As part of RSA’s commitment to providing insight to our partners and brokers, we are taking time to look at market trends, so that we can identify future opportunities to grow. One area which has seen a recent rise in media coverage has been ‘Peer to Peer’ business models, both within the insurance industry and outside. In this article we take a closer look at ‘Peer to Peer’ and explore the potential it has to impact within the insurance industry.
What is a ‘Peer to Peer’ business model?
A peer to peer (P2P) business model exists when customers interact directly to buy or sell services, without the need for an established business or company to support the transaction. In providing the service directly, the seller has the potential to offer a cheap, fast way to access services with reduced overhead costs. The added benefits of this direct approach are increased transparency and the potential for a reduction in the inefficiencies that may be associated with more traditional business models.
High profile examples of P2P business models within our everyday life now include AirBNB, where sellers offer their properties directly to end customers, and Uber, where ‘sellers’ use their own cars to taxi customers to their destinations.
Peer to Peer Insurance
P2P within the insurance industry first rose to prominence in 2010, and has gathered significant momentum in recent years, with notable entrants to the P2P insurance market including Bought by Many (2012), Uvamo (2015) and Lemonade (2016). The general model within the insurance industry is where insurance policyholders form a small group, whose premiums flow into a ‘group fund’, less a deduction from the P2P provider to cover costs. Claims are paid from the group fund, with the potential for premium credits, refunds or donations to agreed good causes. The fee charged by the provider is generally flat and will not be dependent on claims paid.
This group approach enables the P2P provider to leverage their buying power, similar to an Affinity business model, where groups of like-minded customers attracted to a certain brand or principle provide insight into likely performance which can result in reciprocal benefits for all parties concerned. In a P2P model, this performance insight can be used to leverage benefits to the group, such as lower annual premiums for groups who share a common charitable concern or who have a unique risk profile within their market.
Whilst there are clear implications for insurers, with lower premiums, greater transparency and the removal of the insurer/customer relationship barriers all offering the potential to disrupt, not all P2P insurance models are being built with the sole goal of replacing those more traditional insurance models. Bought By Many, for example, operates as a broker between insurers and customers, helping both in the process.
In addition, P2P is not without challenge. Regulation is increasingly ‘catching up’ with P2P companies, with high profile examples including the EU’s recent challenge to Uber’s business model and AirBNB’s longstanding challenges with housing regulators and the tourism and hotelier trade. In April 2014, the Financial Conduct Authority (FCA) began regulating the peer-to-peer lending market, and similar regulation for P2P insurance entrants can be expected, particularly around their minimum capital requirements in the event of a financial shock.
From a customer perspective, P2P creates greater risk in its removal of the third party or trusted company from the transaction. Whilst there is inevitably a saving to be had in using P2P, there is a greater risk that the provider may fail to deliver what the customer has been led to expect, that the product will not be of the quality expected, or that the buyer may not be willing to pay for the services offered. Given the relatively static nature of the insurance industry and customer apathy in general towards insurance, it may be some time before traditional business models are truly tested by P2P insurance.