Peer-to-peer insurance is changing the broker’s role
When we celebrated our 110th anniversary earlier this year (ah, good times), you might recall all those scared brokers and execs of old in little blurb quotes who were terrified of socialism. And as any proud paranoid knows, socialism comes from over… there. Europe. Now imagine what the old boys from the 1950s would make of what’s called “peer-to-peer insurance.”
It seems very much to be a new way of thinking. Many P&C policyholders don’t realize “they are paying for their neighbour, for other people,” says Louis de Broglie, CEO of French peer-to-peer insurer, Inspeer. “They have an idea that you put the premium in the safe, and it’s this premium you use to pay their claim… They have forgotten you pay each other’s claim.” Peer-to-peer insurance emphasizes this transaction, with groups of friends, relatives or even strangers pooling their money and trusting each other.
The coverage, which exists in different permutations, “sits somewhere in between the savings account and an insurance [policy],” says Chris Logan, director of New Zealand-based PeerCover. Since peer-topeer insurance allows people to earn back some of their premiums or simply choose higher deductibles and then pay lower premiums, it’s especially useful for young drivers and other policyholders who have to pay higher premiums.
With Friendsurance, customers at any of 60 German insurers get together in small groups of friends, relatives or strangers nearby. They combine part of their home contents, personal liability or legal expense premiums into a cash-back pool which funds smaller claims, while the traditional insurers continue covering larger losses. But if a group doesn’t make any claims in one year, all members are refunded up to 40 percent of their premiums.
Friendsurance remains the only peer-to-peer brokerage in Germany, but after it started in 2010, similar models popped up across Europe and even Down Under. “That other start-ups [are breaking] into the business area,” co-founder Tim Kunde said in a release, “where Friendsurance has run alone for five years, is underlining the need for innovation as well as fair insurance, and encourages us that we are doing the right thing.” The company argues that traditionally calculated premiums are overpriced, and its cash-back system leads to fewer fraudulent claims.
Then there’s the relative newcomer out of the UK, Guevara—a name that conjures up the memory of Cuba’s Marxist revolutionary hero who was on dorm room walls in the ‘60s more than Klimt posters today. In 2013, it began offering peer-to-peer auto insurance, in which groups of at least 10 policyholders combine their premiums into a protection pool. Any claims are paid from that pool and unused money goes towards the following year’s premiums. If the pool doesn’t hold enough cash to pay a claim, Guevara will cover the difference, as well as any other claims that year. But at renewal, all members will have to pay the full premium.
Deep questions over a car rental
Across the channel in Paris, Inspeer takes a different approach. Unlike Friendsurance and Guevara, clients keep their existing policies but group together to share deductible risk. The idea is clients select higher deductibles when buying policies from a third-party broker or insurer because their Inspeer group will split the cost of the deductible if they file a claim.
The idea for Inspeer came to Louis de Broglie when he and four friends were renting a car. “We chose the higher deductible because we were thinking that, okay, if something happens, we can share the risk,” he says. “It’s obviously something that’s not possible to do by yourself.” So de Broglie, who has worked as an actuarial consultant, began wondering why groups of friends don’t always share deductibles to benefit from lower premiums.
Policyholders with car, house and motorcycle insurance can sign up for Inspeer, and group members don’t need to all insure the same item. They also don’t have to pay up front, but those who join a group but don’t pay their share of claims can earn negative ratings, similar to other sharing economy companies like Uber and Airbnb.
Inspeer, which went live in February, takes a 10 percent cut from every claim paid. At the moment, the investor-funded company doesn’t have many customers, but this doesn’t bother de Broglie. “It has always been a sort of temporary step, this deductible phase,” he says. The ultimate goal would be to develop a Guevara-like insurance product so that from the get-go, “the customer has the feeling that he’s saving some money.” De Broglie found that with the current model, potential clients don’t register how much they could save by sharing deductibles. Many policyholders, he says, don’t realize insurance is meant to help them avoid loss, not to earn fast cash. “So I think that we still have some evangelization to do on what is insurance, in fact, and how it works.”
In New Zealand, PeerCover’s Chris Logan has also had trouble finding clients would say there’s been a few people internationally who have been interested in the idea,” he says. “But actual genuine people who want to share their risk in New Zealand? I’d say there’s only been a few people that are actually registered, two or three.” And even those haven’t ponied up any money yet. To grow the company, Logan plans on creating groups for specific policyholders in mind, such as drivers with dash cams, and then approaching them with the opportunity to lower their premiums through the pool. “…I think they might be more willing to share,” he says. “So I need to market it a little bit more.”
