InsurTech and Peer-To-Peer Insurance

Saul Ewing Arnstein & Lehr LLP
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Saul Ewing Arnstein & Lehr LLP

As InsurTech startup companies continue to enter the marketplace, one innovative concept that has gained considerable momentum in the international insurance market is peer-to-peer insurance.  Often powered by InsurTech, peer-to-peer insurance companies take a different approach to risk pooling. 

Under the traditional insurance model, insurers collect premiums from a large pool of policyholders, usually strangers, and then an underwriter uses profile information from the policyholders to create a risk analysis and adjusts premiums accordingly. Information such as age, medical history, hobbies, and accident history are used to determine the premium that each policyholder pays.  Profits and losses from underwriting under the traditional model are generally retained by the insurance company.  

Peer-to-peer insurers form communities of like-minded individuals who pool premiums together to insure against risk.  By selecting the insurance pool, which often consists of family members, friends, or individuals with similar interests, policyholders share the risk for the smaller group.  If no policyholder makes a claim, the insurer generally pays back a portion of the unused premiums.  As a result, policyholders are incentivized to form low-risk groups and engage in risk-minimizing behavior.    

An even newer wave of peer-to-peer insurance utilizing block chain technology and self-governing models has recently emerged.  Under the self-governing model, policyholders within the community collectively manage all insurance functions, such as setting policy rules, accepting new members, making and approving claims, and paying reimbursements.

One international peer-to-peer insurer is Friendsurance, which is now available in Germany and Australia, and markets itself as the "first peer-to-peer insurance model worldwide." Friendsurance boasts that the average "cashback" to policyholders has been 30% of the paid premiums, due to the  group performance and cashback incentives.  Similarly, Inspeer opened its doors in France and Guevara is expected to open in the United Kingdom in the near future.  

Although peer-to-peer insurers are not yet widespread in the United States, their success overseas is generating considerable buzz and may be an indication of what is in store for the United States marketplace. Any peer-to-peer insurer that decides to jump into the United States marketplace, however, faces unique regulatory and business pressures that ultimately will determine its fate.  In our next blog post on peer-to-peer insurance, we will explore some of the U.S. regulatory hurdles facing this concept.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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