Takaful – $15bn with a 14% CAGR…can P2P Insurance do the same?

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  • Policyholders co-operate among themselves for their common good.
  • Every policyholder pays a part of the contribution as a donation to help those that need assistance.
  • Losses are divided and liabilities spread according to the community pooling system.
  • Uncertainty is eliminated in respect of subscription and compensation
  • It does not seek to derive advantage at the cost of others.

Does the above sound like a PR announcement for the newest P2P Insurance company?  

Well, it’s not.

These are the Basis and Principles of Takaful according to the the Institute of Islamic Banking and Insurance.

Having worked in Malaysia for the past 4 years, I became very familiar with Takaful. When I first started hearing about P2P Insurance, my first thought was ‘Hmm, this sounds a lot like Takaful’.

This week’s article started out as a comparison of P2P Insurance and Takaful. However, as I started reading, researching and going down the rabbit hole more on the P2P topic, I had a Eureka moment.  It has to do with a topic that I have been writing a lot since I took over the weekly Insurtech articles at Daily Fintech; claims.

Let’s start with a bit of background on Takaful and P2P Insurance.  I’d like to thank my friend and former colleague Vas Ramanujam for helping me to clarify some of the points in the ‘What is Takaful’ section below.  Vas is an expert in Takaful and also an Insurtech enthusiast.

What is Takaful?

Broadly speaking, Takaful is similar to a mutual Insurance model, whereby it upholds the principles of mutual assistance, donation and the pooling of risk. The agreement is governed by the principles of Shariah law. It is in essence an agreement between a group of individuals who agree to jointly contribute to a pool of funds and ensure that any losses by individual members are indemnified as defined in the terms of the agreement.

There are a few different types of Takaful models, however I will not go into all the variants for this article.

Some of the other nuances of Takaful includes:

  • In conventional Insurance, the risk is transferred from the policyholder to the company. In Takaful, the risk is shared amongst the pool of participants.
  • An entity that sells Takaful is not referred to as a company, but an Operator. The reason for this is because their role is to manage the fund and risk on behalf of the pool of certificate holders, hence they act more as an operator than as a company.
  • Contracts in Takaful are referred to as certificates rather than policies.  As such, Takaful policyholders are referred to as participants as they mutually agree to participate in the sharing of the risks.
  • Premiums are called contributions (or donations) as it is based on the principles of mutuality as participants voluntarily undertake a contract to mutually help each other. In conventional Insurance, premiums are usually considered as income to the company.
  • In return for managing these funds, the Operator is allowed to charge a Management Fee (defined as Wakalah) which is agreed transparently upfront between the participant and the operator. This is how the Operator makes money and stays in business.
  • The most prominent Takaful model is the Wakalah model which is managed by the Operator by creating two segregated risk funds – the Participant Fund and the Operators Fund. Claims are paid from the participant’s fund. If there is a shortfall, then there will be an interest free loan provided by the shareholders fund. This loan will be paid without interest in future years as future surplus emerges from the participant fund.
  • Takaful prohibit elements such as Gharar (Uncertainty), Maysir (Gambling) and Riba (Usury):
    • Gharar can be described as pure speculation whereby the outcome depends on chance or gambling. One party should not gain more than the other. However the gains should be shared (between policyholder and Takaful Operator).
    • Maysir relates to taking on unnecessary risk/gambling. For example, the Takaful Operator can only invest in Shariah compliant assets (e.g., alcohol and gambling businesses are prohibited).
    • Riba relates loosely to the lending of money and earning interest or an addition to the principle of a loan i.e., an interest-free loan paid by the Takaful Operator to support the Participant Fund.
  • From an operational perspective, claims work similar to that of any other Insurance product, and Takaful Operators will need to have a claims team set up to manage claims.  
  • At the end of each year, any surplus from the Takaful fund will be shared amongst participants and/or the Operator.

Where is Takaful bought/sold?

