By FintechOS · May 26, 2022
5 minute read

P2P insurance: macro- and micro-insurance, part 2

P2P insurance for communities

P2P insurance is part of a new wave of decentralized financial services. What began as a small-scale revolution has since been adopted by established insurers as a more ‘ethical’ and social alternative to standard insurance.

In the first part of this series, we looked at large-scale parametric insurance, but now we’ll consider what insurtech can do on a smaller, more-personal scale. With “de-fi” – decentralized financial services – cutting out the middle man from currency and banking, is there an option for insurers to do the same? Is that a threat to established insurers or an opportunity?

Before we can answer these questions, we need to look at the rise of peer-to-peer services, how P2P specifically works for insurance, and finally, where established insurers fit into this new kind of insurance.

The rise of P2P insurance

Generally speaking, the idea of ‘peer-to-peer’ services could well be the most impactful innovation the internet has brought. Benefits include:

  • Citizen journalism allowing anyone to write news articles
  • Video streaming allowing members of the public to create entertainment
  • Cloud computing allowing easy access to computer services
  • Open banking is a natural use of the cloud
  • Cryptocurrency has cut banks and governments out of currency

With this revolution in peer-to-peer going on, why not decentralize insurance, as well?

Essentially, peer-to-peer (P2P) insurance works like amortization. A group of people pay money into a central pot on a regular basis. When one of them incurs a loss, they can claim from the others to receive a payment from the pot.

Uber drivers could benefit from P2P insurance

This is, of course, entirely feasible without technology. A group of taxi drivers working for Uber on a freelance basis could, for example, each pay money into a joint bank account each month. If any of them had a car accident, they could use the money to pay for repairs without relying on their vehicle insurance.

Yet, what if one of the drivers doesn’t keep up their payments? What if two have accidents at the same time and there is only enough money to pay for one set of repairs? What if a driver makes a fraudulent claim?

This is where an unbiased third party comes in. That company can hold the money in trust, revoke membership for those that don’t pay, make decisions regarding payments, and even lend extra money to the pot. The peers will pay this third party for their work, but by cutting out the underwriter, the peers can still keep costs down.

Using technology to create P2P insurance

So where does technology come in to facilitate this? Well, the above example only works if you have a group of colleagues to share a pot with. Otherwise, you’re just creating a personal savings account.

If you don’t have a group of peers to pay into a pot, technology will allow you to apply to an anonymous group. It’s just like joining a Facebook group or Discord server. You can then insure yourself on a much smaller scale and cut out the middle man.

Oscar P2P Health Insurance website

As these services have grown in the market, such as Germany’s Friendsurance and Oscar Health in the USA, established insurers have looked to offer their own version of P2P insurance.

The advantage to insurer-run schemes for customers is that the insurer can pay to cover any excess if the pot of money runs out, then recover it over time through subsequent payments into the pot. Regardless, the insurer just takes a flat fee for administering the pot and doesn’t claim any premiums.

Other, so-called “third-wave”, P2P insurance policies are now setting up a system whereby peers only pay when a loss is incurred. Rather than pay into a pot, if one member incurred a USD 5,000 loss, each of 1,000 members would pay USD 5 to cover it, for example.

Social insurance through innovative insurtech

As well as reducing costs, P2P can be seen as social insurance – an ethical option when compared to big business. Yet, when run by an insurer, claims for large amounts of money are still feasible and customers won’t be left short.

This leaves P2P insurance as a definite opportunity for insurers to win back customers who may have lost faith in the insurance industry. It can serve as just another string to an established insurers product offering bow.

Like parametric insurance, P2P insurance serves as a way to escape the perception of the insurance industry as greedy and exploitative. After all, insurance has always been a public service, but along the way, its image has been tarnished.

Technology gives insurers the opportunity to rebrand as a trusted partner offering social, ethical services to the community. All this is possible using the right technology partner.

To find out more about what the FintechOS platform can do to upgrade your technology and prepare you for innovative insurtech services like parametric and P2P, book a demo.

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