The term ‘peer-to-peer insurance’ describes a model in which an insurance pool comprises individuals with similar interests, or ‘peers’, who do not necessarily know each other.
Premiums collected from members of the pool are used to pay the claims its members make, but — unlike in traditional insurance — any remaining funds at the end of a year of account are returned to policyholders.
In the case of Lemonade, policyholders are asked to nominate a charity to which they would like any money left in the pool at the end of the year of account to be donated.
Policyholders who have nominated the same charity are part of the same pool, and claims made by these policyholders are paid out of this pool.
A reinsurance agreement covers situations in which claim payouts exceed remaining funds in the pool.
WHAT VARIATIONS HAVE WE SEEN IN ASIA?
China’s booming population of over 1.3 billion people has embraced p2p lending.
Bloomberg estimates that there are about 50 million registered users on various p2p lending platforms in China. Chinese regulators are now catching up with the issues that have arisen following the exponential rise of p2p lending.
The widespread understanding and uptake of p2p lending platforms among the Chinese population creates opportunities for p2p insurance.
Indeed, one of China’s largest insurance companies, Ping An Insurance, has an ownership interest in Lufax, which is one of China’s largest p2p lending platforms.
TongJuBao, also known as P2PProtect, started its p2p insurance journey in China.
TongJuBao’s business model differs from Lemonade’s; with TongJuBao, the amount contributed to the pool by policyholders is the full extent of the potential claims that can be paid from the pool. In other words, the total amount that can be paid to any one individual in the pool is capped.
Friends and family members who are invited by the group’s initiator make up an insurance pool. TongJuBao returns up to 75 per cent of the initial deposit to policyholders if they do not make any claims.
OFFERING MORE CHOICE
In Singapore, Vouch Insurance provides peer-to-peer cover for motor vehicles. Under the Vouch Insurance model, 15 per cent of the premium (or ‘contribution’), is paid into a ‘Group Rebate Pool’, and the members of the pool do not know each other.
Alternatively, policyholders can form their own group of at least 10 people who will potentially have their contribution to the Group Rebate Pool paid back to them at the end of a year of account.
However, if a claim is made under the Vouch Insurance model, the full amount of the claim will be deducted from the pool up to a maximum of SGD 2000. The person making the claim has their contribution deducted first, and contributions of the other people in the pool are deducted proportionally.
Interestingly, Vouch is not an insurance carrier, but has partnered with a number of insurers to offer cover on its platform.
Here in Australia, German peer-to-peer insurer Friendsurance has launched a cover for bicycles that differs from the insurer’s local product. In Australia, Friendsurance is an insurance carrier providing policyholders with the potential to earn a cashback, while in Germany, the company acts as an insurance broker.
Unlike Lemonade, TongJuBao and Vouch Insurance, Australian Freindsurance policyholders do not contribute to a common pool of funds. Instead, an insurance policy is issued with the risk underwritten by Lloyd’s.
The social element is that policyholders have the potential to earn cashback. The amount of the cashback is affected by the claims made by a policyholder and his/her connections.
Peer-to-peer insurance mitigates the moral hazard associated with traditional insurance; there is a disincentive to engage in risky behaviour or to file a fraudulent claim because policyholders may know each other and claims reduce the cashback reward that policyholders can receive.
Conversely, in traditional insurance, policyholders may engage in risk-taking behaviour because they believe that the insurance company will bear the loss, with no direct downside to the policyholder.
A PRODUCT WITHOUT PEERS
While we have covered a number of p2p insurance products in this article, p2p insurance is not yet mainstream. Furthermore, p2p insurance providers face few equivalent competitors in the countries in which they operate. Why is that?
One reason might be that p2p insurance is an emerging product that is still finding its feet.
In many jurisdictions, insurance is heavily regulated, and for good reason. Even if p2p insurance is not considered insurance in relevant jurisdictions, general financial services laws may nonetheless apply as a significant obstacle for any new business to tackle.
Accordingly, it can be hard for new entrants to the market to offer a p2p insurance product. It will also take time for consumers and regulators to understand how p2p insurance works, to learn what risks it is well suited for and to become comfortable with the concept.
WORKING WITH REGULATION
The current regulations in Australia do not expressly contemplate p2p insurance products, and this creates hurdles that make it challenging for true p2p insurance to flourish.
In Australia, prudential and consumer protection regulators APRA and ASIC have not yet stated how they will view p2p insurance players in the market. How they do will likely depend on the model that a particular p2p product adopts.
For example, if Vouch wanted to operate in Australia in the same way that it operates in Singapore, ASIC may consider the product a managed investment scheme requiring special licensing and disclosure requirements.
For the same reasons, Friendsurance’s model in Australia (unlike its model in Germany) does not contemplate the pooling of premiums. In Australia, Friendsurance uses a cashback calculation process.
If a new p2p product is an insurance carrier, APRA may consider its operations an insurance business requiring an insurance licence.
Overseas, the Hong Kong Insurance Authority has specifically voiced its support for insurtech such as p2p insurance and is providing a fast-tracked approval process. While Australian regulators have also embraced the insurtech movement, they have not been as vocal about p2p insurance as their overseas counterparts.
Despite this, help with planning and guidance can support new entrants to the market through their journey to overcome the regulatory challenges in developing products in the Australian p2p space.
Learn more about peer-to-peer insurance at ANZIIF's upcoming Insurtech Conference.
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