Insurance company, Lemonade successfully raised a US $13million seed round last year. The company’s utilises a peer-to-peer (P2P) model, which differs starkly from the traditional insurance model. This model not only provides more transparency, but also allows the company to reduce fraud and strengthen risk management.
Editorial
Lemonade became a fully licenced insurance company in New York on the 21st of September. Just nine months ago, it announced the completion of a US $13million seed round, which was one of Sequoia Capital’s largest seed investments.
Simpler and more transparent
In the traditional insurance model, companies are de-incentivised to pay out claims because they earn money when there are little to no claims. But in the P2P model, policyholders like neighbours and friends form a group and pay the premiums in their claim pool. If there is money left in the claim pool after the policy period, the company will charge a fee of 20 percent of the total amount in the claim pool after which, the remaining amount will be re-distributed to the people in the group.
Although P2P insurance does not earn as much as traditional insurance firms, it can respond quickly by taking advantage of mobile apps and relevant technologies. Lemonade found that the establishment of these groups is expected to reduce fraud and strengthen risk management due to close social interactions between people in the same group.
Source: lemonade.com
The Uber of insurance
The idea of P2P insurance is not entirely new, but Lemonade is the first to do it as a carrier instead of a broker. Currently, Lemonade covers only renter insurance and homeowner insurance, and the monthly price starts at $5 USD and $35 USD respectively. If there is money left in the pool, a fee of 20 percent will be charged.
P2P insurance company usually offers micro-insurance. InsPeer in France, founded in February 2015, covers home insurance, auto insurance and motor insurance; Friendsurance in Germany has a wider coverage, including electronic products, liability, family and litigation; and Guevara focuses on car insurance and charges commissions when handling claims.
A supplementary of the risk management method
CEO & Co-founder of Lemonade Inc, Daniel Schreiber said to LifeHealthPro that traditional insurance brings out the devil in a person. The premium is so high because of the possibility of fraud. He also indicated that there is an inherent conflict of interests between insurance carriers and policyholders in the traditional insurance business model, because the companies make money by denying or delaying claims.
The idea of P2P is both a marketing method and a risk management measure. By being transparent about how much they earn and forego, P2P insurance companies attract people in need of micro-insurances. By allowing policyholders to pool together, the company can reduce the cost of rating the clients and collecting data. Meanwhile, dishonest people are weeded out automatically.
This idea is important for risk management although it will not replace any risks. Risk management can be improved because of the behavioural nature of people in a social circle. Consequently, clients benefit from the identification of their acquaintances. P2P insurance company transfers some part of the risks to the clients while traditional insurance companies tend to rate their clients accurately and absorb all the risks. Thus in comparison, P2P diversifies this value chain.
China’s unregulated P2P insurance
Mayihubao is regarded as a Chinese P2P insurance company. It offers various kinds of insurances, and covers a myriad of policies. Other companies include Tongjubao and ehuzhu. These companies try hard to remove “insurance” from the name of their company, with some even claiming to be a charity organisation. This attempt is due to the need to reshape their image in the eyes of the Chinese people who find insurance companies irritating and annoying.
In some P2P insurance models, a claim made by a person has to be confirmed by the group he is in, but it is not unusual that people in the same group collude to commit insurance fraud.
Since it is very easy to avoid legal consequences, more people will join the insurance project to swindle money out of P2P insurance platforms, resulting in many honest people reluctant to participate. This cycle of dishonest people driving out honest people in P2P insurance projects is known as the Gresham Law. On the other hand, the insurance platform could also run away with clients’ money due to the presence of various loopholes with the legislations. This is especially so when many of these companies do not have an official insurance licence.
Traditionally, insurance companies rate the risk of a person based on their historical data, including variables such as health record and credit, however P2P can help reduce and value the risk greatly. Subsequently, P2P does not replace the role of traditional data, but inatead acts as a supplementary means to gaining such data.
