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Peer-to-peer (P2P) is on the rise - from AirBnb to AirTasker - there’s a distinct shift towards increasing the power of community and insurance is no exception. It is estimated that the global P2P market for financial services will be worth US$897 billion globally by 2024, up from $26 billion in 2015.

While we’ve seen P2P lending players emerge in Australia, P2P insurance is still unexplored. New entrants face prohibitive barriers to entry. They must be an APRA-regulated insurer or have the ability to underwrite in Australia through a foreign insurer licensed in Australia. This requires a minimum of $10 million in assets to meet the Australian insurer prudential requirements.

How is it possible to conquer the barriers to entry?

If you’re an insurtech start-up, it’s almost impossible to compete with the incumbent insurers. A successful ICO might get you there in part, but the ‘barriers to entry’ in terms of getting an insurance licence are still very high - and they’ll continue to present a huge challenge to any disrupter.

It’s unlikely we will see a plethora of P2P insurance providers in Australia but the opportunity remains ripe for disruption. Insureds are still dissatisfied with traditional insurers and the friction points continue to stack up - slow claims process, increasing premiums, hard to place risks and a feeling of powerlessness are common complaints. For some groups, the use of discretionary mutuals might offer another alternative to insurance, in the form of P2P protection.

Discretionary mutuals are making a comeback

Discretionary mutuals have had a checkered history and are not ideal as a replacement for all types of insurance. However, if they are used effectively by start-ups or in certain niche areas, such as for industry or community groups, they can offer a true P2P alternative and allow the peers in those mutuals to have more control over coverage, pricing and the payment of claims.

Mutuals already operate in niche areas including:

  • Virgin Loss of Licence Fund - a discretionary mutual fund established predominantly by Virgin and Tigerair pilots to protect against loss of licence; and
  • Capricorn Mutual - a mutual that offers a broad range of protection to businesses in the motor trades industry including personal lines like home and motor.

A discretionary mutual is different to traditional insurance but it allows for a real P2P community because the members join together for a common purpose which involves funding their own cover and paying for claims. Instead of premiums the members fund the mutual by way of contributions which are then pooled together to pay claims and ‘excess of loss’ or ‘stop loss’ insurance, as well as cover the professional expenses of running the mutual.

A fully funded P2P discretionary mutual is one that works with insurers and reinsurers to help insulate the mutual from catastrophic losses. They share some of the risk and ensure that the mutual can reasonably meet the needs of the community by paying some claims from its own financial resources and others from reinsurance. Doing this doesn’t interfere with the P2P community if those insurers and reinsurers follow the form of the protection offered by the mutual but at higher per claim or aggregate levels.

Discretionary mutuals established in Australia will require an Australian Financial Services (AFS) licence. A Product Disclosure Statement is required for most mutuals because Australian members are likely to be retail clients. But a P2P discretionary mutual can avoid regulation by APRA and the requirement to hold a large amount of minimum capital. There are financial conditions attached to the AFS Licence but these are at lower levels than for an insurer.

Why P2P protection can be the best of both worlds

In a true P2P community, individual members can even have a say in whether a claim should be paid. Just imagine your insurer asking for your views on whether to pay a claim!

P2P mutuals can be more creative in the types of protection they provide, how they manage their risks and the benefits they offer members including rewards and rebates for less claims and for better risk management. It’s possible to do this without the constraint of an insurance contract, because the mutual can work more flexibly to adjust its protection to suit the preferences of the community. For example, the mutual can agree to protect risks that an insurer won’t.

P2P mutuals also have discretion as to whether to pay claims and can change their approach based on the community’s views. Allowing for a more generous payment or none at all, as long as those decisions accord with the representations they have made to members about the protection in the Product Disclosure Statement and there are sufficient funds in the mutual to pay the claim. Discretionary powers of the mutual can be used to set a precedent for ethical and compassionate claims handling and risk-sharing across the community. It can also help to discourage fraudulent claims, especially if members who make such claims are faced with possible expulsion.

With this sort of power comes a lot of responsibility. A P2P mutual will need to be supported by professional expertise to ensure that the mutual can actually deliver on its P2P promise.

One of the few downsides to the use of discretionary mutuals is that they are not a global solution. In Australia and the United Kingdom you can use them, but there are challenges in the U.S. and other countries. For this reason, they probably won’t revolutionise the way P2P works throughout the world. Another is that if you are proposing to offer protection to people who already hold insurances it will be difficult to obtain data from insurance companies if you are a mutual. We’re not yet at the stage where an ‘open data’ regime applies so getting details about a person’s no claim bonus and claims history will be difficult.

Downside of other P2P offerings

While some insurance companies have tried the P2P model, the challenges in establishing an insurer in Australia means that they need to partner with existing insurers.

Friendsurance, a great P2P initiative in Australia, allows cyclists to form risk-sharing groups. Each member of the group is eligible to receive a cash back if no claims are made by their group during the policy period. While this has elements of P2P protection, an insurance company underwrites the insurance in order to comply with Australian laws and individuals have no say over whether claims will be paid. The risk sharing is limited to smaller groups and not a large spread of risk across the entire community.

Mutuals don’t exist to generate profits for shareholders, so any surplus or profit is used to benefit the P2P community. A surplus at year end can be used to fund risk management initiatives, be carried forward or even subsidise future contributions. Provided that the funds are used for the common benefit of the group there is the possibility to use those funds in a number of different ways. A discretionary mutual is only restricted by the objects of its own constitution and it can maintain favourable tax treatment in Australia if the principles of mutuality are observed. When P2P partners with traditional insurers, they still need to make a profit, and profits are not always put back into the hands of the P2P community to decide how to use them.

As each P2P member knows that a claim will come from their own pocket, fraudulent claims tend to be less frequent. P2P mutuals can even encourage better behaviour, particularly if excess funds are returned to the community through discounts or additional benefits.

We believe P2P protection will become more popular for good reason. P2P protection offers a real opportunity for community groups to be involved in their own risk management in a meaningful and engaging way.

Care must still be taken when setting up P2P protection

While a discretionary mutual is a lot easier to set up and manage than an insurance company, advice on the legal structure, the taxation implications and regulatory requirements under Australian law is essential. Professional expertise is required to manage the day to day administration, including membership and claims services. A mutual manager with insurance and reinsurance experience can provide this expertise. There are a number of organisations that specialise in this sort of service and they often collaborate with the members to help enhance and develop their capabilities in operating the mutual. Actuarial, insurance/reinsurance, accounting and taxation expertise is also required intermittently to ensure it remains fully funded.

It can also be challenging for a new P2P mutual to find the right people to support their AFS licence. Securing the right responsible managers is critical and if that’s not possible, partnering with someone who holds an AFS licence with the right authorisations is the best option.

If you need advice on a P2P mutual structure or would like access to our broader networks to investigate the viability of establishing one, contact Charmian Holmes. We’d be happy to help.

Author: Charmian Holmes

February 2018

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