Before the advent of underwriting in London’s coffee houses in the 1600s, civilizations used various mechanisms to provide financial protection within their communities. For example, in the Middle Ages, tradesmen learned their skills through apprenticeships in the guild system. These guilds collected fees, and the wealthier guilds used these fees as a kind of insurance safety net.
If a member of the guild was robbed, if his house burned down or if he died, the guild used money from the safety net to rebuild the house, support the family or settle any financial obligations.
The world of insurance has changed a lot since those times, but the fundamental definition of insurance as “the mutuality in the sharing of losses” hasn’t.
Which brings us to emergence of the new generation of peer-to-peer (P2P) insurance firms. These InsurTech start-ups want to address the conflict between the insured and insurer, because the insurer is betting that the insured won't make a claim, while the insured is betting he will. The P2P InsurTechs also want to address human behavior and moral hazard.
P2P insurance protagonists around the world
Friendsurance – Germany
The pioneer of P2P insurance in 2010, Friendsurance pools its users into small groups and gives its customers a cash-back bonus at the end of each year if they remain claim-less. Friendsurance operates as an independent broker in Germany. See here for an interview with CEO and founder Tim Kunde
Lemonade – U.S.
Claiming to be the “world’s first P2P insurance carrier,” little is known about Lemonade other than that it is coming soon. The company hit the press when it was reported it had raised a massive $13 million in seed funding
(a strong indication where the puck is heading).
Inspeer – France
Here, customers form friend-and-family groups to share the deductible (aka excess) element of a claim. This enables high deductibles, thereby reducing premiums from the insurance carrier. The group shares the benefit of lower premiums and provides each other with financial cover for the higher deductible if there is a claim.
PeerCover – New Zealand
This is a friend-and-family savings scheme to provide financial cover for deductibles in the event of a claim. Like Inspeer, the higher deductibles result in lower premiums for everyone in the group. However, unlike Inspeer, in the event of a claim, members get as much as three times their initial contribution back to cover their excess.
Guevara – UK, TongJuBao – China
For Guevara and TongJuBao, I spoke with the founders to find out more about how P2P insurance works and why it is different from traditional insurance. The two companies have two very contrasting stories.
I'll start in China—or Shanghai and Hong Kong, to be precise. Recently, I skyped with Tang Loaec
, founder of the Community Risk Sharing platform, TongJuBao (aka P2Pprotect).
Tang is on his third financial business launch after a career in banking and risk management. In his spare time, he writes fiction books!
Like most involved with InsurTech start-ups, Tang wants to disrupt insurance.
Tang explained, “We all want protection, but nobody loves insurance. And our insurance providers have not done a good job. In China, customer satisfaction is low at around 19%. Something needs to be done.
“People think the process is unfair. Consumers pay premiums regularly and on time, but, when it comes to the claim, insurers often delay and deny the amount to be paid out. This just leads to a breakdown of trust.”
Often, an InsurTech startup builds a business model that relies on a traditional underlying insurance business model. Tang aims to build a P2P insurance model that is more than a social group sharing each other’s exposure to deductibles. TongJuBao, like Guevara and the recently announced Lemonade, plans to go further and completely redefine the end-to-end insurance model.
This is not just a distribution play built on some social novelty factor. This is the start of a new wave of insurance business!
With TongJuBao, there is no underlying insurance carrier. Its model separates the underwriting process from the claims process, thereby removing any conflict of interest. First, TongJuBao creates social communities or groups that customers join. The company then creates a deposit account for every member.
All members pay two sums of money into their deposit accounts. One is the fee for administration. The other is, effectively, a guarantee deposit to cover the risk being insured. All members pay the same amount into the deposit account to buy units of protection -- in other words, if one unit provides £10,000 of cover, and I want £50,000 of cover, I buy five units.
