Tech Takes Insurance Back to the Roots With Peer-to-Peer Solutions
The concept of mutual risk sharing goes back to the dawn of insurance and is now making a comeback through products integrating digital technology. The question is whether this trend is more than a fad and whether the industry is about to undergo disruption.
To create products for today’s tech-savvy consumers, several startups are coming up with business models that may disrupt the insurance industry. The newcomers are allowing insureds to create social networks (as friends, members of a football club, tenants in an apartment building, etc.) that allow them to share a large deductible or to pool their risk with peer-to-peer insurance. A premium is paid by the group members and pooled, and claims are paid out of the pool. By mutualizing risks within self-selected groups of customers, the new business models are removing traditional insurers. (Read Joanne Tan’s Insurance Models That Appeal to Millennials)
Among the benefits touted are that the peer-to-peer insurance model should generate savings on acquisition costs and administration, and potentially increase the incentive for members to reduce risk-taking behaviour and fraud. Typically, traditional insurance companies take the risk for the very large claims and provide claims services. A few examples of peer-to-peer insurance include Friendsurance in Germany, Guevara in the UK, Peercover in New Zealand, Inspeer in France, and Lemonade, which will launch in the U.S. in 2016.
While traditional insurers have embraced the digital world by creating online distribution channels and mobile apps to manage policies and submit claims, as well as using social media to connect with their clients and build their brands, few are currently competing in this new space. Perhaps because these new business models are still relatively new, so their success, as well as savings and efficiencies, remain difficult to determine.
And many questions remain. How will non-standard risks be handled? How can small- and medium-sized businesses be integrated into peer-to-peer insurance concepts? Insurance companies are successful when they get the right rate for exposure and uncertainty based on a very large pool of risks, but will a startup have the ability to do that with smaller pools?
Combining a tested model, in this case mutual risk sharing, with new technology can very well mean that the insurance industry is about to undergo disruption, but it could also lead to pitfalls. Stay tuned for more developments and in the meantime please do not hesitate to give us a call to discuss this further.