Did you know that Peer-to-Peer (P2P) firms are creeping into a wide variety of financial markets, including equity crowd funding, mortgage finance and increasingly even the insurance market?
Today, insurance companies, and especially insurance carriers, face tremendous regulation at the local, state and federal levels and must raise substantial capital to back policies, so it is not all that surprising that the Peer-to-Peer (P2P) model is advancing to the insurance sector.
What is Peer-to-Peer?
Peer-to-peer, or P2P, insurers put customers into groups based on a shared factor, usually the type of policy. The group's members pool all their premiums, and payment for insurance claims come from the pool. The aim of P2P insurance is to make insurance cheaper and to reduce the inherent conflict between insurance carriers and policyholders at the time of a claim. For this purpose, a certain number of policyholders pool together. In the event of any claim they support each other financially. If there is no claim, the insurance premiums are reduced or the "excess" premiums are given back to the policyholder or to the group.
Recently, P2P insurance startup Lemonade opened for business in New York, nine months after the startup’s debut and initial venture funding announcement.
According to an article in InsuranceJournal.com, the New York-based company, which its founders promise will reinvent the insurance business model and make insurance a “delightful” experience for consumers, is now selling homeowners policies in the Empire State beginning at $35 per month, and renters coverage that starts at $5 per month. Lemonade reports users can buy the coverages instantly, from any mobile device, quickening a process that otherwise may taken days or weeks. Lemonade bills itself as a game-changing high-tech P2P insurance carrier that will upend how insurance is sold and make the process of buying it much nicer and easier for consumers. Its founders believe the current insurance system is inherently antagonistic and annoying.
New York is the first state in which Lemonade is approved to conduct business.
So, will the infiltration of P2P insurance startups, like Lemonade, upset the insurance sector? 3 ways the P2P movement will bring disruption.
- Building Power: Big names in insurance are throwing their weight behind P2P insurance startups like Lemonade, which tap the power of the crowd. These new insurance companies in the fast-growing P2P segment are using crowdsourcing and social networking to create a shared insurance experience. More will follow their lead.
- Rebellious Customers: With P2P, peer groups, such as owners of autos, houses and small businesses, buddy up to absorb each other’s risks, with all contributing money to insure each other’s losses. The startups promise a pleasant, powerful and even a hint of a rebellious insurance experience.
- Venture Capital: P2P startups have hit a nerve with venture capitalists by offering a technologically strong alternative to the existing insurance business model. By and large, their management teams generally are comprised of professionals formerly in leadership capacities with technology firms and insurance companies - fueling the growing category of InsurTech.
So, will P2P insurance groups undoubtedly pose a threat to independent insurance agents and brokers? Overall, insurance market experts at this time largely agree that any real disruption and signficant competition posed to the traditional insurance industry by P2P businesses is future talk. For today, the reality is that the P2P approach delivered a massive disruption to the financial services market, with P2P lending being one of the biggest new developments in the world of finance. What will P2P mean for the insurance sector five years from now? Time will tell.