As a founder of a "peer-to-peer" insurance business I'm not a huge fan of this wiki article as it makes a lot of incorrect generalisations.
> In today's peer-to-peer models, insurance policyholders form small groups online. A part of the insurance premiums paid flow into a group fund, the other part to the insurer.
In a broker-based model this might be true, but you may also be regulated as an insurer, or have a commercial relationship with a regulated insurer.
> For claims above the deductible limit the regular insurer is called upon.
Or the re-insurer, depending on whether the business deals with the underwriters or goes directly to re-insurance.
> The only requirement is that all group members must have the same type of insurance
Not necessarily. In fact ideally not. There are significant savings to be made by leveraging an existing float rather than having separate pots, and the social density of your group becomes sparse if you can only insure your ferret with other ferret fanciers.
> The providers are financed through brokerage commissions of insurance companies
In some models. Others not so much. As discussed above, dealing with the underwriters isn't the only way to run this kind of business.
Also "peer-to-peer" is a misleading name in some cases. Crowdsourced might fit better.
If I understand it correctly from what your company's website is doing, essentially, you're leveraging the fact that good drivers tend to know good drivers and there could be a social pressure to not affect the group's members.
The function of your company would be similar to that of the traditional insurer except all of the premiums go to the pool for claims and admin instead of also having to share it with shareholders/investors.
What I'm curious is what happens when claims are more than what's already in the pool? My assumption would be that premiums would have to go up to cover the loss so you're banking on the fact that by group selection, claims will be less than the average. And in the event that claims are more than the average, there's probably insurance taken out on that.
Yeah, good comment. I had a few of these thoughts myself in the early days but I think you're missing the main value of it. Apologies for the over-wordy reply.
> leveraging the fact that good drivers tend to know good drivers
I think humans might overestimate our ability to pick 'good' drivers. I wouldn't trust it very far... but it also doesn't matter much.
What matters is badly underpriced drivers, for example your mate who drinks and drives but doesn't yet have a conviction for it. Don't invite him. Everyone else is broadly fine.
> ...there could be a social pressure to not affect the group's members
That's a factor we're expecting to be able to measure, but it's not part of the business model per se.
> The function of your company would be similar to that of the traditional insurer except all of the premiums go to the pool for claims and admin instead of also having to share it with shareholders/investors.
Yeah, broadly speaking. Guevara's revenue stream is a flat fee, compared to a conventional insurer whose income is your premiums... so Guevara isn't motivated to inflate your premium or to look for technicalities when handling claims.
> when claims are more than what's already in the pool?
The UK motor insurance market requires policies to have uncapped liability, so you always need reinsurance. Even when you're insured through Admiral et al the larger claims are farmed out to Munich Re, Swiss Re, Trans Re, etc.
> ... premiums would have to go up to cover the loss...
To an extent, yeah. You do get price volatility, but we cap it at 100% of your (competitive) Year 1 premium. Your premium can drop as low as 25-30% of your typical market rate in a good year, and averages out costing about 50%. You get that huge discount in exchange for taking that volatility.
That discount is effectively the underwriting profit that would normally go to the insurance company.
> ...so you're banking on the fact that by group selection, claims will be less than the average.
We're not banking on group selection being meaningful to our claims rate. We hope for lower claims rates, and lower average claim size, but we'll be very successful without those things because it's simply a better business model. There's much less moral hazard, lower susceptibility to fraud, less information asymmetry... but more importantly (a) as you build up capital your premium drops, so you get a lower price and we get a higher LTV through reduced churn, and (b) we have a lower CAC compared to conventional insurers. I know I'm biased but I think it's a strong model even before any of the behavioural benefits.
I should add that I have now stepped back from Guevara (I can't commit enough time for family reasons), so my knowledge of product pricing, policy, and the rest of this stuff is dating rapidly.
Thanks for your really insightful comments. I've been studying and working in the industry for several years now trying to see if there's a better way to do it. In fact, I did study Guevara along with other insurance-based startups to see if there's anything to learn from or be aware of.
It doesn't seem to me that customers would see full value of their "purchase" if they have never had a claim. Yet, it's crazy that their premiums go up because someone else had a major accident. On the flip side, insurers can't really choose to raise their rates like a normal business would do. For me, this is the fascinating part about insurance businesses.
What is curious to me is if there is a way to build a risk model that assumes that people will get into accidents by default? You've mentioned that people overestimate our ability to pick good drivers. Why not build a model that assumes people are bad drivers by default and optimize from there?
