The aims of peer-to-peer insurance are to save money through reduced overhead costs, increase transparency, reduce inefficiencies, and especially to reduce the inherent conflict between insurance carriers and their policyholders at the time of a claim.
There are many types of peer-to-peer insurance. The first type was created by Insurance broker (as opposed to insurance companies). In this broker model, insurance policyholders will form small groups online. A part of the insurance premiums paid flow into a group fund, the other part to a third party insurance company. Minor damages to the insured policyholder are firstly paid out of this group fund. For claims above the deductible limit the regular insurer is called upon. When there is no insurance claim, the policyholder gets his/her share refunded from the group pool or credited towards the next policy year. If the group pool happens to be empty, a special insurance comes into force.
More recently, models created by insurance companies have arisen. The insurance model is similar to the broker model except that as the peer-to-peer provider is the actual insurance company. If the pool is insufficient to pay for the claims of its members, the insurance carrier pays the excess from its retained premiums and reinsurance. Conversely, if the pool is “profitable” (i.e. has few claims), the “excess” is given back to the pool or to a cause the pool members care about. Peer-to-Peer insurers take a flat fee for running the operations of the insurance enterprise. The fee is not dependent upon how many (or how few) paid claims there are.
A group can be set up by the policyholders, forming a social network somewhat like Facebook. In the broker model, the only requirement is that all group members must have the same type of insurance. Examples are liability insurance, household contents insurance, legal expenses insurance and electronics insurance. In the carrier model, the only requirement is that the group members have something in common, such as being members of the same club or believing in the same charity.
In the broker model, the peer-to-peer insurance concept carries no costs other than the special insurance. The providers are financed through brokerage commissions of insurance companies.
In the carrier model, the peer-to-peer insurance concept carries no cost other the fixed fee to the carrier’s management and the cost of reinsurance and other more minor expenses.