According to Milliman’s Global Takaful Report 2017, Takaful is primarily sold in the following areas:

SouthEast Asia – Indonesia, Malaysia, Brunei

GCC – Bahrain, Kuwait, Oman, Qatar, UAE and Saudi Arabia

Africa – Sudan, Egypt, Kenya, Gambia and Tunisia

Others – Bangladesh, Pakistan, Turkey, Sri Lanka, Syria, Yemen and Jordan

How big is the Takaful market?

Screen Shot 2017-10-30 at 9.53.31 AMScreen Shot 2017-10-30 at 9.50.58 AM

I realize the US Insurance market alone is over $1 trillion in premium, however, these numbers are nothing to balk about.  Takaful is a major product around the world and has grown quite well over the past few years.  

What is P2P Insurance?

For purposes of writing this article, I have reviewed Friendsurance, TeamBrella, TongJuBao, Lemonade, Inspeer.  I have also included Lemonade in this analysis as they originally started as a P2P and I think a lot of the underlying philosophies of their business still resonate with the comparisons made in this article.  I will also still include them under the category of P2P player for purposes of this article only, as described below, though I do recognize that they no longer label themselves as such.  (the words in italic are a post-publish edit based on Lemonade’s pivot from P2P to ‘tech company doing insurance’ that I had overlooked).  

My comments on P2P Insurance will based on my aggregate view of these P2P players (by player, I refer to either a P2P broker or carrier) and their business models.  I will mention names when needed for specific examples and provide relevant caveats as well for differences in business model.  

For those of you that have followed my articles over the past two months, you will notice a trend where I often refer to the fundamentals and principles of Insurance. As such, rather than analyzing the companies above, let’s look at the principles of P2P Insurance.  

There is not a clearly defined set of principles for P2P Insurance from an institute, like I have for Takaful above.  However, from a review of these different P2P players, there are a few key principles which P2P players seem to abide by (which also relate to the problems they are trying to solve).  These principles are:

  1. Transparency – typically P2P players refer to transparency in relation to how premium is used, how profits are derived for their company and/or transparency in the claims process.
  2. Trust/Fairness – this can be two fold – 1) relating to the transparency point above, P2P players claim that a policyholder can trust them more because there is ‘no conflict of interest’ in paying claims/profit making and 2) because you are in a group of individuals that you have more closely aligned interests with, there is more of an element of trust because you’re not just pooled together with random individuals as with regular Insurance.  
  3. Control – the P2P player will typically show that they are giving more control to the customer, either by being able to choose the peers they group with (in case of self governing, actually selecting the person to join the group based on risk they carry), how claims are getting paid (in case of self-governing, which claims are paid), the charities they give back to, flexibility with respect to how the customer manages their policy, etc
  4. Reduction of Cost – similar to the concept of group Insurance, by bringing more people together,  the cost should go down.  Combine that with characteristics of a mutual, where there are shared interests/risks, the costs may go down even further. Further, P2P players expect to bring down the cost of claims due to the peer/social element and are expecting policyholders will claim less
  5. Affinity – trying to make policyholders feel ‘good’ about the Insurance they buy. Perhaps it’s cooler to say ‘I have a digital platform with a bunch of people around the city that allows us to connect and protect each other in case something happens to me or my stuff’ vs. ‘I just bought some Insurance’.
  6. Social Good – Combining all the above, this brings about the original intention of what Insurance was supposed to do – and be a social good that everyone can have! Oh, and let’s give some money to charity too.  

Where are the similarities between Takaful and P2P?

With the above Principles of P2P now outlined, let’s look at why I think these two products are so similar:

  • Both products based on a purpose close to the policy/certificate holder – either some sort of affinity or religion
  • Both focus on the social good and community aspect of what Insurance/protection offers
  • Both focus on transparency of their operations and profits are not the primary objective
  • Both have some sort of mechanism to give money back to policyholders
  • Both aim to reduce premium/contribution by a combination of pooling people together plus focusing on the social element in an effort to reduce claims frequency

What can we learn from this?  How can the principles of Takaful and P2P be applied to the existing value chain?