> It doesn't seem to me that customers would see full value of their "purchase" if they have never had a claim.
If you think about Guevara's insurance as capital expenditure (by describing it as a purchase) then, sure, you're right, losing some of it because of someone else's accident triggers our human aversion to loss.
But, the trick there is that while Guevara's insurance can be described as capital expenditure, conventional insurance is always operational expenditure. With conventional insurance you're not buying your insurance, you're only renting it. At the end of the year you have nothing.
> Why not build a model that assumes people are bad drivers by default and optimize from there?
I think Guevara's model is as close to that as it's possible to go. By moving an acceptable degree of the financial repurcussions for accidents onto you and your social group, Guevara is stepping back from needing to care directly about who is and who isn't a good driver.
For example, if there were a way let a group choose their own prices, or pay flat prices, then (in theory at least) Guevara would be able to entertain that idea. Pricing matters for Guevara in terms of customer acquisition, and in terms of making things feel fair for your group-mates, but other than that it's not a big issue.
Insurers care about pricing so much they're putting tracking devices in peoples cars to understand their driving patterns. They need to get more and more and more data because they're ultimately trying to predict the future. Guevara doesn't need to do that.
You raise a good point: why is it even legal for premiums to become profit? Insurance should have two separate pots: the money that is contributed to cover claims, and the fee that the manager charges. Allowing "non-payment of claims" to become profit is a huge moral hazard.
> Allowing "non-payment of claims" to become profit is a huge moral hazard
Totally, it's EPIC, EPIC, EPIC, moral hazard. The hazardiest of hazards. It's toxic; all of the mistrust and information asymmetry flows out it.
If insurers weren't constantly nudging prices there'd be no need to switch car insurer so often (45% of the UK motor market churns per year) and the price comparison sites probably wouldn't need to have existed.
If people could trust insurers to handle claims fairly then we wouldn't need to spend as much money managing complaints and government oversight.
Aside from a high regulatory barrier and the significant capital investment required, another reason the insurance industry has resisted serious disruption for so long is that a lot of the way things work are hidden behind closed doors, jargon, based on who you know in the industry.
In the UK at least, even the pseudo-standard industry APIs they use (based on EDI, EDIFACT to be specific) are hidden behind a licencing organisation (Polaris) owned by the ABI (the industry body) that charges per transaction. It's a cartel.
If it were in the future I'd describe it as dystopian.
In the US they use X12, which is an XML-based version of EDI, which was published publicly by ANSI at least.
This would be interesting to me if I could put together a small pool of say ~5 friends of the same age (22) and health (good).
If everyone did this, health insurance rates would drop drastically for pools of young, healthy individuals and rise drastically for the old and the sick. Which somewhat defeats the point of insurance - spreading risk over large, heterogeneous portions of the population.
That isn't the point of insurance in its original sense. Insurance, originally, was about being able to reliably get the expected value out of something whose outcome would vary. Take a ship, for instance: ten ships go to the East Indies, three return laden with spice, seven sink. Expected value: some spice. So, you pool homogenous risks and investors can expect a more reliable income, less a fee for the broker and all the rest.
I would argue the word has been bent and beaten far out of its original shape into something close to what you're talking about, especially in health. It's not insurance as much as assurance. You don't pay in early in life to get the expected value later in life. That would be insurance. You fight to try and get more than you deserve when you're above the life expectancy, if you're good at paperwork. If you're bad at paperwork or a smoker, you're the one whose early death frees the medical resources and insurance money needed to pay for the one who's good at paperwork, less a fee for the broker and all the rest.
In this second meaning of "insurance" you're right, the point is totally defeated because nobody will want to "insure" a sickly old man's health just as nobody in their right mind will write fire insurance for a cigarette.
Insurance is simply the act of diversifying risk and normalizing returns. When you are insured, you are consequently assured (confident) that you will not receive some huge, unexpected cost but that you will rather pay out in manageable portions over time.
It could be across a pool of investors, as you describe in the spice-trading example. Nobody wants to self-insure because of the chance of a huge catastrophe taking out their ship and netting them a huge loss and likely a lifetime of debt.
It could be across a pool of investors, as I describe in the health-insurance example. Nobody wants to self-insure because of the chance of a huge catastrophe putting them in the ER and netting them a huge loss and likely a lifetime of debt.
