The peer-to-peer (P2P) model holds a lot of promise for insurance. I’ll be slightly controversial here and say that it actually might be the first pseudo-innovative concept in insurance for a good part of the last 100 years. Of course one might argue that insurance has also introduced other product level innovations like investment linked / participating products together with a slew of other specialized products. An eagled eye observer might even add other “incremental innovations” that have been brought about by technological progress.
Let me clarify, the reason why I say P2P is a pseudo-innovative concept while others are not is because P2P, while still being based on the basic concepts of insurance, is adding a substantial innovative twist on it, you can call it an e-village, a digital community that aims to look after its members in the time of difficulty. Other industry changes that came in the recent past have been largely an incremental adjustment to existing models.
Fundamentally insurance is a promise of financial help when an unfortunate loss of some sort happens. The customer pays his insurance premiums in exchange for this promise, trusting that the insurer will be there to help when specific things that they’ve agreed to cover, happens. Hence, promise and trust are two inseparable elements underpinning insurance. The insurance industry has unfortunately seen a substantial and accelerating erosion of customer and societal trust over the last century.
An overview of the P2P model
While the concept of P2P is fundamentally similar to Mutuality, which has been around in Insurance since 17th century, it does bring in a much stronger and direct social aspect.
P2P as a defined insurance concept started in 2010 by Friendsurance in Germany and has since gained more momentum with recent additions since 2014: Guevara UK, PeerCover NZ, Riovic SA, insPeer FR and TongJuBao.com CH. An upcoming P2P insurance startup in the US, Lemonade, has secured a $13m seed funding from Sequoia Capital, with an ambitious aim to reshape global insurance. There are a number of recent very good articles that map out the details of P2P insurance universe from for example, CBI Insights and from Rick Huckstep at The Digital Insurer. Confirming the accelerating momentum of P2P, as recent as late March 2016, Friendsurance pulled $15M to expand P2P insurtech to Australia.
Before we zoom into the specific focus of this post, which has to do with potential of P2P insurance model in Asia, let’s look for a second as to how Mutual insurance differs from P2P insurance. Both have the policy holder groups as owners of shared risks that they pool together. In both, any profits earned by a company are returned to policyholders in the form of an annual payout or reduced future premiums (in contrast to a stock insurance company, owned by investors through shares listed on public stock exchange and therefore any profits channeled to those investors).
The differences start with the size of the insured segment, which in P2P is based on either a common type of risk or a community “unit” (for example. neighborhood, family, apartment block, village), the Mutual segment is comprised of all the customers who are also owners of the company. The operating structure is the second major difference; the mutual company is largely similar to the stock insurance company while P2P is aiming to have a lighter “footprint” that relies primarily on a technology platform together with positive social dynamics within the insured group to monitor. The third difference is the placement of customer trust – in the P2P model trust is placed as much in the P2P insurer as it is in the unit that you are part of, while in other insurance types it’s a David and Goliath scenario where the customer is placing their trust somewhere between an agent and a large insurer.
Obviously there are a multitude of implementation differences but its foreseeable that P2P is a “safer” and more transparent insurance option as both funds and risks are remaining with the insured units. I.e. there’s no chance that insurer runs away with your money as the money stays with you and re-insurance acts as a next tier in case of claims exceeding a pre-defined threshold.
Unique aspects of Asia, its insurance market and its fit for P2P insurance
Having been immersed into Asia, both in the emerging and developed countries for the past 8 years, I continue to be amazed at just how much culture and diversity is present in this part of the world. Combine it with a healthy regional growth over the past 20 years and it makes if for a very interesting place in time to be here.
The Asia uniqueness is a remarkable balance between insatiable ambition for progress and a strong respect for community units. Recently, a research article in Science magazine proposes a justification of some of those differences based on a “history of farming rice makes cultures more interdependent, whereas farming wheat makes cultures more independent, and these agricultural legacies continue to affect people in the modern world”.
Community ties: Based on my reflection of living and working in Asia, I do feel that Asians have a much stronger family and community ties than people in the West. Combine it with the other regional factors highlighted below and a picture of a region, prime for P2P insurance, starts to emerge.
Emerging communities: Asia is also home to a large number of emerging countries, from China and India to large parts of South East Asia (Burma, Indonesia, Vietnam and Thailand). This means more rural population across the region and less safety nets of savings that more developed countries are able to provide.
Low insurance take-up: The current penetration of insurance in developing parts of Asia has been low and is not increasing fast enough. Insurance is still largely distributed through tied agents and agents in Bank branches (Bancassurance). This is tried, tested and highly constrained distribution model that insurance companies are pursuing across the region. The thinking goes, if Europe in the early days needed the agents to sell insurance, so will emerging Asia. Unfortunately, this distribution model while having a variable growth cost has a limited reach, is expensive, prone to miss-selling, which erodes trust further and doesn’t allow for rapid scaling up.
Online connectivity: The region is rapidly getting connected online and is skipping ahead in the development by leaps and bounds. Technology infrastructure across emerging Asia might not be as robust but smartphone penetration is increasing quickly.
All of these factors combined i.e. a defined need for insurance, rapidly increasing mobile connectivity and strong community ties together make technology- enabled P2P insurance potentially the best choice to most effectively roll-out protection across communities in Asia. Furthermore, the momentum of trust build-up in the model will help to propel insurance to more rapidly reach uninsured parts of Asia.
Customizing P2P for success in Asia
To be overly simplistic, Asia can be divided in three major segments: i) rural population (which still leads a largely traditional way of life), ii) small merchants (SMEs), and iii) urban population mostly made up of larger businesses together with its employees/families.
The P2P insurance model will need to be customized for the language localization, segment needs and sophistication. For example, while someone in the SME segment would have their critical worry in safeguarding their business and income, the members of rural segment would worry more about the having food on the table, a roof over their heads and the health of their family.
While the easiest customer segment to access for P2P might be the urbanites and SME owners who would already be familiar with the concept of insurance and simply be looking for a more cost effective and trustworthy way to buy it, the largest opportunity is clearly in the uninsured segment of Asia population (see chart below). To effectively access the uninsured, education programs that help to empower communities through P2P insurance will need to be run through development banks and other non-governmental organizations.
Lastly, I recognize that there are many questions that remain open about P2P that we didn’t get a chance to dive into in this article: such as who manages that capital? How to ensure fraud is minimized in this model? If P2P is so different why are they applying for licenses? To do these questions justice, I decided to leave it to the subsequent articles that will cover further details of the model.
P2P insurance excites me because it fundamentally offers a very powerful promise of bringing the element of trust back into insurance through allowing the trust relationship to transition from current individual-insurer to a balanced one between two individuals.
To wrap it all up, P2P seems to check a lot of boxes for what “ideal” insurance would be, righting some of the wrongs that have crept up over the decades into the insurance model. In my mind, it appears to be particularly powerful and well suited for Asia. It of-course remains to be seen whether this current breed of P2P insurers are going to be the ones that experiment their way into Asia’s hearts and minds but it certainly does seem to be heading in the correct direction.
Thanks for reading. Would love to connect with you on LinkedIn and hear your thoughts.