Peer-to-Peer Insurance - how it works and why people like it

Peer-to-peer insurance (PPI) is an insurance model that looks different depending on the company providing it. There are two models currently being used: A) classic group insurance with lower premiums, and/or B) shared excess cover, while retaining your original insurer. PPI is not well-defined, nor does it abide any particular rules at this point. 

Insurance, at its core, is the mutual sharing of loss, but in today's marketplace, not the mutual sharing of gains. Insurers get paid to take on the risks that would otherwise lie on our shoulders, but the cost for consumers can be prohibitive, and the benefits hard to see when no claims are made. Excesses can be high to get discounted premiums, so there's always a trade-off of expense. 

Where did PPI come from?

The peer-run risk-sharing system is not new - in fact early mutual funds and guilds were created by specific groups to share in losses and gains together, so when disaster struck one or more, the pool of funds they all contribute to got them back on their feet. So long as disaster only strikes one family at a time, the pool survives. If nobody uses the pool, it grows, and in some cases, dividends/payments/refunds are offered. This back-payment is now stuffed into shareholders' pockets, not the pockets of policyholders. 

The PPI model is more diverse than the transference of your risk to one insurance company, which is how we are currently obtaining insurance. This model is the transference of your risk to a group of people, of whom you, in turn, share in their risk. 

The benefits of PPI

People are less likely to commit insurance fraud and exaggerate claims when the people they are ripping off are their family and/or friends, or that they will lose money along with everyone else. This puts responsibility for the pool squarely on the pool, even if they are strangers. If there's one thing humans can all agree on, it's the value of money in our pockets. 

In one model, those in the pool get cash back every year if no claims are made on their pool, which can be - without a claim - up to 40 per cent of premiums. This is an attractive offer, and also an incentive to avoid claims unless absolutely necessary. 

The value of this type of group insurance is the removal or lowering of the excess payable; with that spread across more people, the premiums subsequently drop, so opting for a high excess results in low premiums, plus low or no excess. This saves money, and while it's a bit convoluted, it works out. Instead of the choice being between high premiums or a high excess, you can simply opt for PPI, which means lower premiums and almost no excess. 

The pitfalls of PPI

Your pool needs to be a collection of trusted people, since while it is generally expected that people will avoid ripping off people they have made a deal with, it is not unheard of by any means. The pool should be made up of trustworthy people, making this truly a social venture. You rely heavily on the good behaviour of those in your pool. 

This only works for certain types of insurance. 

It's messy. The insurance business has an ongoing, barely-hidden war waging between clients and insurers, since the company is betting on no claim while the client is betting on a claim. This oppositional relationship is often perceived as combative and is not typically harmonious, with the reputation of insurers consistently poor, particularly in the US. The feeling that a claim is going to be a fight is common globally, since the oppositional relationship is clearly defined and paid for. 

Another issue is control of people in the pool. What if there is a person who claims more than everyone else? It's possible that the pot of money may become dry, in which case the participants are left with their normal excess fees, reducing the game to nothing but extra administration. 

The PPI industry

There are several main players globally, but they all do it differently. 

Friendsurance
This German company works with over 60 German insurance companies (and is moving into Australia), and connects strangers all looking for the same sort of insurance. It has over 100,000 customers, after set-up in 2010. 

Friendsurance acts as a broker, putting consumers into small groups, giving cash-back bonuses each year for the claimless, and utilising group insurance discounts to spread the load. They offer private liability, home contents, and legal expenses insurance, and the more people in your group, the less you pay.

According to the company, in 2013-14, 80 per cent of their customers got money back. Friendsurance also won a start-up of the year award in Germany, and investors include Horizon Ventures, VantageFund and e.ventures. 

Guevara
This UK company is essentially acting as a broker, but in this case, the pool is made up of people of your choice - friends, family, trusted acquaintances, or other users, to add to groups of five or more for car insurance. Premiums go to covering the group with discounts given to those with low claims.

This company was invested in by Mosaic Ventures, and Guevara won Wired Money's startup pitch competition in 2014 - just 48 hours later they had sold over £100,000 in premiums. They use a flat fee system, with caps on premium price changes at 100 per cent of your group's first-year premium. Premiums could also drop to 30 per cent of market rate meaning you know where the top and bottom limits may be.  

Lemonade
This US-based company landed US$13 million in seed funding (Sequoia Capital and Aleph), and is setting up licensing in New York so it can underwrite and offer policies itself, instead of relying on other insurers as a broker. It's launch isn't far away, so other information is scant. 

Inspeer
This French general insurance-related company acts as a sort of excess insurance for small groups of friends or family members. The point of it is to divide the cost of your excess, so you can raise the excess amount and get a discount on insurance.

High excesses means lower premiums, and so if or when you do need to make a claim, your co-members are alerted, pay their share, and Inspeer takes a 10 per cent cut of the final claim payout. You can be part of as many groups as you want, but the maximum you will pay for each claim is €100 for any one participant, and €1,500 across the platform. 

PeerCover
PeerCover is a New Zealand-based start-up with founders originating in the cryptocurrency space. PeerCover allows insurance groups to be created (or joined). This system seems a bit more complex (and more truly social) than the others, since this is a real social network.

This company offers actual insurance, but only for small-ticket items that would normally fit into your excess. For example, a mobile phone worth $600 can be insured using PeerCover, but with your regular contents insurer, your excess may be $500 or $1,000, so the usefulness of your insurance with a regular insurer (with lower premiums due to high excesses) is pretty limited and not really worth the claim.

PeerCover allows you to specify what you want covered, and what it's worth, and then you contribute to the pool. If one member makes a claim, everyone else in the group gets to judge whether the claim is valid or not, and if so, it gets paid out of every person's pool. If more than half the group says no to the claim, it is denied.

Your initial deposit should be just greater than one-fifth of your excess, to also cover the PeerCover fee of NZ$100 per claim, tacked on to each transaction/claim. Your money can be withdrawn at any point, and every person's contribution determines the value of their contribution to other claims, but in turn, you can receive up to five times your own balance in a claim. 

Glow

In a new twist to sharing losses (and gains), Glow is a not-for-profit (in)fertility cost-sharing program. A collection of healthy couples trying to conceive all contribute to the pool of funds, which is, after ten months of trying unsuccessfully, is used to do the necessary testing and assistance for infertility.

Each person must fill out their daily log online and contribute money to the pool to remain a participant. If a participant becomes pregnant, their contributions end and their money is used to help another couple who couldn't conceive after ten months of trying. There are no refunds. 

The discussion

PPI works best for small-claim policies like car or small-item insurance, compared to large claims like life insurance. In fact, so far nobody is doing PPI for life, TPD, trauma, or income protection. Crowd-based insurance is still in its infancy in terms of development of concepts, which still remain the very old loss- and gain-sharing model of the guilds of the past. 

PPI is an emerging industry that deserves attention and development - this is one area of innovation in insurance that will hopefully be followed by new, more unique models worthy of our attention.

The dichotomy that exists between clients and insurers could do with being more harmonious, with the benefits of clients being more in line with the benefits of insurers. How we do that remains to be seen, but peer-to-peer insurance is one way of tapping into the good in people for everyone's mutual benefit. Creating motivation to succeed - value sharing - is changing the way we do business in lots of ways, with insurance being one business that can lead the charge.