Peer-to-peer: insurance with a friendly face?

It’s called Xiang Hu Bao, and it’s an online mutual aid platform introduced by Alipay. Since its launch in China in 2018, it has attracted more than 100 million participants, helping health protection in China become more inclusive, especially for those of lower incomes and living in rural areas.

Xiang Hu Bao offers crowdfunding support in times of severe sickness. The math here is simple. You pay an estimate of $4.25 throughout a year. There is no up-front premium, and money is taken out of your Alipay account automatically once a member gets a payout.

Your cover is around $40,000 and stipulates that claims can be made for a precise number of a hundred illnesses. From the claims pool, the company takes up to 8% of commission. Most of claims are processed automatically by blockchain, while more problematic cases are analyzed and voted upon by the jury, which consists of the platform members.

Led by reciprocity, backed by technology. That’s what peer-to-peer insurance is all about. It’s now gaining in prominence in China, but might soon expand to other countries, putting the traditional insurance model at risk.

A common cause

Peer-to-peer insurance works as a risk-sharing online platform, where people form groups and pay a premium for one common pool. That’s where the payouts are made from in case of any claims – with a commission attached that aims at upkeeping the platform.

Unlike traditional insurance, the peer-to-peer model gathers people with similar needs, and minimizes the odds of unused premiums not being refunded. Plus, when the people have common interests, they are less likely to file fraudulent or unnecessary claims. The model introduces transparency and keeps costs at a minimum.

P2P’s great leap forward

The biggest opportunities for this type of mutual aid are now being seen in the most-populous and most-aging nation: China. The pressing issue was that approximately one billion Chinese remained with minimum health coverage after major system reforms. People who could afford it, bought private insurance. But what to do when a premium eats up 20 or 30% of your salary? Wish for health or search for alternatives. Seeing this, the Chinese were ready for the next step – the social forms of insurance.

Still, health is not the only area where this insurance works. There is a whole bunch of unusual covers, not offered by traditional companies.

Imagine a support group for your marriage, free counselling and payout in case of divorce. All of these are delivered by a Chinese platform TongJuBao, which, beside marriage safety, offers mutual aid for child or income protection. Not only can you join a group within TongJuBao, you can start one yourself too, and then invite your friends or family.  

Powerful allies

The business model of P2P insurance may sound utopian. Still, it exists, it works and it’s pushing out of the Chinese borders.

That’s largely because it’s backed up by the biggest local brands from technology, e-commerce or insurance worlds. Alibaba, Tencent, Qihoo360, Fanhua, even the Chinese equivalent of Uber, Didi Chuxing – all of these players are now building their own insurance models. And that certainly sounds like a threat for traditional insurance, in China and beyond. At least in theory.

Because in the rest of the world, peer-to-peer insurance largely remains an undiscovered card. It’s more complicated to regulate and popularize. Traditional insurance providers, in regions like Europe and North America have sufficient offers to delay new market entrants. But this phenomenon is not to be disregarded: McKinsey places peer-to-peer insurance among 9 leading insurtech trends.

Beyond China

Peer-to-peer insurance is now being tested mainly in the US, followed by the UK and Germany. According to Statista, 37% of American respondents are willing to use P2P insurance, or already have it. But another 40% wouldn’t consider using it.

One of the most recognized insurance platforms in the Western world is the US-based Lemonade. They organize groups connected by similar insurance needs, with a common payout pool. Additionally, at the end of each fiscal year, Lemonade transfers the unused premiums to a chosen foundation, keeping 20% as commission.

German Friendsurance, on its part, is more of a broker. It also groups users, but purchases a group policy for them from a traditional insurer. The more people in a group, the lower the costs of a single policy.

Eating the insurers’ lunch?

The Chinese regulatory system allows peer-to-peer platforms to act kind of as insurers. This is not as easy in more advanced and democratic economies. With various organizational and legal restrictions, the P2P model seems to be unfeasible on a large scale. On top of that, people’s trust toward unregulated industries isn’t too high, and the traditional insurer position in Europe or North America is too stable to be heavily disrupted as of now.

And so, the critical mass needed for the success of any sharing economy model in insurance isn’t expected to be reached anytime soon. It’s more of a wake-up call for the whole insurance sector to invest in digital tools, earn customer trust and be more transparent with people.

But then, there’s the pandemic factor too.

Boosted by the pandemic

It’s still difficult to estimate how the popularity of peer-to-peer insurance has changed with the arrival of the coronavirus. We can observe, however, that some providers, such as Xiang Hu Bao, are reacting fast to what’s happening: the said platform offered an additional COVID-19 coverage as early as in January 2020. Business Wire has estimated that the number of users in mutual aid insurance in China will triple until 2025. This wave is also rising outside of China. Lemonade, just in April, decided to launch their new products in the Netherlands.

Peer-to-peer insurers were first to serve their clients online, and adjust their offers as needed, with exceptional time-to-market. Their competitiveness, especially in terms of fast adaptation to change, is largely due to using blockchain. This technology, used for managing users and claims, is referred to by the European Parliament Research Service as the “key technology in the critical domain of epidemic management”. It is now listed among ten main technologies to fight the coronavirus. The expectations for it to be developed further are high, especially in healthcare and insurance.

Keeping up the pace

One thing is certain: in times of pestilence, it’s especially important to take care of the insured remotely. Starting with the need of online quotations and client portals, where individuals can log in and connect with their insurers. The insurers, on their part, could move online to stay in control of the whole business, including tracking sales, monitoring agents and keeping in touch with customers. Having one tool, such as Comarch Digital Insurance, for selling, storing or processing claims, now, more than ever, is the key to win customers. Just to keep up the pace with the Chinese.

Julia Burda