The reason we leave it to big organizations currently is because they have the resources (data, underwriters) to accurately asses and price risk. They charge a fee to do this. They are allowed a certain amount of extortionate leeway due to government regulation mandating certain minimum amounts of insurance, which you allude to in arguing with companies for reduced rates.
Fwiw: I paid accident claims for over five years. Most claims fell into one of two categories: "accident waiting to happen" or people trying to get coverage for things like the chiropractic care they were going to get three times a week anyway. Only a tiny portion of claims really struck me as shit happens/man, it sucks to be you.
If you really want low health bills:
Do all that boring stuff you constantly read about, like brush, floss, eat right, exercise, and only drink in moderation. Do not ever get rip roaring drunk. Especially do not drive or engage in other dangerous activities while drunk or high. Don't sleep around casually. Don't ride a motor cycle. If you want to go hiking in the mountains, take the appropriate precautions and do not drink or do drugs.
A lot of claims will not be covered anyway if you were drinking, taking drugs or engaging in risky behavior (parachuting, mountain climbing). And keep in mind that insurance only protects against financial loss, and only to a limited degree. If you permanently maim yourself doing stupid crap, you will not only be stuck with high medical bills and reduced odds of making a good income thereafter, you are also permanently maimed, duh. Living with chronic pain and other issues of that ilk still sucks majorly, even if you win the lottery and are set for life financially.
All around good advice, if your goal is to survive as long as possible. You miss out on some amount of fun, though. I don't mean that in any kind of "way", just that if that is your goal, this is some good advice.
I have been rip roaring drunk, once or twice. It wasn't any fun and then I was sick afterwards.
I have hiked up mountains, in spite of a fear of heights. I did it sober and took appropriate precautions.
I am not suggesting you not have a life. If you want to drink, you can. You just need to have a designated driver or call a cab. If you want sex, you can have that. Just not with random ass strangers whose histories are total unknowns.
I enjoy my life. And I have very few regrets. I think "fun" that leads to regrets = you are doing it wrong.
But I was like that before I paid accident claims. Paying them just made me more confident that I am right.
Edit: I am genuinely curious what fun you think I am missing out on, though perhaps that is not clear. I really wonder what you think I am not doing that somehow makes my life less fun. Because I sincerely do not see it.
Well, this is what I wanted to avoid. I didn't mean it in any particular "way", especially an accusatory one. I've just done the opposite, basically living like there is no tomorrow. It was a lot of fun, but very dangerous, and it wouldn't be very good of me to advise anyone else to do it. But it was a lot of fun, a lot of the time. And regrets are easy to get over -- for me -- if I go into a situation telling myself "no regrets".
And what happens if one of your 5 friends is diagnosed with an incurable but expensively treatable illness? Do you kick them out? Do you increase the premiums? Do you invite more people in to the pool?
There are many ways to design plans around this nowadays. With Obamacare making health insurance
guaranteed issue (they have to cover you), you really would just try to foot the bill for at most 12 months before you could go on a marketplace insurance plan. While it might be gaming the system, it's now law.
Nowadays, health insurance is really "assurance" sprinkled in with a doctor subscription (as daniel-cussen mentioned). With that in mind, a hypothetical plan design would collect premiums that bundle reserves, a concierge medicine program, like HealthTap, and critical illness insurance, cancer, and/or accident insurance. These insurances only cover specific incidents for the immediate term. Once someone triggers one of these events, you could push them onto the exchange where the larger risk pool would then cover it on an ongoing basis.
Whether or not that would be ethical is up to you...
From an economical standpoint, depending on your area's availability (read urban centers), you could likely put together this entire package for a collective and pay the ACA tax for less than an ACA approved plan.
You might have included a clause where you can release a member from the pool for a high one-time cost from each of the other members.
At the end of the day, you would undoubtedly be liable to pay in one form or another for a portion of those treatments, unless the friend felt bad and voluntarily left the insurance group.
Insurance among friends would be weird, mixing emotional and purely mathematical calculations.
A single trip to the ER with a serious, but non-life threatening, injury could easily cost more than any 2 members of your group make in an entire year.
So its a crap shoot - your small group is very likely to be cheaper, 99% of the time. The only important thing is, can your group actually support a real medical emergency at full cost? That's the only reason to join the group after all.
When participating in a larger insurance group, these same costs are born solely by insurance premiums. But the costs are not the same - big insurance companies have negotiated lower prices across the board. Your group cannot.
