Peer-to-peer: a mutual interest

The concept of peer-to-peer insurance made headlines in late 2015 when US-based Lemonade announced plans to operate as the world’s first peer-to-peer insurance carrier, offering renters and home insurance to the State of New York.

The concept of a peer-to-peer insurance model had existed before this. A number of peer-to-peer insurance brokerage firms had cropped up over the years including UK-based Guevara, New Zealand-based PeerCover and German-based Friendsurance, the latter of which is a pioneer of sorts, launching in the German insurance market in 2010.

“In 2010, our founders realised that it’s not fair to pay insurance premiums year after year, even if you don’t have any claims,” says Friendsurance co-founder Tim Kunde. “So they developed the first peer-to-peer insurance model that rewards small groups of customers with a cashback bonus each year if their group remains claims-free.”

Since Friendsurance launched its peer-to-peer insurance model, it claims that more than 25 copycats have emerged across the world, and a new segment solely for peer-to-peer insurance has been established which, Kunde expects, will become a market standard in the long term.

What does peer-to-peer insurance really mean? And just how disruptive is it?

“Unlike most insurtech companies that are focused on improving distinct parts of the existing value chain,” says Jonathan Howe, global insurtech leader at PwC, “these peer-to-peer plays are trying to resolve the perceived conflict that there has always been between a customer wanting to make a claim, and an insurer not wanting to pay a claim.

“If that’s a conflict at the heart of most insurance models, peer-to-peer companies try to resolve that by meeting the interests of both the company and the policyholder,” Howe says.

In the case of Lemonade, the perceived conflict between the customer and the insurer is removed by allocating unspent premiums to a charity of the policyholder’s choosing.

With Friendsurance, the unspent premiums go into a cashback pool, which is returned to users of the service.

Lemonade and Friendusrance—and peer-to-peer players in general—seem to be attracting a younger demographic, notes Howe.

According to Daniel Schreiber, CEO of Lemonade, its primary customer demographic are mostly urban, under the age of 35, and tech-savvy.

Similarly, 38.6 percent of Friendsurance’s customers are between the ages of 18 and 30, followed by 19.9 percent between 31 and 40, and 20.2 percent between 41 and 50.

What is disruptive?

The two elements that make peer-to-peer insurance ‘disruptive’, according to Howe, are that not only is the infrastructure of these companies very different from that of the traditional model, but there is also the involvement of shareholders and the corporate layer that comes with that.

“One could argue that the peer-to-peer models are not actually that different; you can compare them to what mutual insurance was about 100 years ago, or Takaful, the Islamic insurance where members contribute money into a pooling system in order to guarantee each other against loss or damage,” says Howe.

“In some ways, lots of these look like a mutual model with brand new operating systems and tech to bring them into the 21st century,” he explains.

“I keep saying it’s disruptive, but then someone else might say it’s not that different from what was around 100 years ago.”

To Howe, the fundamental point of peer-to-peer insurance is simple.

“We’ll all put our money in the pot and we will pay out from that pot. If there is money left over, we will give it back to each other, or give it to a charity, or reduce premiums in the future.

“If there’s no money left over that causes a slight problem because we have to put more in, but most deal with that by buying reinsurance cover.”

Howe believes the peer-to-peer model is disruptive compared to a lot of the other models out there, partially due to the involvement of shareholders and the corporate layer that comes with traditional insurers.

“A traditional insurer can deal with new technology if they invest or partner. They can deal with a different distribution system, they can deal with a different broker system, and they can deal with a different analytics system or new data.”

However, what the traditional insurers can’t deal with is a model that says they don’t want corporate involvement taking profits for shareholders.

“That’s where you get—if you’re an incumbent—true disruption,” he says.

In comparison with the rest of the insurtech space, Howe says there are relatively few players looking at peer-to-peer, but they are certainly the more innovative, and have greater potential to disrupt.

“If they can articulate the benefit of not having that shareholder leg, this could be very attractive to consumers. Having said that, traditional mutuals have seemed to struggle to use that as a competitive advantage for years. That’s the challenge.”

An enabler

From Kunde’s perspective, the peer-to-peer model is not necessarily disruptive—rather, he sees Friendsurance as an enabler.

“We don’t want to replace insurers, we just tackle specific points of the value chain in order to make insurance more customer-friendly,” he says. “All the other startups and emerging companies within the field of insurtech help us to gain traction in the market, for sure.”

The independent insurance brokerage operates in the German market with a six-digit number of customers and more than 70 domestic insurance partners.

How Friendsurance works is that customers with the same insurance type form groups online. A portion of the paid insurance premiums goes into a cashback pool, and if there are zero or just a few claims, the members of the group receive a share return from the cashback pool in January of the following year.

So far, more than 80 percent of users have received a cashback. In the property insurance line, the average cashback has been 30 percent of the paid premiums.

If claims are made, the cashback decreases for everyone, Kunde says.

“Small claims are paid out of the pool. In the event of bigger claims, the standard insurance company covers any amount that exceeds the coverage through the group. In case there is insufficient money left in the pool to cover a claim, stop-loss insurance covers the rest.

“As a result, insurance customers always enjoy full coverage and never pay more than they would without Friendsurance.”

Currently, a claims-free bonus is available with a range of retail products in Germany for car insurance, home insurance, legal expenses and private liability insurance.

“New contracts will already have the Friendsurance concept built in, enabling customers to receive a yearly cashback,” Kunde explains.

“Moreover, the claims-free bonus can also very easily be added to existing contracts, creating the most convenient way of saving insurance premiums—without any change in coverage, price or provider.”