Unlike their French counterpart, PeerCover is structured so that group members would pay up front, and if they make a claim, the most they could get paid is three times what they put in. There’s also a voting element. “If somebody has a claim, they’d provide me with some brief information,” says Logan, with which he would decide if it’s a legitimate claim. But a majority vote from dissenting group members would overturn his assessment. Logan points out that since PeerCover takes a $100 NZD fee for every claim, “unlike an insurance company, there’s no incentive for me to agree or disagree.”
Logan doesn’t anticipate doing much fact checking during the claims process. If a member files a claim with their insurer as well as PeerCover, Logan would confirm with the other company, but for smaller amounts; a photo of the damage would suffice. “It’s going to be a very light touch,” he says. And that’s why groups are meant to be small—around 10 people—so all members know each other in real life. willing to share deductible risk. “I Otherwise, says Logan, “it becomes a bit more like the insurance situation” where policyholders are tempted to make fraudulent claims with a “let’s get as much as I can out of it” mentality.
Inspeer’s de Broglie agrees: “We think that because your peer will pay your claim, you will be more responsible in your behaviour, or will not [commit] fraud… We cannot enlarge the pool too much, otherwise you are losing this responsibility effect.” But some risks like third-party liability, he adds, can’t be covered by peer-to- peer insurance because too many people are required to share such big claims.
Pugs and Rugger
Logan sees peer-to-peer insurance as a reinvention of the broker’s role. Like their Canadian counterparts, more and more insurers in Australia and New Zealand are going direct, and peer-to-peer insurance “is an opportunity for the broker to get back into that game a little bit more.” Logan eventually wants to move PeerCover to a brokering role. “Actually,” he says, “the view was to start increasing the excesses, and then speak to an insurer that would offer quite a high excess.”
Similarly, the UK company, Bought By Many, works with insurers to develop policies for hard-to-place clients who group along geographic, medical or other lines. There are online groups for pug owners, parents of children who play rugby, drivers who happen to be musicians and many other policyholders who aren’t well served by current coverage options and who meet insurers’ desired risks.
For CEO Steven Mendel, an actuary by training who co-founded the company in 2013, “it has always been about redressing balance in financial services.” He points out corporations get better treatment than individuals when negotiating for insurance, mutual funds and other financial products, and “there isn’t a justification” for most of those differences.
So Bought By Many liaises with insurers “to understand what type of risk exposure they want, where do they want to grow their book.” Insurers may be developing a product for a new marketplace, amending existing products to suit specific groups or simply offering more competitive pricing.
Unlike the deductible sharing companies, Bought By Many sells entire policies, and unlike Friendsurance and Guevara, it doesn’t participate in the claims process. Since the company negotiates on behalf of thousands, the company’s website boasts, clients get a better deal, saving on average 18.6 percent on their premiums.
For example, bikes are often included in home insurance, but may not include liability coverage or the dedicated cyclist’s $5,000 wheels. “We have found an insurer that wants to target cyclists and is much more understanding of how bikes are actually kept,” says Mendel. “The bike cover is a no-cost extra, and the home insurance also comes with a 10 percent discount.”
And for 1,223 pug owners, whose furry friends are rare and expensive and stolen more often than other breeds, Bought By Many helped develop a policy that includes more reward money and a bigger budget to advertise that reward. “And if the pug still isn’t brought back to you,” says Mendel, “we pay much more than a regular policy would to replace the dog.” K&R isn’t just for high-rolling CEOs anymore.
Bought By Many is officially licensed as a brokerage and earns money through commissions, but Mendel doesn’t see his company that way. “We think the broker [has] a very important role, but the part of the industry that will suffer as a result of us being around is the traditional broker,” he says, “because we don’t think the role of a traditional broker actually can be justified anymore.” Brokers in the UK, he argues, typically earn about 30 percent a year in commissions, which strikes him “as a ridiculously large amount of money. Often, they’re not doing very much. So you might renew your policy year after year after year because it’s the only one that’s available or the one that’s most suitable for you, but the broker still earns the same commission as if you had taken it out for the first time.”
Bought By Many has flipped the power dynamics of buying and selling insurance— insurers now bid for customers’ business—and has no plans to go back. The company expanded to China in July by working with Ping An, the country’s second-largest insurer, and a Canadian insurer recently approached Mendel for a partnership. Bought By Many doesn’t yet have plans to open an operation across the Atlantic, but direct writers aren’t the only things moving into broker territory.
“We are not a broker representing a small number of individuals,” says Mendel. “We’ve got over 87,000 members now. We have a relatively powerful voice in this space.”