In an article earlier this year, Bernard (Daily Fintech’s CEO) talked about Lemonade to see if P2P was a game changer.  This references the characters from Winnie the Pooh.  I am going to look at the various members of the value chain through the eyes of these characters and slightly change the definition of each character:

  • Tigger is the excitable cat, full of enthusiasm for every new technology which will surely change the world for the better and do it right now.  Tigger is a P2P Insurance entrepreneur.  
  • Eeyore is the old grey donkey who thinks it is all rubbish, that all this change will only end badly or won’t happen at all. Eeyore is an incumbent that is a sceptic to P2P Insurance (primarily due to the negative press that P2P puts on the Insurance business).  
  • Winnie The Pooh is a humble “bear of little brain” who somehow gets to the right answer by asking good questions. We all want to be that insightful bear, but in the tech world the market is the only judge of what works or does not work. Winnie the Pooh is the same.  He is someone who is looking at both and trying to question – what is the right thing for the industry?

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P2P Insurance primarily looks to strengthen the relationship between the Carrier and Policyholder…but what can we do to strengthen claims (and not just the payment of claims)?

The following diagram below shows the three parties involved in an Insurance claim.

Screen Shot 2017-11-01 at 9.34.25 AM

I am using the term Provider loosely.  For Provider, I am referring to body shops for auto Insurance, contractors for home Insurance and hospitals/doctors for health Insurance.  

The current P2P players have been going after Insurance incumbents based on the sentiments I outline above.  This has brought out a lot of areas for improvement for the industry.  

If Insurance was just about the timely paying of claims, then these problems may be easier.

But what is the other factor not being addressed in any of these models?  It’s how to reduce and get fair cost from third parties who actually provide for the Insured to be whole again.  As I mentioned in last week’s article, this is the unknown factor that can lead to a lot of extra expenses/fraud to the Insurance company, which leads to the onerous processes we see in claims today.

If we can solve for this, along with some of the issues raised by P2P players on the current model, then we are really onto something meaningful for all.

Summary

Everything I read when it comes to Insurance and Insurtech mentions something about customer experience.  People buy Insurance for piece of mind.  They want to know ‘Do I have the protection I need, that will pay in an unfortunate event that I need to claim, without much hassle.  And will this protection be at a cost that is reasonable for the benefits that I am getting’

That’s it.

The rest is just bells and whistles.  

So, when we look at Insurance models – whether it be Mutual, P2P, Takaful, Conventional, etc, we need to look at the fundamentals and principles of Insurance and what it is there for, as well as the current problems across the value chain that could either use an upgrade or replacement altogether within the current business models.

I will admit, the marketing that some of these P2P players have is good, real good.  And they do touch on some big, big problems in our industry.  Things like trust, moral hazard, transparency, ease of claims and affinity are issues that big incumbents face every day.   I think these areas being brought up are good and actually bring to mind more questions to mind for our industry to think about:

  • Moral Hazard – Will people be more careful with P2P Insurance?  The idea behind P2P is that because you get money back/money goes to a charity, then you will be more careful so you don’t claim.  While this is nice in theory, this is also one of the main reasons people buy Insurance.  People want to offload some of the risk of their day to day lives to someone else (i.e. Insurance carrier) so they don’t need to worry about it.  And some people are willing to pay a bit more to do so (i.e. premium – no intentional play on words there).
  • Self governing models – I realize that not all P2P models are self governing.  For the millennials who are more in touch with digital based applications, self governing can work real well.  However, for similar reasons as mentioned above, some people don’t have the time, patience or expertise to manage their own policies.  Do people really want to be ‘active’ with their policies?   On the same token – are people in a self governing model experts enough to be an underwriter or claim assessor?
  • Claims – Should policyholders really be in control of who gets paid a claim?  How will this impact the process?  What if someone is perceived as a bad risk and can’t get into anyone’s group?  Is this a good thing?  
  • Anti-selection – Traditional Insurance helps with the concept of risk pooling.  P2P tries to help with this by putting together similar groups.  However, this would mean, that people will definitely not want others that are going to negatively impact my group’s characteristics.  
  • Community/social cause – is this strong enough as religion, to the extent where people will put others before them all in the name of greater good?  
  • Passing of risk – in the P2P model, it seems as if more and more of the risk is taken on by the policyholders and reinsurer rather than the Insurance company and reinsurer.  Does this actually go against some of the ‘social good’?

