- Peer-to-peer insurance eliminates the bureau of traditional insurance. Getting paid by an insurance company requires going through so many hurdles; this is not the case with peer-to-peer insurance.
- Small groups with common risk can get together and insure what traditional insurance companies may not be willing to cover.
- No funds are lost in peer-to-peer insurance. Where claims are not made, groups can share the funds contributed during the year.
Open enrollment season is here, which means many organizations and their employees are selecting health insurance plans – and dealing with rising premium costs.
In traditional insurance plans, monthly premiums are paid to an insurance carrier. The carrier then pays out claims filed by covered individuals using those premium funds. The increasing overall cost of healthcare means a heavy financial burden for enrolled employees, and often an even bigger burden for employers who help pay premium costs. [Related: How to Save Money on Business Insurance]
While a traditional insurance plan is the most common for employers to offer, it's certainly not the only option. One potentially more affordable alternative for small businesses is peer-to-peer (P2P) insurance. Here's what you need to know about it and how to decide if it's right for your business.
What is peer-to-peer insurance?
P2P insurance is a "risk-sharing network where a group of associated or like-minded individuals pool their premiums together to insure against a risk." Unlike a traditional insurance model, in which a large group of individuals with varying risk levels are covered under the same plan, P2P insurance lets you select your insurance pool – be it friends, family members, or simply people with whom you share interests and activities.
"By selecting one's pool members, the insured is assuming responsibility for the group's risk profile," wrote Jake Frankenfield for Investopedia. "This selection technique would motivate an individual to initiate a pool that has a low-risk outcome, and hence, low cost for the members."
Instead of keeping unused premium funds as profits like traditional insurers do, P2P insurers return any remaining funds at the end of a coverage period to the pool's members. If the claim payouts exceed what's available in the pool during a given coverage period, a reinsurer, which assumes part of the risk in exchange for a share of the insurance premiums, will cover the difference.
What are the benefits of P2P insurance?
Kyle Hoffman, vice president of customer success at Insureon, noted that, while the core concept of P2P insurers is not new, new entrants like Lemonade and Guevara are offering new distribution channels: online direct to consumer. This improves interactions between insurers and the insured "by leveraging new technology like automation, AI and modern CX [customer experience] concepts, and enhancing the benefits returned to insurers in years where there are a few claims," he added.
Hoffman said that very small businesses can benefit significantly from a P2P insurance model. These microbusinesses are often less complicated to underwrite since there are fewer individuals to insure.
"Microbusinesses – companies with less than 10 employees – are the perfect target for P2P insurers, because it's a large and growing segment of the market that has traditionally been underserved by brokers and carriers," Hoffman told Business News Daily. "As P2P insurers become more established and sophisticated, they'll likely move up channel to serve larger businesses who yield better unit economics."
According to Hoffman, the major benefit of P2P insurance is the value it places on growth. "In contrast to a stock carrier, which effectively serves its shareholders, P2P insurers as mutual insurance companies seek to deliver value to their policyholders."
P2P insurers are looking to build their competitive advantage with a low cost, which is frequently the first and foremost consideration for small businesses, said Hoffman. However, prudent insurance purchasers will thoroughly assess the coverage being offered and the carrier's ability to pay claims and balance that with the cost of the insurance, he said.
Peer-to-peer insurance vs. traditional insurance
Transparent process
P2P insurance is provided by members all facing similar risks. They have a clearer process in terms of payments and joining requirements. Members are conversant with who is joining the group, who is making a claim and how much is left in the pool.
Traditional insurance firms face a huge number of rules and regulations at the national, local and state levels. They have huge operational costs to back up these policies. Peer-to-peer insurance, on the other hand, is simple and has minimal regulations. The cost of operation is also minimal since the groups usually comprise only a few individuals.
Easier to make claims
Making claims is easier with peer-to-peer insurance, as it involves fewer procedures. Payout is usually made within minutes since it's often digitized. Traditional insurance payments could take months or, in some cases, years. The payment process is often not digitized and involves lots of paperwork. A client must prove loss, undergoing a rigorous process before the insurance provider determines the value of the loss.
The members of a peer-to-peer insurance pool may know each other well. They will be well aware of incidences that require claims, so a member will not have to prove much.
Lower premiums
Peer-to-peer insurance charges lower premiums than traditional insurance, because it has fewer running costs. Where members are few, insurers may not need employees or even an office. These costs significantly reduce the premiums members need to pay. These funds are often invested in reinsurance.
Pros of peer-to-peer insurance
- Money back: Where funds are not reinvested, they are shared among the members based on their contributions. Unlike traditional insurance, which might never return your funds, peer-to-peer insurance acts as a saving opportunity where funds saved could be used for personal projects.
- Ease of receiving claims: It is easier to receive claims from peer-to-peer insurance. It requires less paperwork, and the processes are often digitized. P2P insurance is not for profit, so the members should have no problem making claim payments.
Cons of peer-to-peer insurance
- It's not available everywhere. P2P insurance is a new experiment that has not been accepted everywhere yet.
- It lacks personal contact. Peer-to-peer insurance is all digitized; registration for the insurance products and payments is done digitally. This is convenient for many people, but others prefer to handle these transactions in person.
- You are not always assured of payment. When several claims are made at a time, all the pool's funds may be used up. Some members may not receive their claims.
- It is not always cheap. In some cases, the premiums for P2P insurance are higher than what you'd pay for traditional insurance.