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Peer-to-peer pressure

Peer-to-peer insurance has been talked about for a long time now, but we’re still waiting for the “Uberisation” of the industry to kick in.

So is it all just hype, or should traditional players be running scared?

It can be a difficult question to answer, because peer-to-peer insurance is a very broad term that can mean a lot of different things.

German disruptor Friendsurance, which plans to expand to Australia, is perhaps the most established model of a peer-to-peer insurer, having emerged in 2010.

Policyholders with the same type of insurance form small groups, and up to 40% of the premium is returned if the group makes no claims.

Smaller claims are paid from the group pool, with larger claims covered by an underwriter.

US-based Lemonade claims to be the world’s first peer-to-peer insurance carrier.

It has raised $US13 million ($17 million) in initial funding and signed arrangements with reinsurance partners including Berkshire Hathaway’s National Indemnity, XL Catlin and two Lloyd’s syndicates. It has yet to be launched and has not revealed its exact operating model.

Meanwhile, the UK’s award-winning Bought By Many groups people together according to their insurance needs, and then negotiates mass discounts with insurers.

Insurers have been warned they ignore so-called insurtech at their peril, but is peer-to-peer insurance a genuinely new concept?

“About 300 years ago some people in a London coffee shop came up with the idea of sharing risk with their peers,” National Insurance Brokers Association CEO Dallas Booth says.

“That is what the industry does. But we are interested and keeping our eyes open. I’m more interested in the concept of cutting through customer pain points in the transaction process.

“People who come up with ideas of that nature could challenge the traditional players.”

Nicholas Scofield, GM Corporate Affairs at Allianz, agrees.

“Insurance is the original peer-to-peer product,” he told insuranceNEWS.com.au.

“It might have taken centuries for the internet and certain phrases to make it sound sexy, but the basic principle of peer-to-peer insurance is identical to that of traditional insurance.”

He believes Australia’s tight regulatory environment added to traditional insurers’ increasingly accurate pricing will make it hard for peer-to-peer insurers to have much of an impact.

“I’m not saying we are complacent about digital disruption – far from it.

“But we are quite happy to disrupt ourselves if there are technologies and processes that can improve customer experience.

“Whether some peer-to-peer start-up is about to burst onto the scene and surprise us all, I don’t know. But I’m not holding my breath.”

Mr Scofield says returning part of the premium merely indicates that consumers have been charged too much in the first instance, and believes a small start-up would likely face greater repair costs than established players.

“If you haven’t got a price proposition you are not going to disrupt anything in a hurry.”

He also believes the success of Uber and Airbnb is largely down to leveraging “unused inventory” – the cars and spare rooms of ordinary people.

“If you try to apply that to insurance, it doesn’t really work. What is the unused inventory? There isn’t any.”

Social media expert Amy Gibbs, Digital Communications and Content Strategy Manager at the Australian and New Zealand Institute of Insurance and Finance, accepts peer-to-peer insurance is not far removed from traditional models.

But it can still have a major impact, she says.

“These companies are gaining traction and, indeed, many were thought up initially to counter bad experiences consumers have had with traditional insurance companies,” she told insuranceNEWS.com.au.

“While they often have bonuses such as receiving a percentage of your premiums back if the pool doesn’t make a claim, what they are really selling as a benefit is a consumer-centric ideology.

“Nearly all these start-ups use language along the lines of ‘making insurance fair, trustworthy and transparent’ in their marketing.

“They are also beneficial in that they use technology that is current, making the insurance process easy and painless for the customer.”

Most other industries have been disrupted, she says, and insurance can expect the same.

“Insurtech start-ups are quicker, aren’t encumbered by legacy technology, have lower overheads due to different business models, and are looking at new ways of insuring, such as on-demand insurance with increased personalisation.

“Perhaps most importantly, they put a huge focus on the consumer – and mean it.”

Pooling people into smaller groups should reduce claims, and fraudulent claims in particular.

“People are less likely to claim against friends and family than they are a faceless insurance giant,” Dr Gibbs says.

But that raises the question of what happens to those who are considered a greater risk.

They won’t be welcomed into a smaller group of self-selected peers, so will they be left out in the cold?

Insurance Partner at Deloitte Rick Shaw believes peer-to-peer is a good idea, with genuine potential. He describes the concept as “tech-facilitated micro mutuals”.

“When was the last time you made a claim on your insurance? If you don’t tend to claim, wouldn’t you like to be able to be pooled with others with a similar record?

“Insurers tend to group us with like risks, but the internet allows us to disintermediate, and we might want to have some say in it ourselves.”

Mr Shaw believes Australia’s regulatory environment makes it hard for new entrants – but not impossible.

“Established players are being a little complacent if they think they can innovate as quickly as start-ups,” he told insuranceNEWS.com.au.

“That said, the majors are a lot more innovative than they were five years ago.” 

The Insurance Council of Australia (ICA) says it and its members “continue to monitor the development of peer-to-peer insurance models operating in overseas markets”, to anticipate any regulatory issues.

“Australian general insurers recognise the benefits of competition in driving innovation, higher industry standards and better consumer outcomes,” spokesman Campbell Fuller said.

“However, ICA believes it is vital that all like businesses operating in a market are subject to the same laws and regulations, in the interests of fairness and consumer protection.”

It remains to be seen whether peer-to-peer models can truly offer better-value cover.

However, the combination of consumer-focused rhetoric and technological innovation could still be a powerful draw.

“Recent history is littered with the corpses of giant companies that thought they could ignore technological and consumer change,” Dr Gibbs said. “Incumbents still have time to stay on top, but they have to adopt new thinking and ways of business – now.”

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