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Peer-to-Peer Insurance
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Presented at the Insurance and Technology CIPR Event

Adapting to the Recent Trends
Ty Sagalow, Chief Insurance Officer, Lemonade Inc. CXO Insights


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Peer-to-Peer (P2P) Insurance

Last Updated 7/30/18

As new digital technologies are altering the ways insurers engage with their customers who bring into the market new demands, preferences and behaviors, there may be new alternatives to the 300 year-old traditional insurance structure of centralized risk-pooling. Peer-to-peer (P2P) insurance is a new innovation that allows insureds to pool their capital, self-organize, and self-administer their own insurance. The core idea of P2P is that a set of like-minded people with mutual interests group their insurance policies together introducing a sense of control, trust, and transparency while at the same time reducing costs. It is estimated the global P2P lending market will be worth $1 trillion by 2025, up from $64 billion in 2015.

While P2P insurance is a potential new disruptor in the insurance market that could transform the industry, it is not necessarily an entirely novel concept. In essence, P2P represents as much a return to the old roots of insurance as a leap forward. Reflecting the very nature of the sharing economy, P2P insurance leverages the latest technological advances in social networking to best apply the model mutual insurance companies have basically used since the early days of insurance. To enable insurance to achieve its original mission, and do what it once did so well, the core idea and mission of P2P insurance is the betterment of the entire community with benefits accruing to all participating members.

The model of P2P insurance can mitigate conflicts that may exist in the traditional centralized insurance structures between insurers and policyholders as their incentives do no always align. In traditional insurance, reserved premiums not paid out in claims are typically held by insurers. However, in P2P insurance—with members pooling their own resources to cover losses—residual funds (excess premiums) from the paid premiums return to the group when a smaller than anticipated number of claims are filed. At the same time, in bad years when losses from claims actually exceed collected premiums, coverage with a reinsurance company is in place to cover the difference. Thus, in P2P insurance, since premiums not needed to pay claims are refunded to the member policyholders, conflicts between insureds and insurers tend to be minimized, if not eliminated.

Lemonade is the first U.S.-based P2P company to officially announce plans to operate as an insurance carrier, and late in 2015 Lemonade applied to become a licensed insurance provider in New York State. New P2P insurer Uvamo also plans to operate as a licensed insurance carrier. The P2P model may be relatively new to the U.S., but P2P models have emerged in other countries including Germany, the United Kingdom, and China. Although the P2P insurance market is very promising, just as any other disrupting technology it has to overcome growing pains and challenges before it is established. One of the earliest P2P startups UK-based Guevara announced in September 2017 that it had closed down, offering important lessons for innovative insurance solutions and particularly P2P insurance.

A new wave of P2P insurance based on a self-governing business model using blockchain technology has recently emerged moving closer towards mutual insurance. This new P2P insurance model is doing away with traditional premium payment using instead a digital wallet where every member puts in their premium in an escrow-type account only to be used if a claim is made. In this model, none of the members carry an exposure greater than the amount they put into their digital wallets. If no claims are made all digital wallets keep their money. All payments in this model are done using bitcoin further reducing transaction costs. Teambrella claims to be the first insurer using this model based on bitcoin.

Although, P2P insurance could and should be regulated like any other insurance company within the existing regulatory framework of state regulation, this innovative model of managing and delivering insurance products presents a new challenge for state insurance regulators to study its strengths and weaknesses as well as its differences from traditional insurers. Understanding the need for innovation, state insurance regulators' actions are always guided by the need to protect the interests of policyholders who rely on the insurance coverage as well as to help maintain the stability and reliability of the insurance industry.

Status: The NAIC continues to closely monitor all new innovations that could potentially disrupt the insurance industry. In that vein, and to better understand how the emergence of the P2P model and the associated technology is shaping the future of insurance and impacting regulation, the NAIC Center for Insurance Policy and Research (CIPR) hosted an event, Insurance and Technology, during the NAIC Spring 2016 National Meeting. The presentations, as well as the audio from the event, are available to download on the CIPR website.

In July, the CIPR hosted a webinar with The Institutes Griffith Insurance Education Foundation called, "Peer-to-Peer Car Sharing and its Impact on Insurance: Examining the Road Ahead for Public Policyholders." This webinar included presentations on the current P2P car sharing landscape, including existing business models and the future direction of the market, and liability issues surrounding P2P car sharing.