INSURETECH: DISRUPTING THE 100-YEAR-OLD INSURANCE MODEL
As cars become automated and currencies become digitalized, the sharing economy expands its presence to a sector whose underlying business model has not seen innovation in over 100-years—the insurance industry. Although still in its infancy, peer-2-peer (P2P) insurance platforms are becoming an increasingly popular alternative to traditional insurance institutions.
P2P insurance takes modern technology and applies it to how insurance functioned at its inception when insureds covered each other on a communal level for similar risk types. For example, the P2P carrier Lemonade currently offers renters condo and homeowners’ insurance. In short, P2P works by pooling together a community of peers, who in essence, guarantee each other for a common risk type e.g. homeowners insurance. In fact, the first form of insurance in the U.S. was a community-based insurance company developed by Benjamin Franklin. Even before Franklin, insurance took a community-based form when ship captains would pool funds together to insure one another from disasters at sea.[1]
On a behavioral level, the current model
inherently causes a conflict between the carrier and insured when the carrier is incentivized to deprive the insured of dollars on the policy because each dollar saved is a profit earned by the carrier. Alternatively, P2P models are set up to take away this incentive by only accepting a 20% flat fee and give unclaimed money to a charitable cause of the policyholder’s choice. As Lemonade’s Chief Behavioral Officer stated, “since we don’t pocket uncleaned money, we can be trusted to pay claims fast and hassle-free.” Lemonade looks to rebrand the industry as beneficial and communal rather than a necessary evil.[2]
Still, there are a couple hurdles that P2P carriers will need to overcome. First, a P2P model requires the pool of peers to leverage their social networks and bring new members into the group. One major characteristic of the P2P model is that it is communal in nature—the pool is composed of not only similar risk types but also peers who agree to guarantee each other. The pool manages their own affairs, such as the group’s risk selection, underwriting, and risk management and marketing. In terms of risk management, industry professionals are likely to know more about causes of risk management rather than an insurance agent who is not a specialist within the given industry. Nevertheless, as the group expands, the communal characteristic breaks-down and the risk becomes increasingly complex and less communal.[3]
Lastly, much like our financial and banking system, the insurance regulatory system is fragmented. Because insurance is predominately regulated by the state, regulatory requirements and compliance standards vary. Most recently, California granted Lemonade a license to sell its renters and homeowner insurance plans.[4] Further, the platform-based insurance company Slice was also granted a license to sell surplus insurance to California residents. So far, Lemonade can offer its products in only a few states, including New York and California, but it looks to expand to all 50 very soon.[5] It will be interesting to see if this community-charity-based P2P model is sustainable and the long-term implications for traditional carriers.
[5] Id.