Here’s a primer on P2P insurance, including what it means for consumers:
1. It’s New... and A New Business Model
P2P insurance is so new that providers, and coverage areas, are very limited. Lemonade Insurance, licensed just four months ago, so far provides home and homeowners’ insurance to the New York City metro area. Fellow startup Uvamo has been in development for the past year or more, but is yet to launch.
Lemonade and their ilk upend the traditional model of insurance. In that long-standing arrangement, the insurer defines the risk you pose, charges you a premium according to that calculation, and then takes responsibility for the payout, whether or not their pool of customers makes such payments profitable. With the P2P model, the companies use social technology to assemble a circle join together and pool their money in the form of premiums. The pool then builds up and can be tapped into if someone in the circle were to file a claim. And the entire pool of customers can benefit if claims fall short of the revenue in premiums.
2. There’s Been Success in Other Countries
While the P2P model is relatively new to the U.S., similar P2P models have emerged in other countries, including Germany (friendsurance), the United Kingdom (Guevara) and China (TongJuBao), according to the National Association of Insurance Commissioners, who say they are closely monitoring the emergence of P2P.
3. It’s Digital and Fast
Lemonade has already increased the speed and ease by which New York-area residents can get homeowners and renters insurance for the home they own or the possessions in their rental apartment. Even in New York, with its metropolitan population of over 15 million people, it’s difficult to get even an online quote for insurance. You generally still need to call an agent, provide information to them over the phone, and wait to get the quote.
With Lemonade, by contrast, you can simply log-in to their app and receive a quote in less than 3 minutes. You can then pay online, and have the coverage kick in that day.
4. Part of the Proceeds Are Shared
With P2P insurance, if none of the people in the “social pool” file a claim, part of the money is returned to them as a dividend. This model is suppose to build trust and transparency between insurer and insured, making the insured to stay with the company and continually pay premiums. Lemonade’s offering even has a social-responsibility aspect, through the company’s pledge to donate at least 20% of unused premiums to a charity of the customer's choice.
5. It Can Be Inexpensive
Part if the success of this model in Britain, Germany and China has been highly competitive premiums. Lemonade has launched with aggressive pricing, as well. It promises renters insurance for “$5 and up,” which compares with a typical rate of at least $20 a month in New York, even for basic coverage. And its homeowners’ insurance begins at $35 a month, where New York-area premiums from traditional providers are usually upwards of $50 per month.
6. Some Potential Speed Bumps Are Ahead
P2P insurance is launching only locally for a reason. In the US, insurance is regulated at the state level, so different states have different barriers of compliance, meaning there are essentially 50 different insurance markets. A policy that works in one state may have be changed dramatically in another for the company to be profitable in both; it’s as yet unclear how successfully these startups can navigate that regulatory patchwork to become a viable, widely available option. In Britain and Germany, by contrast, regulation (and therefore the market itself) is national.
It’s also unclear as yet how these startups may manage risk as they grow. As their network begins to encompasses millions of people, its composition might change in a way that endangers those low premiums and appealing perks.
On the other hand, the field could also expand, potentially to include auto insurance, where there are already some new innovative digital players, such as Metromile.
7. There’s Little Risk to Trying P2P Insurance
For now, however, the understandable (since it’s so new) questions that hang over P2P insurance shouldn’t necessarily deter you from giving it a try, especially if you are currently uninsured--as more than 6 in 10 renters are, for example. While they differ in some key ways from traditional insurers, the P2P startups must be compliant with regulations that require them to have sufficient cash in reserve to pay off all anticipated customer claims.