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P2P insurance, short for peer to peer insurance, is a relatively new form of insurance which has made its way to the marketplace in the developed countries. There are a number of characteristics which make P2P insurance different from traditional insurance. Some of these characteristics have been listed below.
Transparency: In case of traditional insurance, all policyholders deal with the insurance company on a one-to-one basis. This means that they have no reason to deal with one another. This leads to reduced transparency.
However, in case of a peer to peer insurance policy, people who know each other or share similar characteristics form their own group. Hence, all members know each other or at least can know each other. This creates more transparency in the P2P insurance model. Since people who know each other also tend to know the lifestyles and risk profiles of other similar individuals, the total risk profile of a P2P insurance group tends to be lower than the average traditional insurance group.
Less Fraud: In P2P insurance, all policyholders know each other. Hence, if one policyholder makes a fraudulent claim, they might be directly stealing from other policyholders. Statistics have shown that the number of fraudulent claims being filed in P2P insurance is very low. As a result, these groups don’t have to spend a lot of administrative costs trying to verify the validity of the claim. Lack of frauds and lower administrative costs make P2P insurance significantly cheaper than the traditional insurance model.
Refunds: Most policyholders believe that there is a moral hazard in the insurance business. They believe that since insurance companies exist for a profit motive, they will try to deny as many claims as they can. Also, if they do not pay out the claims, traditional insurance companies can retain the rest of the money as profit. On the other hand, P2P insurance groups refund the unused money to the policyholders. Since the P2P groups are not working with the profit motive in mind, they tend to be more liberal with the money they give out as claims. This is the reason why claimants have a better experience while dealing with P2P groups rather than with insurance companies.
Reinsurance: It is also important to note that P2P insurance is as safe as traditional insurance. This is because they pay for reinsurance. As a result, they have the cover from traditional reinsurance companies if the pool runs out of money and the members still need to make another claim. However, this is only a safety measure. Most of the times, P2P groups are able to pay out the claims from the pool. A refund is more likely than the group running out of money and trying to make a reinsurance claim.
The P2P insurance model is still nascent. It still faces a lot of problems which need solutions before the model can go mainstream. Some of the problems with the model have been listed below.
Customer Knowledge: It needs to be understood that P2P insurance is a difficult concept to explain. Traditional customers are used to giving away their money to insurance companies and then expecting the insurance company to deliver the service. The concept of P2P insurance requires vigilant and educated customers. The problem is that most people in the world have a problem understanding plain vanilla insurance products. It is unlikely that they have the time or the inclination to understand a complex product like P2P insurance. If they don’t understand the benefits, they are likely to stick with old age insurance companies whom they have tried and tested. Lack of trust will prevent them from switching over to new and volatile start-ups.
Different Risk Profiles: Also, P2P insurance only works when the people in the group have similar risk profiles. This might be difficult to maintain over a period of time given that the risk changes according to many factors, age being one of them.
If people having substantially different risk profiles are merged into the same group, it is highly likely that people who are careful about how they manage risks will end up paying more. On the other hand, those who are rash will end up benefitting from the arrangement. Since the P2P group is transparent, this may breed discontent amongst the risk-averse members. Over time, the group will only be left with rash members making the entire group unviable.
Scalability: Lastly, the insurance market is huge. For a model to become popular across the globe, it has to be scalable. The problem with P2P insurance is that the model is not scalable. The advantages of this model only work in a small-scale setting. If millions of people are added under this model, it may become unsustainable and may end up causing more problems than benefits.
The bottom line is that peer to peer insurance is still relatively new. It is unlikely to become the dominant insurance model in the world. However, it is still going to grow by leaps and bounds.
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