It looked like the P2P movement, which is reminiscent of the broader sharing economy, might stop at lending. But that’s not actually the case. Now some new peer to peer companies are popping up–peer to peer insurance companies.
As with peer to peer lending, this model tries to hold down costs for everyone by cutting out some of the bureaucracy found in typical insurance companies. Essentially, a peer to peer insurance company puts groups of people into a pool according to their needs. Everyone pays into the pool. Then eligible claims are paid for out of the pool.
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Traditional Insurance versus P2P Insurance
There are a couple of issues with traditional insurance. For one, you are in a pool with all kinds of people. If you’re a great driver, for instance, your insurance company may also insure the risky teenaged driver down the street. Sure, the teenager’s insurance premiums are sky-high in comparison to yours. But yours may still be higher than they need to be.
Also, the insurance company is incentivized not to pay out on claims. Their business model is to get as much as they can in premiums but to pay out as little as possible in claims. The more claims they pay out, the lower their bottom line.
That’s why it’s often so difficult to get an insurance company to pay your claim. You have to jump through all sorts of hoops. And this even though lower-risk individuals are likely paying too much in premiums to begin with.
Peer to peer insurance is different. In this model, you’re grouped with other peers who are roughly similar to yourself. You all pay into a pool for your insurance–whether health or car or whatever. When one of the members of the network puts in a claim, they are paid out of the pool.
There are a few different models of peer to peer insurance companies. In the most common model, the company works like a broker. They pull together the members of the pool and charge a flat fee for their administrative services. If the funds in the pool can’t pay for all the claims, the insurance company covers the extra from its profits. If there is money left over in the pool, it goes back to the members or to a good cause.
In short, peer to peer insurance has some of the same benefits of peer to peer lending. There tends to be more transparency between members. And cutting out the middleman–or at least cutting the insurance company down to an administrative organization–saves everyone money.
The peer to peer model described above is still the most common type of this insurance. But a higher-tech option has been made available through the blockchain. In this option, each person pays a certain amount of money into a digital wallet using the blockchain. Any time a claim is made, each person puts a certain amount towards it. If there’s money left over, the money goes back to each member.
What if a member makes a claim too large to be covered by the digital wallet balances? The model is underwritten by reinsurance through a more traditional insurance company to cover this possibility.
This is still a pretty uncommon option for peer to peer insurance. But it’s out there, and it’s evolving.
Pros and Cons of Peer to Peer Insurance
As with all financial products, this one comes with its pros and cons. On the good side, this type of insurance may cost less than traditional insurance. However, that depends on your risk factors and the type of insurance you’re looking to buy. Still, it’s worth shopping around to see if your costs will be lower.
Also, you could get some of your money back. Some life insurance policies offer this benefit, but it makes the premiums much higher to begin with. With peer to peer insurance, getting some of your money back is written into the model. And even if there isn’t enough money to pay for a large claim from the pool, responsible insurance companies have reinsurance to cover the claims.
Finally, these new companies often write technology into their models. Instead of adding technology to a cumbersome claims process, they start with high-tech and user interface in mind. So with many of these companies, you can upload a picture of your claim and get a payout in less than a day.
On the flip side, peer to peer insurance companies are pretty young. They can’t operate in some states yet because insurance is so heavily regulated. And as with all relatively new financial products, we may not yet know all the potential caveats of this one. So feel free to try a peer to peer insurance company. Just keep your eyes wide open for potential problems as you go.
Where to Get Peer to Peer Insurance
You can get all sorts of different P2P insurance, but these companies are still pretty small and don’t operate in many states. In Germany, Friendsurance is the largest company, and it’s one of the oldest all around. In China, Tong JuBao offers peer to peer insurance. These companies all offer lower premiums than their competitors.
The largest company currently offering in the United States is Lemonade. This insurance carrier takes a 20% flat fee out of your premium to pay for running costs. Then it takes 40% of the fees to cover reinsurance. The remaining 40% pays claims. Any of that 40% left over at the end of the year is donated to a charity that customers choose.
Lemonade currently offers renters, condo, and homeowners insurance in New York, California, Illinois, New Jersey, Nevada, Georgia, Pennsylvania, Maryland, Arizona, Michigan, Colorado, and the District of Columbia. It offers renters and condo insurance in Texas and Rhode Island. And it offers renters insurance in Iowa, Wisconsin, New Mexico, Ohio, Oregon, and Arkansas. It’s working to add additional states shortly.
While Lemonade is the only large peer to peer insurance company operating in the U.S. right now, more are probably coming. And there are some health insurance type companies doing something similar to this model. In fact, health sharing companies have been around for years. They operate on a similar model, minus the return of premium or giving back at the end of the year. You can check out more about health sharing companies, specifically, here.
This type of insurance is fairly limited now, but if you live in a state that offers it, you may be able to save money on basic types of property and liability insurance. And even if you don’t, be on the lookout for more peer to peer insurance companies to come in the future.