I see p2p insurance as a total loss, because in time of need they cannot possibly pay.
From what I'm reading, it sounds like the p2p insurance is intended to cover a portion of the deductible. This would allow the members of the pool to choose higher deductible plans than they would otherwise be comfortable with. If someone develops a chronic illness which is expected to always eat up the pool they would probably be booted after the first year.
I have no idea what the legality of it would be, but it probably wouldn't make sense to accept or keep someone with an expensive-to-treat condition in small pool like that because there may not be enough other members to absorb the cost.
The whole point is that everybody has coverage under a high deductible standard insurance plan (which will be significantly cheaper than a low deductible plan), and then the group shares the risk of the deductibles.
Best case, everybody pays less for insurance (including what they pay into the p2p pool). Worst case, someone gets sick and busts the pool (and gets kicked out if it's chronic), but everybody still probably paid less overall. Not sure how well this works if the person who got booted can't get their deductible reduced.
I think health insurance is weird in a number of ways for this. It'd probably be great for e.g. homeowners insurance.
Wow, that's insane! I hope you guys (I'm assuming USA) fix this system soon. In countries with a developed health care system, this sort of thing does not happen.
Though the set of ~5 seems to expose you to a lot of risk still. What if the size of the set were increased such that the risk was 1 in a million rather than 1 in five.
What if the set of those insured was almost the size of a population?
Not only would you have spread the risk greatly and reduced cost, but you'd probably benefit from collective bargaining power to be able to reduce the costs that you were exposed to.
In the limit, I think you might reach the Affordable Care Act: a single risk pool for each region, and price variations only on age and smoking status.
That article needs work, and lacks historical context. The first such organization was the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire, established by Benj. Franklin in 1752. They're still in business.[1]
Originally, they sold permanent fire insurance. You paid premiums for some number of years, and were then paid up for the life of the building. The building can only burn down once, after all.
Yeah, p2p is similar to p2p lending, which is not exactly a mutual credit union. The difference is the social factor which means they'll help each other, but also that they'll trust each other.
Material insurance (where you're insuring a certain $ amount) works because people have utility curves that justify it: the utility of losing 1M is much higher than 10 the utility of losing 100k.
So for p2p, 10 people can buy just 5 insurance contracts and distribute the rest of the risk amongst themselves.
This is how USAA got started as well. A group of 25 US Army officers got together back in 1922 to insure their vehicles. They're one of the better insurers these days if you're eligible for their services.
How does this differ from long-existing "mutual" insurance companies? A policy holder essentially owns a a share in the insurance company. Peer-to-peer automates this on the web.
I'm under the impression the p2p insurance schemes are supposed to consist of small pools of peers supposedly closely-associated enough to be willing to evaluate each others' risks, whereas the mutuals tend to pool risk across larger groups and differ from other insurers only in that they share the profits with their policyholders.
I suspect in practice the larger, more diverse pool of risks and knowledge of professional underwriters at conventional insurers (mutual or otherwise) will trump the "I know X, Y and Z are very good at looking after their possessions" knowledge of the P2Ps, but it looks like the P2P schemes tend to back up the p2p scheme with a traditional insurance policy (with a relatively high excess), so actually the p2p scheme is only underwriting a portion of the overall insured risk. Theoretically you'd then get the benefit of the underwriters' ability to assess and cover expensive and idiosyncratic risks and your own better position to assess your peers' behaviour.
I would love to see some form of this concept implemented here in the US. Does anyone know of any startups trying to work on this? I wonder what some of the larger obstacles are from having this created.
> In today's peer-to-peer models, insurance policyholders form small groups online. A part of the insurance premiums paid flow into a group fund, the other part to the insurer.
In a broker-based model this might be true, but you may also be regulated as an insurer, or have a commercial relationship with a regulated insurer.
> For claims above the deductible limit the regular insurer is called upon.
Or the re-insurer, depending on whether the business deals with the underwriters or goes directly to re-insurance.
> The only requirement is that all group members must have the same type of insurance
Not necessarily. In fact ideally not. There are significant savings to be made by leveraging an existing float rather than having separate pots, and the social density of your group becomes sparse if you can only insure your ferret with other ferret fanciers.
> The providers are financed through brokerage commissions of insurance companies
In some models. Others not so much. As discussed above, dealing with the underwriters isn't the only way to run this kind of business.
Also "peer-to-peer" is a misleading name in some cases. Crowdsourced might fit better.