoins. People who know each other join the group and deposit money in a specific bitcoin account. The funds in the wallet are maintained by the member and the team. During a claim, the team decides on the reimbursement and each member contributes their share from the wallet.
Is India Even a Market for This?
It might seem too early given that a large part of the country is not financially savvy.
To put things in perspective, 80% of the adults (>15 years) have bank accounts in India, but as per the All India Rural Financial Inclusion Survey, 52% of the respondents are comfortable with keeping their savings at home. Moreover, in urban areas, P2P insurance products will be competing with traditional ones, especially at this stage when insurance penetration is <4%. The regulator too needs to wake up to the reality of P2P insurance.
However, following in the footsteps of other nations, we can use it as a distribution channel to increase insurance penetration, which is almost half that of the global average. Here’s a list of potential ways and products to go about it:
- Using the vast nexus of self-help groups (SHGs)
A survey estimates that India has ~6.7Mn SHGs with ~90Mn members. SHGs have seen tremendous success in restricting moral hazard when it comes to banking and lending. The same approach can be extended to P2P insurance, where the overall product is reinsuranced by another insurance agency.
Here, a distributor might play an important role in managing the operations, but while keeping the claims and the amount close to the ground. For instance, they can use a P2P based model for the event of a childbirth. To manage the risk, we can have a model where a part of the premium is transferred to the overall pools which cover all the mini-groups which are created. And in case the claims overshoot the pool of money in a certain individual group, then the money reserved for the overall pools can be used.
- Affinity-based insurance
Adding to the previous point, this approach would seem to work well in urban areas where similar people come together for various purposes, like a club. Insurance companies can tie up with the group entities for their members’ specific needs.
This is similar to corporate insurance. However, until now, most of the products are related to health instead of specific use cases concerning a club. For instance, a group such as “Alcoholic Anonymous” can be given a product for a common risk they face.
- Legal insurance for small- and medium-sized businesses (SMBs)
SMBs with legal cases against taxation authorities may come together. In case the decision goes against them, they can claim some money from the pooled amount. This can be a form of legal insurance based on the outcome.
The theme is to identify groups and reach out to them for their individual needs. India’s size allows each use case to be a large enough problem to be solved. Moreover, the P2P distribution model would remove the problem of adverse selection and moral hazard amongst the premium holders, as they would not want bad apples in their groups and can themselves keep a check on the rest of the members.
Conclusion
Given the regulatory constraints and the legacy players’ move, it might be difficult to see new insurance companies in the near term, especially companies creating innovative insurance products for long-tail use cases. However, we may see several new-age distributors trying to figure out a way to capture this market through not just individual data but also group data.
India is a large and diverse country with unique needs of micro-communities that traditional insurance companies cannot fulfil with “one-size-fits-all” products — whether it is in health insurance, auto insurance, or any other contingencies.
Note: If you’re an innovative founder working in this space, let’s brainstorm. Reach out to me at raunak@eximiusvc.com.
