Sharing may be caring, but now it is also a booming economy. The sharing economyâ€”otherwise known as collaborative consumption or the peer economyâ€”is disrupting everything from transportation and lodging to errands and the exchange of goods. One of the latest areas to feel this disruption is the insurance industry with the peer-to-peer (P2P) insurance.
What Is Peer-to-Peer Insurance?
Insurtech, a fusion of new insurance models and technology, is the broader umbrella peer-to-peer insurance is sheltered under. Based on the success of fintech, insurtech looks to disrupt the conventional insurance industry in a host of ways. A handful of startup companies have sprung up and are offering peer-to-peer insurance as one part of the insurtech model.
Peer-to-peer insurance functions differently than traditional insurance. Traditional insurance focuses on centralized risk pooling. Individuals pay their premiums for coverage in the event of issues or accidents involving apartments, houses, cars. If the unexpected does not happen and payouts are not merited, the insurance company is able to keep the premium as part of its revenue.
By contrast, peer-to-peer insurance gathers like-minded individuals who agree to pool their premiums. If claims are not filed, the unclaimed funds, or underwriting profits, are returned to members, applied to the follow yearâ€™s premium, or donated to a charity of the userâ€™s choosing, usually after the peer-to-peer insurance company receives its flat-rate fee.
Benefits of Peer-to-Peer Insurance
There are several benefits of peer-to-peer insurance that make this type of insurtech appealing in light of the rapidly growing sharing economy.
- Reduced cost. Because peer-to-peer insurance is typically run through startup organizations, the overhead cost is minimal. Among other things, these lean startups have fewer, if any, brick and mortar offices and smaller staffing requirements. As a result, premiums can be offered at a reduced rate compared to the cost of traditional insurance premiums.
- Streamlined process. Both quotes and claims process quickly, usually online or even on mobile apps. Instead of the traditional back-and-forth between brokers or agents and prospective customers where information is provided, more information may be requested and quotes are processed, at least one P2P insurance company boasts providing a quote in under three minutes and customers can gain coverage the same day. Additionally, since money is pooled among family, friends and other congruous individuals, people may be more motivated to submit claims honestly and even avoid submitting smaller claims, allowing for a faster processing time.
- Common interests. Because peer-to-peer insurance takes place across family, friends and other compatible individuals, the group is highly motivated to choose individuals who fit a lower-risk profile. In addition to offering customized coverage based on group needs, there is also an incentive to make positive choices and foster positive habits because of the possibility of rebated premiums if there are no claims or losses.
Challenges Facing Peer-to-Peer Insurance
Like any new model, peer-to-peer insurance does not come without challenges.
- Reluctantly. It is human nature to be cautious of the new and unfamiliar. Compared to the centuries-old traditional insurance model, P2P insurance is a newborn. P2P insurance is based on the notion that customers will be willing to form pools with people they know. As a result, it could be very difficult for individuals to recruit wary family and friends.
- Growing pains. Peer-to-peer insurance is driven socially – customers are incentivized to spread the word. The customer pool may start as a network of friends and family, but it could quickly expand and end up resembling the traditional insurance model. Additionally, it is relatively unknown as to how risk will be managed when these startups grow in size.
- Regulatory issues. The biggest speed bump facing peer-to-peer insurance has to do with regulatory issues. Much like the ride-sharing regulatory issues that made headlines with the launch of Uber and Lyft, peer-to-peer insurance is primed to face similar difficulties. With insurance regulated at the state level, peer-to-peer insurance could look very different in each state. The regulatory differences, compounded by the fact that each peer-to-peer insurance company runs in different ways, can be overwhelming for prospective customers, especially if they are already reluctant to adopt this new insurance model.
Will Peer-to-Peer Insurance Stand the Test of Time?
The peer-to-peer insurance model comes with many benefits including reduced cost, streamlined processes and common interests. But it also carries its own particular challenges, including reluctance and the inevitable growing pains, as well as regulatory issues. Only time with tell if these peer-to-peer insurance startups become the next unicorn or the next flop inside the sharing economy.
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