Guevara, moral hazard and the future of P2P Insurance

By Rick Huckstep

In a two-part research note, I review the current crop of InsurTech startups in Peer-to-Peer Insurance. Part 1 yesterday positioned P2P Insurance, the protagonists and reviewed an alternative approach to protection insurance in China. Part 2 today looks at the role of P2P Insurance in addressing moral hazard and features Guevara, the UK motor P2P insurer.

WS Guevara_Swimmers Group 3000x2000

Moral Hazard

Picking up the thread of yesterday’s Part 1, a common theme when talking to InsurTech firms is “the moral hazard”. The long form definition of moral hazard can be found here on Wikipedia.

Wikipedia explain how the term was widely used in the late 19th century by English insurance companies, implying fraud or immoral behavior by the insured party.

In the modern context, the term is used to define the actions and choices of the protected party when they don’t carry the financial consequences of those actions. If an insured party knows they are protected financially should they crash their car or drop their iPhone in the street, do they act with the same level of precaution as they would without any financial cover?

And why should they? That’s what they’ve bought insurance cover for, isn’t it?



Leaving personal responsibility and the moral dimension of this debate to one side, the fact is that a riskier attitude ultimately leads to higher premiums for everyone.

Which is why P2P Insurance offers the potential for lower cost insurance. By joining groups or communities that you have an affinity with, whether that be family, friends or common interests, the business model relies on a socially responsible attitude to risk taking, as well as a financial one.

If the insured knows that the deductible (aka excess) is going to be funded by their family members are they less likely to make an exaggerated claim? Especially, when they are also taking it from their own pot (read pocket!).Guevara_Logo_black

Hanging out with Guevara

One sign of success is when your name is regularly dropped as a pioneer in your field. As was the case a couple of weeks ago when both Guevara and Friendsurance were prominently named as the Lemonade story hit the press. (If you haven’t seen it, Lemonade just raised $13m seed to build an a full service P2P insurance business.)

So it was my absolute pleasure to spend time recently with three of the four founders of Guevara at their London HQ – Paul Anderson, Rich Philip, and Mike Greer, (the fourth co-founder is Kim Miller).

Anyone who spends time in the investor community, especially early stage investing, will tell you that “it’s all about the team!”. And there’s no better example than the team here at Guevara, with a wide range of different backgrounds, skill sets and experiences.

Everything about Guevara is super professional, which cannot be said for every new startup. From the cool branding and young turks’ positioning to the grey haired underwriting and pricing experience they’ve employed in the back office.

Formed in 2013, Guevara started offering motor insurance in late 2014. As they explained the origins of this digital insurance business, all three of the founders relayed their own personal experiences of buying insurance, from paying high premiums to having no idea who they were insured with.

But the best story came from Paul. Originally from Australia, when Paul first came to the UK he bought car insurance based on having an Australian driver’s license. It cost him £1,000.

Close to renewal time, his insurance provider reminded him that his Australian driver’s license was only valid for a year and he must switch to a UK one. However, there was an unintended consequence of swapping…he was re-categorised as a new/inexperienced driver of less than a year! As a result, his premium shot up to £4,000!

Same driver, same car, same location!

Sadly, this is an all-too-real illustration of how motor insurance works today and why there is a real market opportunity for a new approach.

“Old Insurance is rubbish”

Guevara offers a standard motor insurance policy that is underwritten
using traditional rating factors (ABI rating, driver history, location). The premiums are market competitive, although drivers are unlikely to find Guevara on the aggregator sites.

This is because Guevara are different. And here’s why.

New Guevara customers are offered a choice of groups to join when they take an insurance policy. Their Base Price (which is what Guevara call the premium) is then split in two with one portion going into the individual group (this is called the Protection Pool) and the rest going into a single collective pot that supports all of the individual groups (Guevara call this Insurance Fees).

The amount of the split is anything up to 50% and depends on the number of members in the group. For groups of less than 10, the pool contribution is 20%, with 80% going into Insurance Fees. But when groups get to be larger than 100 members, then the Base Price is split 50:50 between the two pots.

Claims are first paid from the money collected in the Protection Pool associated with each group, until it runs out (or doesn’t, in which case there is a surplus). In the event that the Protection Pool runs out, then claims are covered out of the collective pot (Insurance Fees).

And in the event that the collective pot runs out, i.e. the combined ratio exceeds 100%, then Guevara are reinsured by a traditional carrier.

The key here is that any surplus is redistributed back to the members. At renewal time, all money in the Protection Pool stays where it is and the renewal premium is discounted accordingly.

The model works so that members could achieve 100% discount on their Protection Pot contribution and only pay the Insurance Fees element if everyone in their group does not make a claim. For the larger groups, this is 50% of their originally quoted motor premium!

To Affinity and Beyond!

What makes Guevara works is affinity. Having an association with the group is really important because this model relies on keeping claims expenses down. Even if there has been an accident and a claim needs to be made, the member is now directly incentivized to minimize the claims expense.

Guevara screenFor example, following an incident, how often does the insured go and arrange their own hire car instead of letting the insurer do it for them at a much lower expense.

And going back to the question of moral hazard; if the Guevara customer knows that their claim will directly impact friend or family, or negatively impact their affinity group, they are more likely to only claim what is necessary.

What this all comes down to is this. Guevara’s model seeks to rebalance the fundamental conflict that exists in traditional insurance. The insurer sells insurance because they bet the insured won’t claim. Whereas the insured buys insurance because they bet that they will. Both insurer and insured are betting that the other one is wrong.

What you see is what you get

A continued complaint of customers is that they there is no transparency with motor premiums. How they are calculated? Why they vary so much from one insurer to another? Why do they go up from one year to the next?

