The Sharing Economy and Insurance: Peer-to-Peer (P2P) Insurance

From Uber to Airbnb, eBay to Kickstarter, the sharing economy is where individuals share assets or services with one another directly or through other means such as the internet or an app. The sharing economy has grown more and more in the past few years as technology has made connecting with others easier than ever. But what about a long-standing and somewhat conservative industry like insurance? Many of us may see in our own jobs, from the potential for autonomous vehicles in auto to the use of drones to take pictures of buildings in property pricing, that our industry is far from immune to changes in technology. To learn how the sharing economy affects us as actuaries, we can look at peer-to-peer (P2P) insurance.

What is P2P insurance and how is it different from traditional insurance?

P2P insurance is similar to traditional insurance in the sense that a company receives premiums from a large number of insureds, pools premiums from similar risks, and uses them to pay a company's claims, operating costs and reinsurance. If claims exceed the premiums collected, then the company uses reinsurance and accumulated premium to pay these claims. When there is premium left over, rather than becoming profit as it would with a traditional insurance company, these funds are distributed back to policyholders or, in some cases, donated to charities or other non-profit organizations. P2P insurers pride themselves on using the latest technology — apps and streamlined claims and quote processes — to keep their costs as low as possible in order to offer their customers lower premiums.

How does P2P insurance leverage technology?

P2P insurers take advantage of technology not only to keep costs, and thus premiums, low, but also to facilitate the quote and claims-paying process. They make it easy to receive a quote online in minutes and use apps to allow insureds to submit a claim. The insured can take a picture of the damage and submit any additional information online or even take a video to explain what happened. Another common claimed advantage for P2P companies is that, because they only keep a fixed percentage of premiums for themselves, they prioritize paying claims out to insureds and paying them quickly.

Real-world example — how does it work?

One of the most well-known P2P insurers in the U.S., Lemonade, provides homeowners and renters insurance in over 20 states. People can receive a quote online and once they buy a policy, they select a charity to which any leftover premiums will be donated. Insureds that choose the same charity are pooled together and their premiums are used to pay claims. In the event of a claim, the insured can submit all of the loss event details through the app. Lemonade then runs algorithms to determine if the claim can be approved instantly and paid to the insured's bank account. If not, the claim is sent to a human claims handler.

Lemonade may be one of the biggest P2P insurers in the U.S., but there are many others that operate worldwide. Friendsurance was launched in Germany in 2010, partially in an attempt to diminish insurance fraud. Friendsurance customers can select an insurance product offered by an insurance company through a partnership with Friendsurance and connect with other insureds who have a similar insurance need. These insureds are then placed in a pool and part of their premiums go to the insurer, another part goes to Friendsurance and the rest go in a cashback fund. Friendsurance indemnifies insureds for any small claims and the insurance company pays larger claims. As insureds submit larger claims covered by the main insurance company, the cashback fund decreases. At the end of the year, whatever money remaining in the fund is distributed back to insureds. Thus, customers are incentivized only to submit claims when truly necessary. By handling small claims directly, Friendsurance also decreases costs for the main insurance provider and consequently allows insureds to also pay lower premiums.

P2P insurance shows us that even a more than 300-year-old industry like insurance can be transformed by the sharing economy and changes to technology. How disruptive this trend will be remains to be seen, but it shows us that we should always expect changes to our industry.