While the UK peer-to-peer insurance market still seems to be struggling to make a substantial impact; the future for peer-to-peer insurance in the US is looking brighter. This week Sequoia – the major investment group put $13 million into the peer-to-peer start-up operation Lemonade.
Why is Sequoia Investing in Peer-to-Peer?
The idea of peer-to-peer insurance is simple. It allows a group of similar people to pool their risk and thus receive lower premiums based on group risk against individual risk. If few or no claims are made during the period of risk coverage – there is then a “cash back” element to the policy which allows the members of the group to get paid for not filing claims.
Unsurprisingly, this is likely to appeal to consumers as a way to reduce their insurance premiums over the course of a year.
The concept of peer-to-peer insurance is not new. In fact, there are companies that have been involved with pooled risk for a long time. The trouble was that consumers, until recently, would have had problems finding others to pool their risks with.
Now, with the internet and the sharing economy running hand-in-hand, it may be time for the peer-to-peer model to take off in the mass market.
Of course, investors aren’t handing over wheelbarrows full of cash because they’re looking for a better deal for consumers; they’re hoping for huge profits by enabling higher levels of competition in one of the most valuable market places on earth.
The property and automotive markets, in which peer-to-peer insurance is easiest to develop, are worth billions of pounds and more than a trillion dollars in the United States in profits. That’s a substantial amount of money and it’s worth fighting over.
However, potential for disruption to the insurance market is one thing – actualizing it is quite another. The key challenge facing peer-to-peer insurers is educating the general public. That’s a public that already finds insurance confusing to begin with.
While the idea of cashbacks may lure in policyholders; failure for those cashbacks to materialize (because claims have gone over a certain threshold) may well drive consumers back into the arms of traditional insurers even if they make the switch in the first place.
It would be a good idea for insurers to keep an eye on Lemonade and the progress that it makes; peer-to-peer insurance may, with the right backing, be something that the mainstream insurer needs to consider carefully in the very near future.