Peer-to-Peer Insurance: Why it may not replace traditional insurance? 

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Peer-to-Peer Insurance: Why it may not replace traditional insurance?

 

Several weeks ago, I did an article explaining the basics of Peer-to-Peer (P2P) insurance. In the article, I also touched briefly upon how P2P insurance combined Blockchain is challenging traditional insurance. And I still stand by my view that P2P insurance is sure capable of creating a dent in the financials of traditional insurers. How big the dent would be is something that time would tell. However, it is very unlikely that traditional insurers would cease to exist.

P2P insurance is not all that new concept: The idea of getting together and pooling resources to cover for the risk of the group has roots in the 19th and the 20th centuries. So, if someone says P2P is a new concept, s/he is off by a few centuries! The fact that traditional insurance companies existed and continue to exist after P2P (or mutual) insurance was first thought of gives us substantial reasons to believe that traditional insurance companies aren’t going anywhere. And here are a few possible explanations.

Size of the pool: The core idea behind all the variants of P2P insurance is coming together and sharing the risks. On the face of it, this should work and is in line with pooling of risks – the central idea of insurance. But what if the pool is very small, say 20 people? In a pool as small as this, if say, 2 people claim, the chances are the pooled resources may not be able to fully cover the losses. And hence the P2P insurance would need to fall back on traditional re/insurers to cover the extreme events

On the other hand, a separate set of problems creep in when the pool becomes very big, say 10,000. Traditional insurers have dedicated underwriting teams to segregate the risk pool into the homogeneous groups so that each insured pays in proportion to the risk they bring in. In most variants of P2P insurance arrangements, everyone contributes the same amount which would mean the less risky contributors would pay for more risky participants resulting in resentment.

Additionally, when the size of the pools becomes very big, the feeling of bonding no longer exists inviting the risk of fraud, which P2P arrangement was expected to curb and hence offer cheaper insurance!

Long term contracts: The common theme around P2P insurTech is trust given the profit of their business is independent of the amount of the claims and hence they have no incentives to deny any claim. This clearly makes it easy to attract potential policyholders because when you buy insurance you are buying peace of mind. This feature of P2P insurance is good enough to tip the balance for shorter duration contracts, say 1 year. But how many of us would be willing to buy a 30-year life insurance contract from a startup which didn’t exist a year ago? This possibly explains a limited number of P2P insurers focusing on life insurance.

Interesting yet difficult concept: Insurance is not an easy concept and most policyholders don’t fully appreciate what they are covered for. However, over a period of time, they have a certain notion of how insurance works i.e. you pay the premium and get money when you claim. However, in most P2P arrangements you can expect the money back even if you don’t claim. While that is good, P2P insurance requires educated and vigilant customers and hence it would have a tough time scaling the operations and reaching the masses!

Regulation: Insurance, in general, is a heavily regulated industry. In several jurisdictions, P2P insurance is not regulated and that explains mushrooming of P2P insurers in the recent past. However, there are jurisdictions wherein the regulation is not clear. There are good chances that regulators across the globe would catch-up with the innovation and start designing rules for P2P insurance. With evolving regulation, the P2P insurers might be required to go through the challenges which traditional insurers faced several decades ago!

In toto, P2P insurance, especially when combined with Blockchain has huge potential and bring in several exciting opportunities. But I think it is equally important to be a bit cautious before joining the bandwagon. To that end, this article makes an attempt to create a balance and highlights the potential challenges that P2P insurance comes with!

In case you have any questions, about P2P insurance or insurance in general, do write to us at hello@fidentiaX or reach out to me on Twitter when you can #AskTheActuary directly! I am live next on 22nd April at 8 PM SGT!

Disclaimer: The article has been written with an aim to broadly explain an otherwise complicated and technical topic for readers with little or no insurance background. Hence, it doesn’t have finer details but is still broadly correct. The readers are recommended to take advise from their respective financial advisers before taking any financial decision.

 

 

 In case you have any questions, about P2P insurance or insurance in general, do write to us at hello@fidentiaX or reach out to me on Twitter when you can #AskTheActuary directly! I am live next on 22nd April at 8 PM SGT! 

Disclaimer: The article has been written with an aim to broadly explain an otherwise complicated and technical topic for readers with little or no insurance background. Hence, it doesn’t have finer details but is still broadly correct. The readers are recommended to take advise from their respective financial advisers before taking any financial decision.

 About the writer: Mr Sumit Ramani is the Chief Actuary of fidentiaX. He is a qualified Life actuary and a computer science engineer with over a decade of experience in (re)insurance business with a focus on modelling of life and health products, peer review and business analysis.

 

Edward Goh