Why not crowdsource insurance in order to provide access to cheaper risk capital? Why not reward policyholders for unused policies? Friendsurance, launched in 2010 in Germany is a peer-to-peer insurance concept – mutualizing ‘like’ risk amongst a self-selected group of ‘friends’ and rewarding the groups with cash-bonuses at the end of each year if they remain claimless. The groups handle small claims through the consortium of funds and an insurance company backing the arrangement steps-in to cover the larger claims. As such, each group member pays premium – part of which goes into the fund to cover small losses and the other part goes to a regulated insurer providing the group’s insurance policy in order to take on the risk for the larger exposures.
Friendsurance is currently working with 60 domestic insurance partners in Germany. Currently, more than 80% of the customers who take advantage of the claims-free bonus receive up to 40% of their premiums back.[i] In this way, Friendsurance aligns incentives with the policyholders and encourages risk-mitigating behavior. Furthermore, it increases customer satisfaction and customer loyalty.
Friendsurance groups are usually between 4-16 members. The selling point is that the more people you have in the group then the less premium each group member pays. Groups of friends connect online and are formed through social media sites like Facebook, Linked-in, and Twitter. The site currently offers third-party liability, homeowners, and other personal lines such as mobile phone insurance and is looking to expand into new products such as auto insurance.
Opportunity to reduce costs
The Friendsurance model reduces both insurance fraud and information asymmetries that usually increase the cost of insurance. Accordingly, there are three reasons why friends save — (1) In the case of a small loss, friends pay according to the amount they have pooled and friends are less likely to cheat each other, (2) Friends are good at making assessments of those that they know and will pick those who are less-risky to join their groups (mitigates adverse selection), and (3) once groups are formed, friends will incentivize good decision making and risk-mitigating behavior (avoids moral hazard). Furthermore, price decreases are passed down to the consumers due to the lower customer acquisition costs for the insurer/broker since the groups are self-formed. Lastly, there is data collected and shared through the social process of forming the groups that the insurance company can likely leverage to offer a fairer price.
However, not many insurance start-ups have adopted crowdsourcing and social networks to offer discounts on insurance and Friendsurance, in particular, may be struggling to reach the scale that they need in order to be sustainable. It is noted that their current customer base is 5-digits since they launched 5 years ago.[ii] A few reasons why the P2P model may be difficult to scale include (1) lack of trust which is essential for building a community around a financial product, (2) lack of traditional insurer paper in order to provide protection for larger losses further hindered by the large time requirements and high capital constraints to transform the P2P from a broker to an actual insurance company, (3) regulatory barriers. Furthermore, this model will only work for small-ticket, short-tail insurance items like auto insurance (property coverage) unlike larger, long-tail items like health insurance whereby the payments are much larger and can continue over many years. Furthermore, health insurers are able to negotiate payment discounts based on the power of large numbers that these smaller groups can’t offer. Lastly, are members dispelled once other group members note them as too risky? There could be difficulty in retaining groups each policy period.
I believe we could see this simple, social, sharing-model for insurance take off though only for small-ticket insurance items or in developing countries that are faced with a large protection gap. We are already seeing a few fast followers take-on a similar social model in Britain, France, New Zealand, and China. However, scalability will be essential for the success of the P2P model. Groups must be incentivize to form with adequate cost savings and use of digital technologies to allow for ease and simplicity in not just acquiring their insurance policy but also throughout the policy period.