In a two-part research note, I review the current crop of InsurTech startups in Peer-to-Peer Insurance. Part 1 positions P2P Insurance, the protagonists and reviews an alternative approach to protection insurance in China. Part 2 looks at the role of P2P Insurance in addressing moral hazard and features Guevara, the UK motor P2P insurer.
Before the advent of underwriting in London’s coffee houses in the 1600’s, civilizations used various mechanisms to provide financial protection within their communities. For example, in the middle ages, tradesmen learnt their skills through apprenticeships in the guild system. These guilds collected fees and the wealthier guilds would use these fees as a kind of insurance safety net.
If a member was robbed or their house burnt down or they were to die, the guild would use money from the safety net to rebuild the house, support the family or settle any financial obligations.
The world of insurance has changed a lot since those times, but the fundamental definition of insurance as, “the mutuality in the sharing of losses”, hasn’t.
Which brings us to emergence of the new generation of P2P Insurance firms. These are InsurTech startups that want to change the relationship between the insured and insurer. They want to address the conflict dynamic that exists between both parties because the Insurer is betting on the Insured not making a claim. And the Insured is betting that they will.
The P2P InsurTechs also want to address human behavior and the moral hazard (see part 2 on this subject tomorrow).
Over the next two days, I will publish a two part research note that explains P2P insurance, identifies the P2P InsurTechs in play today and illustrates two very different business models through interviews with Founders.
P2P Insurance protagonists around the world
Friendsurance – Germany
The pioneer of P2P insurance from 2010, Friendsurance pools its users into small groups and gives its customers a cash-back bonus at the end of each year if they remain claimless. Friendsurance operates as an independent broker in Germany. See here for an interview with CEO and Founder, Tim Kunde.
Lemonade – US
Claiming to be the “world’s first P2P insurance carrier”, little is know about Lemonade other than “it is coming soon”. They hit the press two weeks ago when it was reported they had raised a massive $13m in seed funding (a strong indication where the puck is heading!).
Inspeer – France
Customers form friends and family groups to share the deductible (aka excess) element of a claim. This enables high deductibles, thereby reducing premiums from the insurance carrier. The group shares the benefit of lower premiums and provides each other with financial cover for the higher deductible if there is a claim.
PeerCover – New Zealand
This is a friend and family savings scheme to provide financial cover for deductibles in the event of a claim. Like Inspeer, the higher deductibles result in lower premiums for everyone in the group. However, unlike Inspeer, in the event of a claim, members get up to 3x their initial contribution back to cover their excess.
Guevara – UK
TongJuBao – China
For these last two InsurTechs listed, I spoke with the founders on both teams to find out more about how P2P insurance works and why it is different to traditional insurance.
And these are two very contrasting stories. Tomorrow, I feature Guevara after spending time with 3 of the founders here in the UK.
Tang is on his 3rd new financial business launch after a career in banking and risk management. And in his spare time he writes fiction books!
Like most InsurTech start-ups, Tang wants to disrupt insurance.
Tang explained, “We all want protection but nobody loves insurance. And our insurance providers have not done a good job. In China, customer satisfaction is low at around 19%. Something needs to be done because the market problem does exists and people are frustrated.
“And people think the process is unfair, consumers pay premiums regularly and on time, but when it comes to the claim, insurers often delay and deny the amount to be paid out. This just leads to a break down of trust.”
Often, the InsurTech startup builds a business model that relies on a traditional underlying insurance business model to support it. Tang’s model is to build a P2P insurance model that is more than a social group sharing each other’s exposure to deductibles (or ‘excess’ as we call it in the UK).
TongJuBao, like Guevara and recently announced Lemonade, plan to go further and completely redefine the end-to-end insurance model.
This is not just a distribution play built on some social novelty factor. This is the start of a new wave of insurance business!
With TongJuBao, there is no underlying insurance carrier. Their model separates the underwriting process from the claims process, thereby removing any conflict of interest. First TongJuBao create social communities or groups that customers join as members. They then create a deposit account for every member, which TangJuBao has delegated authority to operate each of their accounts.
All members pay two sums of money into their deposit account. One is the fee for administration. The other is effectively a guarantee deposit to cover the risk being insured. All members pay the same amount into the deposit account to buy units of protection.
This approach, in Tang’s words, is “embedded community level risk-based pricing and all members are treated equal”. To illustrate the point using made-up numbers, if one unit provides £10k of cover and I want £50k of cover, then I buy 5 units.
Tang explained that his first year focus is on launching a range of social risk products into the Chinese market.
– Marriage cover is typically not insurable because divorce is a human, not event based decision. TongJuBao’s product will launch with a flat rate premium and a short term no claims period (to guard against early payout on someone buying, marrying, divorcing and claiming in a very short period of time). Effectively this is selling an insurance product as an alternative to a pre-nup.
– In China, child abduction is a massive social problem (see recent report from the Guardian). Nobody knows the true scale of the issue but it has been a problem since the 1980s and possibly an unintended consequence of the “one child” policy.
TongJuBao’s policy will provide immediate support to the family through an agency that will offer emotional support to the family as well as initiating search and rescue activity in the critical early hours after abduction.
– The third product provides family unit cover for when one spouse has to leave their job to support the family. This is a surprisingly common problem in China where one family member has little choice but to up sticks and move to another city for employment reasons. And the consequence is that their partner has to give up their job as a result.
How does TongJuBao work?
Tang explained, “The members of each community pay premiums into a large pot and then members draw on the pot when they claim. Essentially, everyone in the community signs a contract with everyone else. The members all share the risk and reward.“
This is a mutualization model where everyone puts into the pot and anyone can draw from it. But there is a capital limitation with this model and so all payouts are restricted to a capped amount. In many ways, you could look at the TongJuBao model as a marketplace more than as an insurance carrier. However, unlike the Uvamo model, the members are not speculative investors looking to get a return on their investment.
And as for regulation, TongJuBao operates under a civil law contract and not as a regulated insurance business. This is the model that has been working for P2P lending for the past 8 years and Tang expects it to work just as well for P2P insurance.
Can this business model scale?
Tang believes he can get the same rates of growth in protection as China has seen in lending. He told me, “the model will scale. Just look at P2P lending in China, which has scaled to over 2,000 platforms and total volume of lending is 4 times more than rest of the world put together! And how did this happen? Because in China, Banks were not meeting customer needs. It’s the same story for insurance, they are not serving customer needs.”
In many ways, TongJuBao’s business model takes us back to the roots of insurance. Back in 1696, Hand in Hand, the predecessor to the UK’s largest insurer Aviva, was created to provide everyone in the community with protection in the event of fire. Members paid in a subscription and Hand in Hand owned their own fire brigade. And everyone in the community enjoyed the collective support of all members in the event of a fire.
More to come…
In Part 2 tomorrow, I continue this feature on P2P Insurance, how it addresses the moral hazard and my discussion with the founding members of UK motor insurer, Guevara.
The author, Rick Huckstep is an InsurTech thought leader. Daily Fintech Advisers provide strategic consulting to organizations with business and investment interests in Fintech.