Tang explained that his first-year focus is on launching a range of social risk products into the Chinese market:
– Marriage cover is typically not insurable because divorce is a human-based, not event-based, decision. TongJuBao’s product will launch with a flat-rate premium and a short-term, no-claims period (to guard against early payout on someone buying, marrying, divorcing and claiming in a very short period). Effectively, this is selling an insurance product as an alternative to a pre-nup.
There is a similar product in the U.S. market from Safeguard Guaranty
, which claims to offer the “world’s first divorce probability calculator
– In China, child abduction is a massive social problem (see this report from the Guardian
). Nobody knows the true scale of the issue, but it has been a problem since the 1980s and is possibly an unintended consequence of the “one child” policy.
TongJuBao’s policy will provide immediate support to the family through an agency that will offer emotional support as well as initiate search-and-rescue activity in the critical early hours after abduction.
How does TongJuBao work?
Tang explained, “The members of each community pay premiums into a large pot, and then members draw on the pot when they claim. Essentially, everyone in the community signs a contract with everyone else. The members all share the risk and reward.“
This is a mutualization model, but there is a capital limitation with this model, so all payouts are restricted to a capped amount. In many ways, you could look at the TongJuBao model as a marketplace more than as an insurance carrier. However, unlike the Uvamo model, members are not speculative investors looking to get a return on an investment.
As for regulation, TongJuBao operates under a civil law contract and not as a regulated insurance business. This is the model that has been working for P2P lending over the past eight years, and Tang expects it to work just as well for P2P insurance.
Can this business model scale?
Tang believes he can get the same rates of growth in protection as the ones China has seen in lending. He told me, “The model will scale. Just look at P2P lending in China, which has scaled to over 2,000 platforms and [where] total volume of lending is four times more than [the] rest of the world put together! And how did this happen? Because, in China, banks were not meeting customer needs. It’s the same story for insurance; they are not serving customer needs.”
In many ways, TongJuBao’s business model takes us back to the roots of insurance. Way back in 1696, Hand in Hand Fire & Life Insurance
, the predecessor to Aviva, the UK’s largest insurer, was created to provide everyone in the community with protection in the event of a fire. Members paid a subscription, and Hand in Hand owned its own fire brigade. Everyone in the community enjoyed the collective support of all the other members in the event of a fire.
A common theme when talking to InsurTech firms is “the moral hazard." The long form definition of moral hazard can be found here, on Wikipedia
. In the modern context, the term is used to define the actions and choices of the protected party when it doesn't carry the financial consequences of those actions. If an insured party knows it is protected financially should it crash a car or drop an iPhone in the street, does it act with the same level of precaution as it would without any financial cover? And why should it? That's what the insured party has bought insurance cover for, isn’t it?
Leaving personal responsibility and the moral dimension of this debate to one side, the fact is that a riskier attitude ultimately leads to higher premiums for everyone.
This is why P2P insurance offers the potential for lower-cost insurance. By having you join groups or communities you have an affinity with—whether family, friends or people with common interests—the business model relies on a socially responsible attitude to risk-taking, as well as a financial one.
If the insured knows the deductible is going to be funded by family members, is she less likely to make an exaggerated claim, especially when she is also taking the deductible from her own pocket?Hanging out with Guevara
One sign of success appears when your name is regularly dropped as a pioneer in your field, which was the case when Guevara and Friendsurance were prominently named when the story about Lemonade hit the press
So, it was my absolute pleasure to spend time with three of the four founders of Guevara at their London headquarters—Paul Anderson
, Rich Philip
and Mike Greer
. (The fourth founder is Kim Miller.)
Anyone who spends time in the investor community, especially during early-stage investing, will tell you it's all about the team. And there’s no better example than the team at Guevara, with a wide range of backgrounds, skill sets and experiences.
Everything about Guevara is incredibly professional, from the cool branding and young Turks’ positioning to the grey-haired underwriting and pricing experience in the back office.
Formed in 2013, Guevara started offering motor insurance in late 2014. As the founders explained the origins of this digital insurance business, they relayed their personal experiences in buying insurance, from paying high premiums to having no idea with whom they were insured.
