“INSURANCE is an unfortunate fact of life. We pay large premiums to cover ourselves for bad events that often never happen. But there is another way. An online insurance firm called Peercover lets groups of people insure each other on their own terms and at a fraction of the cost.
Insurance is the latest financial service to get a shake-up from peer-to-peer (P2P) dynamics. Already, individuals can lend money for a return with interest. Similarly, people wanting to exchange currency can avoid banks and instead use P2P services to find other people looking to make the opposite trade.
“The changes in financial services that are happening now are happening more quickly and dramatically than anything we’ve seen over the last 100 years,” says Ron Suber of peer-to-peer loan company Prosper. “Peercover is a great example.”
P2P insurance is simpler and cheaper than mainstream methods. “People are paying profit and overhead to insurance firms when they pay premiums,” says Peercover co-founder Jared Mimms. Peercover groups don’t collect premiums. Instead, every individual in the group has a stake – each is both insurer and insuree. The group’s founder sets the initial conditions for that group, including what can be insured and the maximum value of an item. The payout for a claim is split between all members but is only made when the majority of the group approve the claim. The amount you pay out is directly proportional to the value of the goods you have insured, as calculated by Peercover’s algorithms. Someone insuring a $400 cellphone will pay a larger proportion of a member’s claim than someone who is insuring a $100 cellphone, for example. Members who fail to pay are ejected from the group and are no longer covered.
The reason all this is possible is, as with other P2P services, because of the rise of new ways to pay online. “The kind of insurance we’re interested in wasn’t possible a few years ago,” says Mimms. “It only became possible because of micropayments.”
Behind micropayments are breakthroughs such as the virtual currency Bitcoin and the payment network Ripple, which Peercover uses. Both charge an extremely small fee for processing a transaction compared with traditional models such as credit card companies, making payments as low as 20 cents feasible.
Initially, Peercover’s focus is on building groups to cover small things like cellphones, and what Mimms calls positive insurance. This is where a group pays out when a member reaches an agreed goal, such as giving up smoking. But he has grander visions too, such as health insurance, where large groups of Peercover users could negotiate preferential rates for treatment.
“The technology allows for the potential of collective bargaining in the negotiation of healthcare costs in which groups may band together to practise some of the bargaining techniques used by governments and traditional insurance behemoths,” Mimms says.
Ellen Carney, an insurance industry analyst with research firm Forrester, says Peercover points towards the future of insurance. “It’s very clever. This model is at the historical roots of so many insurance companies.”