Peer-to-Peer Insurance – Blockchain ImplicationsPaul DeCoste
Peer-to-peer (P2P) Insurance
The peer-to-peer insurance (P2P) is a disruptive form of insurance that allows insureds to pool their capital and self-administer their insurance. In order to avoid or reduce the possibility of fraud, the critical aspect of P2P, this type of insurance creates groups of people that share mutual trust and interests. By grouping their insurance policies, they aim to reduce the cost of policy management, payback themselves in the form of residual funds after claim payouts or re-insure in case the claim amounts exceed the pool. In its essence, P2P insurance is substantially different from traditional insurance where the insurance company keeps premiums not paid out.
Many insureds that utilize traditional insurance policies realize that such policies are not always working in their best favor. P2P insurance allows groups of individuals with similar interests to expose of capital waste that may come along with traditional insurance methods, while simultaneously coming together as a community. With the same goals in mind, this is a community that works together for the benefit of everyone involved. Thus, in a community of individuals where there is a shared sense of care for other individuals, P2P insurance is a method to protect the community and, in a way, allow each insured to bear responsibility for risk materialization.
Whether facilitated by an insurance broker or insurance company, the P2P can be respectively of broker or carrier type. In the broker type, a broker facilitates the P2P structure, and reinsurance is performed by a third-party insurer. Whereas, in carrier type, the insurer both facilitates P2P structure and offers reinsurance. The flexibility of coverage, and appeal to have premiums or partial premiums back, has facilitated the creation of companies such as Lemonade in USA and Friendsurance, PeerCover and Riovic in Europe. By using emerging technologies such as blockchain and smart contracts, the recent entrants in the P2P space, such as Teambrella and VouchForME, show that P2P insurance is evolving and still has not had its final say.
The Future of Blockchain for P2P
At its core, the blockchain technology is a decentralized architecture of trust instituted as an open (e.g. Ethereum), semi-open (consortium blockchain), or private (Hyperledger) distributed ledger where transactions between parties are recorded in verifiable and immutable ways (see ). Smart contracts are first defined as “a set of promises, specified in digital form, including protocols within which the parties perform on these promises” (see ). In software engineering terms smart contracts can be described as self-executing scripts running on the blockchain platforms. It is estimated that smart contracts and blockchain enabled technologies in general will produce business value-add growth by 2025 ranging in $176 billion (see ) through increased efficiencies, new products and de-materialization of economy. In the insurance industry, the ramifications of this emerging technology remain to be fully played out and the question is whether P2P products will be part of its success story or its failure.
The project sponsored by Society of Actuaries (SOA) aims to develop a new model for P2P (re)insurance based on blockchain Hyperledger technology with multiple communities of peer to peer insureds. This is an exciting time for emerging insurance and blockchain technology with the disruptive potential to change how we think about and what we expect of insurance and our communities.
Petar Jevtić (PI) is an Assistant Professor at Arizona State University, School of Mathematical and Statistical Sciences, USA. Previously, Dr. Jevtić held the position of Assistant Professor at McMaster University, Department of Mathematics and Statistics in Canada, where he also completed a Postdoctoral Fellowship. His research interests include Actuarial Science and Mathematical Finance. He published in top theoretical mathematics (Mathematics of Operations Research), statistics (Statistics and Probability Letters) and actuarial journals (Insurance: Mathematics and Economics).
Dragan Boscovic (Co-PI) is a Research Professor in the School of Computing, Informatics, & Decision Systems Engineering (CIDSE), as well as Technical Director of CIDSE’s Center for Assured and Scalable Data Engineering, and Distinguished Visiting Scholar, mediaX, at Stanford University. He leads ASU’s Blockchain Research Lab, where his team’s mission is to advance the research and development of blockchain-based technologies for use in all areas of potential impact.
Enclosures https://www.naic.org/cipr_topics/topic_p2p_insurance.htm  See Lovelock, J. and Furlonger, D., 2017. Three Things CIOs Need to Know About the Blockchain Business Value Forecast. Published by Gartner.