Is P2P Insurance Going to Disrupt the Industry?
The insurance industry is notoriously conservative. Any slow-moving, wealthy industry is a target for disruption. So, where are all of the Silicon Valley startups taking over the industry? The short answer is that while the insurance industry may need a facelift in a number of areas, the overall model just is not broken. New technologies like blockchain may revolutionize certain sectors of the industry, but will not lead to a full scale upheaval of the traditional insurance model.
Let’s review an exciting new startup in the P2P insurance arena: Friendsurance. Friendsurance is a Berlin based company and is one of the first P2P insurtech players. Friendsurance’s concept is that it allows small groups of people with similar policies to receive cash back at the end of a time frame if there are sufficiently few claims. In other words, you and your group of friends are guilt-tripped into not filing insurance claims unless you absolutely have to because you don’t want to be responsible for ruining the end of year bonus.
You may have heard of this concept before: mutual companies. This is a new twist on mutual companies and can theoretically work if you have a small enough pool of people who you personally know who also sign up for the exact same insurance policy as you. However, this is unlikely to work if you are paired up with strangers who you’ve never met. Also, the more people you put into the group, then the less overall connection you feel to each individual peer. This results in a relationship as arm’s-length as any traditional insurer.
Kyle Nakatsuji, a thought leader in the insurtech arena, breaks down P2P insurance with this handy chart.
This is the same model as a mutual company. Mr. Nakatsuji hits the nail on the head with regard to this model: “The insurance system, while not without its flaws, has functioned for some time and has regulations and processes in place to mitigate adversarial circumstances. In addition, if conflict exists in the insurer/insured relationship, it likely remains present in the P2P model but shifts from customer/carrier to peer/peer.”
Problems with P2P Insurance
We wish the creators of Friendsurance all the best. The general model is a solid one and something possibly worthy of investment. The issue here is not whether it is a good business concept, but whether it qualifies as an industry disruptor. The concept of a mutual has been around since Ben Franklin created a mutual for fire insurance. We applaud Friendsurance’s growth in this arena and eagerly look forward to how they continue to innovate in this environment.
However, the possibilities of P2P insurance span beyond the simple pooling of capital. P2P insurance could group like-minded individuals together into insurance policies based more on ideology than geography. Although each state has an insurance commission with its own set of rules and regulations, it would be difficult for individual states to preclude thousands of individuals from freely banding together to pool their capital into an insurance model. This opens the door to truly decentralized insurance models where the individuals purchase unregulated, unlicensed insurance which pays out claims online.
Decentralized insurance is a tough nut to crack. For example, how do you price policies? Without differentiating individuals into different risk pools then lower risk individuals end up subsidizing higher risk individuals. This defeats the whole concept of using P2P insurance to secure the lowest possible rate.
Insurance managers could fill this void by actively managing the risk pools and ensure the lowest possible rates for the insured. The issue here is that this may be a regulatory nightmare in the United States. It is entirely possible that the optimum risk pool may end up requiring insureds to sign up from all corners of the United States, or even in foreign countries in order to create an actuarially sound distribution of risk. This means that the insurer will have to secure licenses in a number of separate jurisdictions, or just operate as an unlicensed insurer.
The days of P2P insurance may be here. The rise of blockchain technology is likely to ignite a new wave of innovation across the insurance arena. Whether this filters its way down to the captive insurance markets has yet to be determined, but we eagerly look forward to how technology continues to shape our industry.