The value of insurance is abundantly clear and rarely disputed.
Unfortunately, so are its downsides. The frustrations of dealing with traditional insurance companies drive consumers away from getting the proper protection they need in life.
This begs the question: What if you could protect yourself from the risks of life without the hassles of traditional insurance companies?
Peer-to-peer insurance may be the answer.
Peer-to-peer insurance, or P2P insurance, enables groups of individuals to insure each other. The members of the group pool their money to insure against a risk affecting them. If a group member suffers an insurable loss, their claim is paid directly from the pool of money contributed by each member.
The network also may handle the administration of their own insurance. These groups are often comprised of friends, family, or individuals with similar interests.
Many peer-to-peer pools are formed based on the type of coverage group members needed. Common types of coverage using this approach include renters insurance, homeowners insurance, auto insurance, liability insurance, and health insurance.
Peer-to-peer insurance has become more prevalent in recent years. This is largely due to the influx of technology innovation in insurance. Insurtech has helped satisfy the demand for more accessible and low-cost insurance options. Crowdsourcing and social networking platforms have also made it easier for like-minded individuals to form and administer a peer-to-peer insurance pool.
Technology has streamlined the process of getting insured, another advantage of peer-to-peer coverage. In many cases, the process is as easy as answering a few questions, getting a quote, and applying online. (That's how Breeze disability insurance works.)
The latest trend, and perhaps the future of peer-to-peer insurance, is the use of digital currency, such as Bitcoin. In this option, the members of the group pay a set amount of money into a digital wallet. When a claim is made by somebody in the group, each member pays a share of that claim from their digital wallet.
One of the major differences between traditional insurance and peer-to-peer insurance is what insurers do with policyholder premiums.
Traditional insurance companies use part of customer premiums to cover their operating expenses and the cost of providing insurance coverage. The leftovers are invested, which helps cover claims and maximize profitability. Insurers typically do not return “excess” premiums not needed for claims, though some offer rebates, premium discounts, or “rewards” to policyholders who go a certain period without claims.
Peer-to-peer insurers, on the other hand, typically refund premiums not used for claims and expenses to the members of the group. This occurs at the end of a coverage period, which is often annually. Some peer-to-peer groups may donate unused premium funds to charity.
So what happens if the group has more in claims than what was collected in premiums? Peer-to-peer pools are typically covered by reinsurance, which is insurance that covers regular insurance companies against paying out unusually large claims. Traditional insurance companies also use reinsurers to mitigate their risk. In peer-to-peer insurance, the reinsurer covers claims that exceed the premium paid by the group.
Experts also point out the transparency of peer-to-peer insurance as an advantage. Policyholders assume responsibility for the group’s risk profile. This forces group members to create a low-risk pool. Doing so keeps overall costs down and maximizes the chances of receiving refunded premiums.
In addition, peer groups that administer their own policies typically know each other. This makes it easy to monitor who files claims and how much money is in the pool. For this reason, peer-to-peer insurance is less susceptible to fraudulent claims than traditional because group members hold each other accountable. Supporters of peer-to-peer insurance believe it can be easier to receive a claim because traditional insurers often dispute claims made by policyholders out of concern for being defrauded.
The main downside of peer-to-peer insurance is the unknowns associated with any new financial services models. Many traditional insurers have been around and paying claims for decades. There are also not as many options for peer-to-peer insurance as there are individual policies.
Another advantage of traditional carriers is that they enable individuals to bundle multiple policies. People can buy home, auto, life, and other coverage from the same company. On the other hand, peer-to-peer groups typically only pool one type of coverage. So you may have to use multiple groups to be fully covered and even use traditional carriers for certain coverage.
One of the top providers of peer-to-peer coverage in the U.S. is Lemonade, which offers home and renters insurance. You can purchase a policy through the company’s website or mobile app.
Premiums are calculated individually, similarly to how traditional insurances determine the cost. Factors include credit history, recent claims, and the property being insured.
Monthly premium payments go toward the company’s fee and reinsurance, which accounts for about 60 percent of the collected premiums. What remains from those expenses is what Lemonade uses to pay out claims to its policyholders.
Whatever money it does not use to pay policyholder claims is given annually to charity. Peer-to-peer insurance groups within Lemonade are comprised of policyholders who designate the same causes to receive their unused premium.
Because peer-to-peer insurance is a fairly new market and still navigating the regulatory environment, Lemonade is the only major provider in the U.S. It's currently available in 27 states.
Joel Palmer is a freelance writer and personal finance expert who focuses on the mortgage, insurance, financial services, and technology industries. He spent the first 10 years of his career as a business and financial reporter.
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