The best story came from Anderson, who is from Australia. When he first came to the UK, he bought car insurance based on having an Australian driver’s license. It cost him £1,000.
Close to renewal time, his insurance provider reminded him that his Australian driver’s license was only valid for a year and that he needed to switch to a UK one. However, there was an unintended consequence of swapping. He was recategorized as a new/inexperienced driver of less than a year! His premium shot up to £4,000. Same driver, same car, same location.
Sadly, this is an all-too-real illustration of how motor insurance works today and why there is real market opportunity for a new approach.
'Old insurance is rubbish'
Guevara offers a standard motor insurance policy that is underwritten using traditional rating factors (ABI rating, driver history, location). The premiums are competitive, although drivers are unlikely to find Guevara on the aggregator sites.
This is because Guevara is different. Here’s why.
New customers are offered a choice of groups to join. Their base price (which is what Guevara calls the premium) is split in two, with one portion going into the individual group (called the protection pool) and the rest going into a single pot that supports all of the groups (called the insurance fees).
The amount of the split is anything up to 50% and depends on the number of members in the group. For groups of fewer than 10, the pool contribution is 20%, with 80% going into insurance fees. But when groups get to be larger than 100 members, the base price is split 50-50 between the two pots.
Claims are first paid from the money collected in the protection pool associated with each group until it runs out (or doesn’t, in which case there is a surplus). In the event that the protection pool runs out, claims are covered out of the collective pot (insurance fees). And in the event that the collective pot runs out—i.e. the combined ratio exceeds 100%—Guevara is reinsured by a traditional carrier.
The key here is that any surplus is redistributed back to the members. At renewal time, all money in the protection pool stays where it is, and the renewal premium is discounted accordingly.
The model works so that members can achieve 100% discount on their protection pot contribution and only pay the insurance fees element if everyone in their group does not make a claim. For larger groups, this is 50% of the originally quoted motor premium.
To affinity and beyond!
What makes Guevara work is affinity. Having an association with the group is really important, because this model relies on keeping claims expenses down. Even if there has been an accident and a claim needs to be made, the member has direct incentives to minimize the claims expense.
For example, following an incident, how frequently does the insured go and arrange a hire car instead of letting the insurer do it at a much lower expense? If the Guevara customer knows that a claim will directly affect friends or family or will hurt its affinity group, the customer is more likely to only claim what is necessary.
What you see is what you get
Guevara also wants to tackle the continued complaint of customers is that there is no transparency with motor premiums -- How are they calculated? Why do they vary so much from one insurer to another? Why do they go up from one year to the next?
Guevara not only lets customers make their own choices about the group they join but always lets them see who is in the group, how much money is in the protection pot, who is making a claim and, most importantly, how much is left in the pot at renewal time.
Philip, one of Guevara's founders, said the company's aim is to “encourage customers to engage and understand our insurance product. ... Insurance is such a large proportion of household discretionary spending. By giving our customers accountability within their groups and making that transparent for everyone, we can reduce the cost of motor insurance for everyone.”
What next for Guevara?
For now, the team is totally focused on the UK motor market, but I can sense they won’t stop there. And this is more than a distribution play. Guevara is building a full-stack insurance model, and building an insurance business is no small feat. It takes time and a lot of capital to do that. Plus, there is the whole subject of regulation, which has to be embraced and fully adopted into the business model.
Guevara's product is ultra-sticky because the upsides come at renewal time, just when buying decisions are being made. For Guevara to succeed, it has to show, over time, that it can deliver a better trust engagement, a change in driving behavior and, ultimately, lower, fairer premiums for group members (which is the goal for all the P2P InsurTechs I've listed).
Jeff Bezos is credited with saying, “What is dangerous is not to evolve.” The traditional insurance model is not in good health, and this is creating the dynamic for change. The emergence of P2P insurance is evolution in action, even if it is taking us back to the roots of the industry!