​Some have argued that peer-to-peer insurance should be like peer-to-peer lending, i.e. creating a market place where the buyer and sellers of loans can come together, or in the case of insurance, a market place where the buyer and sellers of insurance risk can come together.

But is a new market place really being made? Assessing credit risk and then securitising the loans so investors can buy them is nothing new. Banks have been securitising loans for many years now e.g. mortgage-backed securities. Arguably banks are performing an additional service of diversifying the loans first which peer-to-peer lenders do not do.
Insurers too are not new to securitisation, 'insurance transformers' have been around for a while.  Interestingly, the marketability of securitised insurance risk is normally limited to catastrophic risks - normally because of the complex influence of underwriters and difficult to compare terms and conditions.

For both securitised loans and securitised insurance risk, buyers tend to be highly sophisticated i.e. hedge and pension funds, other banks or insurers. In fact, it was only when ‘the crowd’ such as local municipalities starting investing in these types of securities that things started going wrong i.e. the GFC. So these models have don't favour micropreneurs.

So should these market places be called ‘sophisticated buyers’-to-peer loans or insurance instead of peer-to-peer, maybe peer-to-peer is something else, or as Forrest Gump says - maybe it’s both.

Crowd sourcing p2p insurance startups aim to return Insurance to its roots - see this A.M. Best article (also shown below) 

People who appear in this video include:

• Meg Green, Senior Associate Editor​, A.M. Best Company 
• Fred Eslami, Senior Financial Analyst, A.M. Best Company
• Tim Kunde, CEO, Co-Founder, Friendsurance
• Chris Logan, Director, Peer Cover

Takaful is the Islamic alternative to conventional insurance. Takaful is based on the idea of social solidarity, cooperation and joint indemnification of losses of the members. It is an agreement among a group of persons who agree to jointly indemnify the loss or damage that may inflict upon any of them out of the fund they donate collectively.

The main purpose of takaful is to help folks through bad times. Profit earnings is not the main goal, while sharing any incidental profits generated is acceptable. Conventional insurance faces barriers under Shariah Law because of: 

• Maysir (gambling) – underwriting of risks by shareholders in anticipation of a profit is prohibited, 
• Gharar (uncertainty) – the insured pays premiums in exchange for indemnity against risks that may not occur and 
• Riba (usury) – the company engages in investments that derive their income from interest and/or prohibited industries.
  

PeerCover which offers peer-to-peer insurance is a form of co-operative insurance but is it Takeful? Please let us know by commenting to this blog.

For more information on Takeful see: 

• Hussain, M.M. and Pasha, A. T. (2011). Conceptual and operational differences between general takaful and conventional insurance. Australian Journal of Business and Management Research Vol.1 No.8 [23-28] 

• World Bank presentation ‘Takaful and Mutual insurers: alternative approaches to managing risk’; 
• International Co-Operative Alliance web site.

insure a peer explains p2p auto insurance. If you would like to learn more about insure a peer, click on their name or send them an . 

p2p Insurance is redefining the way we see insurance. Take for example the 7 common characteristics of insurable risks. These 7 principles are often quoted as the core foundations of insurance - p2p is shaking that core:

1. Large number of similar exposure units 
p2p insurance works on a small number of similar exposure units peers. p2p insurance benefits from peer networks reducing agency problems like fraud and exaggeration of claim amounts.

2. Definite Loss 
Most insurance policies are a named peril cover i.e. only defined risks are covered. But this fails to cover unknown risks i.e. what is left over, after you think you've thought of everything. p2p insurance is taking a broader view of risk - in some cases looking to define risk after it has happened.

3. Accidental Loss 
Whilst it makes sense that only fortuitous events should be covered or at least those events outside the control of the beneficiary of the insurance, when you look at the real world it is not so black and white. For instance, is divorce fortuitous - HK p2pInsurer Tong Ju Bao thinks not.

4. Large loss 
Insurers have concentrated on insuring the big ticket items because the frictional cost of insurance (capital, regulation, policy administration etc) making insuring the small stuff uneconomical. The internet and cell phones has changed all of that - many frictional costs are no more. We are seeing a few areas challenging this principle, micro-insurance is just one.

5. Affordable Premium 
If the premium is large relative to the amount of protection offered, then why buy insurance. I think this applies to p2pInsurance as well.

6. Calculable Loss 
This covers off whether a reasonable estimate can be made as to the frequency and severity of losses. It speaks to whether insurance can be equitable i.e. premiums are fair and whether a reasonable claim amount can be determined. The calculation doesn't have to be exact but should be close enough - I think p2pInsurer's simple rules cover this. 

7. Limited risk of catastrophically large losses 
This is in-built into p2p Insurance because no matter what happens the maximum peers can be paid is what is in the pool.

So, p2p is challenging 4 of the 7 core insurance principles. Not bad for a new starter.