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’s 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 through a foreign insurer licensed in Australia. To do this they need at least $10 million in assets under Australian insurer prudential requirements.
How can P2P insurers conquer these barriers to entry?
If you’re an insurtech start-up, it’s almost impossible to compete with incumbent insurers. A successful ICO might get you there in part, but getting an insurance licence is still difficult because of the high barriers to entry - and they’ll continue to present a huge challenge to any disrupter.
While these barriers may mean it’s unlikely that we’ll see a plethora of true P2P insurance providers in Australia in the near future, the opportunity remains ripe for disruption. Consumers are dissatisfied with traditional insurers. Common complaints include slow claims processes, increasing premiums, risks that are hard to place and a feeling of powerlessness.
One solution is to provide ‘P2P protection’ as an alternative to insurance. This can be achieved using a discretionary mutual.
Discretionary mutuals are making a comeback
Discretionary mutuals have had a checkered history. While they can’t replace all types of insurance, they can be used in some niche areas like industry and community groups. Some start-ups have already used this structure to offer a true P2P alternative.
Some mutuals that operate include:
A discretionary mutual is different from traditional insurance. It can create a real P2P community where members join together for a common purpose. Together they fund their own cover and pay claims. Members make contributions not premiums. These are pooled together to pay claims, ‘excess of loss’ or ‘stop loss’ insurance, and the professional expenses of running the mutual.
Discretionary mutuals also have the advantage of giving their peers more control over their protection coverage, pricing and the payment of claims.
A fully funded P2P discretionary mutual can’t operate without the insurance industry though. They must work with insurers and reinsurers to make sure the mutual is protected from catastrophic losses. They share some of the risk and make sure the mutual can reasonably meet the needs of the community by paying some claims from its own financial resources and others from reinsurance. This doesn’t interfere with the P2P community as long as those insurers and reinsurers give the same type of the protection as the mutual - they just give a higher amount per claim or in total.
Discretionary mutuals established in Australia must have an Australian Financial Services (AFS) licence. They may also need a Product Disclosure Statement if they have retail clients.
One of the key advantages of a P2P discretionary mutual is that they aren’t regulated by APRA, so they don’t need $10 million capital. There are financial conditions attached to an AFS Licence but these are lower than APRA’s requirements.
P2P protection offers the best of both worlds
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.
P2P mutuals can overcome many of the issues that consumers have with traditional insurers. For example, in a true P2P community individual members can have a say over whether a claim should be paid. Just imagine your insurer asking for your views on whether to pay a claim!
These funds are not constrained by an insurance contract, so they can be more flexible and adjust their protection to suit their community. They can be more creative about the type of protection they provide, how they manage their risks and what benefits they offer their members. They can agree to protect risks that an insurer won’t and even give rewards and rebates if they have fewer claims or better risk management.
P2P mutuals can also choose whether to pay a claim and can change their approach based on their community’s views. This means a member may receive a more generous payment or none at all. The mutual has this flexibility as long as it’s in line with the protection it has agreed to give members in its Product Disclosure Statement and it has enough money to pay the claim.
The discretionary powers of the mutual can set a precedent for ethical and compassionate claims and risk-sharing across the community. It can also discourage fraudulent claims, especially if members risk being expelled from the fund.
Mutuals don’t exist to generate profits for shareholders, so any surplus or profit is used to benefit the P2P community. At year-end a surplus can be used to fund risk management initiatives, be carried forward or even subsidise future contributions. As long as the funds are used for the common benefit of the group and in line with the objects of its constitution, the fund can use them in any way it wants. As long as it operates within the principles of mutuality, the fund also receives favourable tax treatment in Australia.
With this sort of power comes a lot of responsibility. A P2P mutual needs to be supported by professional expertise to make sure it can actually deliver on its promises.
Unfortunately discretionary mutuals aren’t a global solution. While they can be used in Australia and the United Kingdom there are challenges in the US and other countries. This means that they probably won’t revolutionise the way P2P works across the world.
Another barrier to P2P mutuals is that we don’t have an ‘open data’ regime in Australia yet. So if someone already holds insurance it’s difficult for the P2P mutual to get details from their insurer.
Downside of other P2P models
Some insurance companies have tried other P2P models but they have needed to partner with existing insurers to meet APRA’s requirements. They also need to make a profit and these profits aren’t necessarily put back into the hands of the P2P community.
Friendsurance, a great P2P initiative in Australia, lets cyclists form risk-sharing groups. The risk sharing is limited to these small groups and not spread across the entire community. Each member of the group is eligible to receive cash back if their group makes no claims during the policy period. While this has elements of P2P protection, it needs to be underwritten by an insurance company to meet Australian laws. The individuals also have no say over whether their claims will be paid.
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, it’s essential to get advice on the legal structure, the taxation implications and the Australian regulatory requirements.
Professional expertise is also required to manage the day-to-day administration of the fund, including membership and claims services. A mutual manager with insurance and reinsurance experience can provide this expertise. There are also a number of organisations that specialise in these services and they often collaborate with members to improve and develop their capabilities so they can help operate the mutual. Actuarial, insurance and reinsurance, accounting and taxation expertise is also required from time to time to make sure the fund 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