Other parts of this series:
In my previous blog I focused on two particular technologies – namely analytics and the Internet of Things – and the impact these are having on the InsurTech space. But this time I want to consider a whole new type of insurance model, commonly referred to as P2P (peer-to-peer) or ‘social’ insurance.
So what is it? P2P insurance refers to a set of practices and models which, through technology and community, allow individuals and companies to get together in order to diversify and mutualize common risks. In a way, P2P takes insurance back to its modern roots – the coffee houses of 17th century London, where ship and cargo owners would get together to discuss common problems and find ways to pool their risks.
Since those early days, traditional insurance has become very complex, often based around long value chains prone to friction, high overhead costs, and a lack of transparency for the end-customer. These market failures and frictions result in higher premiums being borne by insured parties. By redefining the traditional insurance structure, P2P insurance aims to eliminate some of these frictions, and to remove the inherent conflict of interest (between the insurer and the insured) that arises during a claim.
P2P insurance is now growing quickly. 2015 was the real ‘lift-off’ year, which saw 16 launch announcements from P2P startups. That’s more than during the previous five years combined. As the momentum has built up, so the P2P models have also evolved: from broker or distribution-only models (where the P2P firms simply group people together based on their insurance needs, and then arrange for a traditional insurer to cover the group) to carrier models (where the P2P firm looks to cover some or all of the risk themselves, and not necessarily as formally-underwritten insurance).
In many respects, P2P insurance can be thought of as being part of the so-called ‘sharing economy’ – loosely defined as a socio-economic ecosystem built around the sharing of human, physical and intellectual resources. It includes the shared creation, production, distribution, trade and consumption of goods and services by different people and or organizations. Popular high profile examples of the sharing economy would be AirBnB or belonging to a local car club. These new eco systems are creating demand for other, completely new types of insurance (such as host insurance or shared motor policies).
P2P Insurance has generated real momentum over the past year as it is seen as Insurance re-defined by the consumer. For the evolving millennial driven insurance customer base, it is seen as something new, transparent, digital / new tech driven and with perceived ethical/social consideration. Many of the P2P players are new to Insurance (Lemonade call themselves a Tech company doing insurance, rather than an Insurance company with tech). P2P insurers tend to be transparent with their business model clearly telling customers how it works (in simple terms) and how the company makes its money. From a digital/tech perspective, P2P insurers tend to be new startups with technology and consideration of distribution models at the forefront of their mind. And lastly, each P2P business model seems to drive a “more open/honest” behavior – for example, reducing fraudulent claims by providing Customers with cash-back based on group claims history at the end of the policy term, or in the case of Lemonade, giving a representative donation to charity.
If you’re reading about P2P insurance here for the first time then don’t worry, you’re probably not alone. In fact, more than half of the world’s consumers haven’t heard of it either. In 2016, Accenture surveyed more than 32,000 financial services customers across 22 countries. 53% of the respondents had never heard of the term or the concept, and a further 17% had heard of the term but didn’t know what it meant. Only 13% considered themselves to be fully aware of P2P insurance and its benefits.
Source: Accenture’s global survey of more than 32,000 financial services customers in 2016
People’s awareness of P2P is, however, considerably higher in the US, where 21% of consumers reported being fully aware. This is unsurprising given that a large number of significant P2P players – including Lemonade, Dynamis, and insure a peer – are based in the US. Awareness levels in most European countries were far lower than in the US, although in the UK – where startups such as Brolly, BoughtByMany, Guevara and so-sure are making headlines – 15% of respondents said they were fully aware.
Whilst consumers’ current awareness of these new insurance models may still be relatively low, the potential uptake in the long-term could be very high. In particular, the potential of P2P models to increase trust (in an otherwise largely distrusted industry), to bring people together, and to reward positive group behaviors (e.g. lower levels of fraudulent claims) by refunding unused premiums is very appealing to consumers. Once the potential benefits were explained to them, 42% of consumers taking part in the survey said they would consider using P2P insurance if it was available to them.
Compared to social lending – which is a well-established part of the banking sector in many developed and emerging countries – P2P or social insurance is arguably still in its earliest stages of maturity and adoption. But there is also a widespread precedent for insurers embracing new operating models and practices in response to customer preferences: Takaful insurance. The growth of Takaful (or Shariah-compliant) subsidiaries and offerings in recent years, especially in Asian markets like Malaysia, has been staggering. Many of the world’s largest insurers have deprioritized some of their own commercial interests in order to align with the religious and cultural needs of their customers. So it’s not a big leap to imagine insurers taking a similar approach when it comes to P2P models – putting the ethical and social preferences of their customers first, in order to create new products or compete for well-defined segments of the customer base. After all, insurers have a long and rich association with other forms of affinity distribution.
In absolute terms, P2P insurance is still a very small movement. But it will certainly continue to grow. And it feels like mainstream insurers could already learn a thing or two from these new models, and from the startups bringing them into the marketplace. In fact, one of the most satisfying parts of running the InsurTech workstream of this year’s London FinTech Innovation Lab was to see just how much the InsurTechs learned from working hand-in hand with traditional insurers – and vice versa. Next time I’ll be delving deeper into some of the benefits and challenges of such collaborations, and examining how 300-day-old startups and 300-year-old insurers can bring out the best in one another.
In the meantime, you can read our new report: The Rise of InsurTech.
Thanks for reading.