The aggregators have not helped as they focus all their marketing dollars on building an ecommerce brand that disconnects insurers from consumers. And is so doing, have created a price race to the bottom that has contributed to over a decade of loss making in motor insurance.

When the consumer gets no value add and buys solely on price, then it is no wonder, with human behavior being what it is, that a disconnected, disinterested insurance customer will maximize their insurance claim at every opportunity.

Guevara want to change this dynamic and it starts with transparency. Customers can make their own choices about the group to join. They can always see who is in the group, how much money is in the protection pot, who is making a claim. And importantly, how much is left at renewal time.


“Our aim is to encourage customers to engage and understand our insurance product”, said Rich (who has the responsibility in the team for marketing). “Insurance is such a large proportion of household discretionary spending. By giving our customers accountability within their groups and making that transparent for everyone, we can reduce the cost of motor insurance for everyone.”

What next for Guevara

For now, the team are totally focused on the UK motor market but I could sense that they won’t stop there. And this is more than a distribution play. Guevara are building a full stack insurance model. Although building an insurance business is no small feat. It takes time and a lot of capital to do that. Plus there is the whole subject of regulation, which just has to be embraced and fully adopted into the business model.

To date, Guevara have relied on social media, word of mouth and the network effect to build it’s customer base. Plus some really cool branding courtesy of founder Mike.

The product is ultra sticky because the upsides come at renewal time, just when buying decisions are being made. For Guevara to succeed, then it has to show over time that it can deliver a better trust engagement, a change in driving behavior and ultimately lower, fairer premiums for group members.

Which is the goal for all of the P2P InsurTechs covered over these two articles.

Insurance Evolution

Evolution-Of-Travel-Insurance1Jeff Bezos is credited with saying, “what is dangerous, is not to evolve”. The traditional insurance model is not in good health and this is creating the dynamic for change. The emergence of P2P insurance is evolution in action, even if it is taking us back to the roots of the industry!

The author, Rick Huckstep is an InsurTech thought leader. Daily Fintech Advisers provide strategic consulting to organizations with business and investment interests in Fintech.


  1. Nice follow up article Rick. These guys have impressive branding and seem to have a great team in place. Just a couple of observations (following from my comments yesterday)..

    i. I see the groups are much smaller than initially thought, so the variance of claims amounts/numbers is potentially even more problematic. Is it inconceivable for all members in a group to make a claim (even with the envisaged ‘social shaming’ behaviour change reducing moral hazard)!? Probably not, at least not compared to the probability of all policyholders in traditional insurance making a claim. Also, with self selected groups is there an additional correlation risk? Insurance generally works on the basis of independence of claims, but in this scenario, you could see a group from, for example, a church in a city coming together under the belief that they are ‘better than average’ risks. Crime happens to be high in that area and everyone in the group is therefore exposed, as there is a lack of diversification.

    Also, is the business model additionally exposed to over confidence bias (90% of drivers think they are better than average!), whereas the traditional insurer works from a purely factual historical data vantage point?

    ii. Is there truly an appetite from the consumer to have their claims potentially known by friends and family, especially when everyone suffers as a result? Given the risk transfer effectively applies to the excess/deductible amount it may be the case that individuals don’t claim at all (unless its a very large claim) to avoid the ‘social shaming’ etc. In this scenario, wouldn’t the individual have been able to achieve the same transfer of risk (and reduced premium) back to themselves via taking a much higher excess at the start? Will be interesting to see how much these groups save over the long term.

  2. Moral hazard supports the general business case for peer-to-peer insurance, but I question whether it is relevant for UK motor. The major motor industry issue is “cost shifting”. This is where at-fault claims are inflated by intermediaries, on an industrial scale, because all costs are ultimately recoverable against the insurer of the at-fault driver. An example is the police receiving a commission for calling out a particular tow truck after an accident. I’m not sure how policyholder behaviour can influence this.

    UK Motor insurance is already the most analysed and competitive class of business in the world (probably). Motor accidents are just that, accidents; they aren’t deliberate actions of the policyholder. Motor insurers are already experts at predicting the risk of a policyholder causing an accident, so I don’t really understand what Guevara’s proposition is: what policyholder behaviour will be “improved” by peer-to-peer?

    Another area where UK motor insurance doesn’t seem to fit peer-to-peer business model is the black swan nature of motor insurance claims. A sizeable portion of motor insurance claim costs is driven by a really small number of catastrophic motor accident claims. If you insured 100,000 vehicles in a single pool about 4 of these would have large claims (>£100k). These 4 claims would end up contributing about 25% of your overall total claims cost. In short you need massive pool sizes otherwise you end up refunding premiums that will eventually be needed to cover black swan events. Look at the potted history of insurance industry to see how problematic accurate reserving is for long-tail lines of business. For mobile phone insurance you could probably get away with twenty people in a pool, but for motor insurance you basically need the scale of an insurance company(!).

    I think insurance does need some major innovation and it’s great to see an article about peer-to-peer as there haven’t been many in either technology or insurance press. You may have guessed – but I (unfortunately) wonder whether Guevara is the real deal?

    • Good points John. Guevara’s model may be more about reducing propensity to claim, especially for fraudulent claims (weak neck syndrome!) rather than influencing moral hazard. Self selecting groups may be better at influencing this than the traditional insurer is at pricing it in.

  3. […] P2P自動車保険は、ヨーロッパではFriendsurance(ドイツ)やGuevara(イギリス)が既に取り組んでいます。モデルとしては、グループメンバーが保険料を出し合ってプールを作り、その中から保険金支払いをし、保険会社の管理手数料として一定額を差し引いた上で、年度末に余った分はメンバーに還元される、というものなります。プールから支払われる保険金が少なければ、メンバーに還元される保険料も多くなるので、安全運転を心がけたり、不要な請求は控えよう、というインセンティブが働きます。 […]

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