P2P Insurance Model: An Introduction
Peer-To-Peer (P2P) business models have disrupted the Financial services landscape around the globe and now it is disrupting the insurance industry with P2P Insurance business model. It is a risk sharing network of individuals where the premiums are shared together against a risk. It is unlike the traditional model where the insurer keeps the unpaid premiums with itself when a claim is not made. We would discuss about the P2P Insurance model, how are fintechs and insurtechs using the same.
Introduction
Unlike other industries which have leveraged and realized the potential of technology advancements, insurance industry has been reluctant over the years. Outdated technology of the core legacy systems, traditional distribution channels as well as paper-based contracts of policies are still in process for insurers today. The pace of innovation for insurance industry is quite slow and the incumbents are now trying to catch up with others. Digital transformations and upgradation of core systems along with omnichannel distribution have gathered steam around the globe as insurers are trying to leverage industry 4.0 advantages.
Alongside we are witnessing emergence of new business models for insurance that are taking inspiration from other Financial industries like banking, lending etc. Peer-To-Peer (P2P) Insurance business model is one such innovation. Unlike the traditional model with a centralized premium collector and claims processor, this model is decentralizing the premium collection as well as processing. Thereby, disrupting the whole insurance space. There are several advantages and disadvantages for such a model, but it can be a success given proper consideration.
Peer-To-Peer Model (P2P)
In order to understand and appreciate the differences that the P2P model has with the traditional insurance model, it is important to understand the basic features of the latter. Basically, the traditional insurance model has an insurer that collects premiums from a group of individuals are through underwriting and performing a risk analysis. The premium collected is variable depending upon the risk profile of the individual. The risk for the individuals for an event is mitigated to an extent that is covered in their policy. The claim is settled for the affected individual and a specific sum of money is transferred to the policyholder. Now, the unpaid premium(s) are not given back to the policyholders but are kept by the insurer as profits. The diagram below explains the traditional business model for insurance.
In comparison, the P2P model has some stark differences in the business model. A group of individuals come together to form a kind of network and pool their premiums together to insure against a common risk. The group generally comprises of friends, family members, co-workers, people from same community etc. Since, the group knows every single individual, there is more transparency and less risk comparatively. Hence, there are low prices for the premiums. If the claims that are to be settled is higher than the collected premiums amount, a re-insurer usually provides its services to the network pool. The biggest difference is that if by the end of the policy period the claims are unpaid, then the collected premiums are returned to the individuals. This makes sure that there is no friction in this model as is seen with the traditional insurance model where there is a conflict of interest between the insurer and the policyholder. The diagram below explains the P2P business model.
The table below summarizes the differences between the two models:
P2P Model in Action
The basic model as discussed in the previous section can work in theory but, we observe some subtle departures from the same when we consider its applications. The P2P model for the insurance industry was introduced by a German start-up named Friendsurance. This innovative start-up launched its online platform in 2010 where it helps its customers to find suitable insurance policies (Auto & Home) for them. It allows customers to form a pool themselves or groups customers together into a pool. The collected premiums are pooled together where a part of it is paid to the connected insurers and the rest is kept by the start-up to manage claims up to a limit. When the year ends, the unused premium is returned to the policyholders. Friendsurance does not charge anything from the customers but charges a commission fees from the insurers. This model has seen success in Germany as the platform has over 150,000 users currently and is now looking to expand into other geographies like Australia. [
Over time we observe similar models used around the globe and across different insurance businesses. Lemonade, based out of New York City, offers a different take on the P2P model. It offers home insurance policies to its customers where like Friendsurance, a part of premiums, 20-25%, collected is used for day to day operations cost. 75–80% is used for claims management and reinsurance. The remaining unused premium is donated to a charity of choice for the policyholder instead of returning the money to the policyholder. This is where this model differs from the theoretical P2P Model where the unused premiums are returned to the customers. This is an innovative use of the P2P crowdsourcing model and giving value back to the society. The company uses chatbots and AI in claims processing and management. Lemonade now also offers life insurance policies to its customers.
P2P Insurance model is also used by insurance providers for niche segments other than the general and life insurance industries. Bought By Many, UK, is a pet insurance provider which uses a modified P2P model. The company uses the basic logic of buying in bulk (getting discounts) and getting better deals as a group in comparison to a buyer buying in silo. In this way, policyholders get reduced premiums and insurers get customers at a reduced acquisition cost. It is a win-win for all. This model is different to the theoretical model as the unused premiums are not returned to the policyholders.
After considering some successful implementations of the P2P model, we should also focus on the failures. Guevara, based out of London, shut down its operations in 2017. It offered car insurance to a group of individuals like other P2P models. Gather, Boston based insurer, offered a P2P type of model to businesses. These businesses would collectively own the insurance company that offered the insurance. There are a few other attempts at introducing the P2P model in insurance that failed to sustain. It is important to understand both sides of the coin when we evaluate a new opportunity.
Summary
In order to summarize, the future of Insurance 2030 would witness new and innovative business models like the P2P business model that we discussed in detail. There are both positive and negative sides to this but their existence cannot be ignored. With time these models will improve and will challenge the incumbents for market share of the ever changing and evolving customers who are now digital natives living in a connected digital world.
References:
[1] Antora-Fani Dima (www.blog.objectiflune.com, June 2018) : Legacy system modernization in the Insurance industry
[2] Jake Frankenfield (www.investopedia.com, June 2018) : Peer-to-Peer (P2P) Insurance
[3] Matt Walker (www.badcredit.org, July 2019) : How Friendsurance Introduced a P2P Insurance Model to the Market and Expanded with Its Digital Bancassurance Platform
[4] Hadas Tayeb (www.tearsheet.co, Sept 2016) : Lemonade Insurance: I do not think P2P means what you think it means
[5] Matthew (www.productmint.com, Nov 2019) : The Lemonade Insurance Business Model — How Does Lemonade Insurance Work & Make Money?
[6] Anthony R. O’Donnel (www.iireporter.com, Feb 2017): Bought By Many Uses Digital Model to Launch Insurance Products for Members
[7] Ben Carey-Evans (www.verdict.co.uk, Oct 2017) : After Guevara’s collapse, is the industry ready for P2P insurance?
[8] Shefi Ben-Hutta (www.coverager.com, Sept 2017) : Another Failed Attempt at P2P Insurance