Takaful faces the same sort of criticism as P2P Insurance.  P2P Insurance gets it for saying that it is nothing new.  It is just mutual Insurance with a sexy technology wrapper on it.  Takaful gets the same in regards to its comparisons to conventional Insurance.  

Does it really matter if P2P Insurance is repackaged mutual Insurance?  I don’t think so. What matters is the learnings we can get from different product lines and different markets.  In Insurance, there is no one size fits all approach and in the competition of incumbent vs. Insurtech, there will be no one winner (unless amazon or apple takes over it all).  A lot of the things being done and currently in existence can operate mutually exclusive of (and even in competition with) each other, and the best way to do that is by continually understanding each of the respective models, parts of the value chain, etc, and learning from it (with an aim of customer experience always in our mind).  

Honestly, I don’t care what the actual product is called.  Let’s look at fundamentals and what we are trying to solve first, then you can put the package around it and call it whatever you want to call it.  As long as it solves the issues outlined above, it’s good for everyone.  

Personally, I see P2P Insurance working for P&C more than I do for life and health. This is primarily due to social aspects.  I can’t see people being open to everyone else knowing about their health claims and/or even voting on whether their health claim should be paid or not.  

There is definitely a market for P2P Insurance and opportunities to grow this space. I see it as ‘coexisting’ with the current Insurance products (with the current still being the majority), which will continually get upgraded and enhanced by the technology solutions we are seeing today.

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Stephen Goldstein is an experienced Insurance executive and Insurtech dealmaker with a core focus on growing revenue, launching go to market initiatives and advising industry leaders.

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9 comments

  1. The following text in your excellent article should be corrected :Maysir relates to taking on unnecessary risk/gambling. For example, the Takaful Operator can only invest in Shariah compliant assets (e.g., alcohol and gambling businesses).Obviously alcohol and gambling are NOT Shariah compliant. So the example should state “are prohibited” .Best regards, Philip

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  2. A quick note for this article.
    I have amended the last paragraph from:
    There is definitely a market for P2P Insurance and opportunities to grow this space. I see it as ‘coexisting’ with the current Insurance products out there, which will continually get upgraded and enhanced by the technology solutions we are seeing today.
    to:
    There is definitely a market for P2P Insurance and opportunities to grow this space. I see it as ‘coexisting’ with the current Insurance products (with the current still being the majority), which will continually get upgraded and enhanced by the technology solutions we are seeing today.

    After some LinkedIn discussion on this post this morning, I did not believe I gave my final opinion in this article on which type of insurance, the traditional models or P2P, will be the majority of the market. I still believe the current types of insurance/model will be the majority, however there is a lot that will be improved/enhanced to the value chain, some of which will be learned by the carriers based on what the P2P players are currently doing/marketing.

    Thanks

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  3. Hi Stephen,

    What a great work ! You spot the similarities between takaful and p2p 🙂 Actually they are all the same. The big difference is takaful is doing this business so as to make insurance suitable for Islamic religion (because classical insurance is not allowed in Sharia ) while p2p is doing to be more transparent and get rid of conflict of interest.

    I agree with most of your opinions about p2p. Actually the new model is has not proven yet. Some of the p2p insurance brokers closed the show while some are going in their ways :). Actually this is not only about the model , the matter is how the company use technology in insurance. I think this creates the difference, not the model 🙂

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