Should You Try Peer to Peer Insurance?

January 27, 2017

peer to peer insuranceAnything an established company can do, a startup can do better. That’s the mantra of the decade, isn’t it? Uber and Lyft beat taxis. Airbnb and HomeAway lure people away from hotels. Now, a handful of companies are eyeing the insurance market, too, and planning to disrupt it with peer to peer insurance.

But is peer to peer insurance right for you? Read on and find.

How does peer to peer insurance work?

When you get down to it, insurance is just a bunch of people agreeing to cover each other’s losses. Back in the 1600’s, British merchants were sitting in a coffee shop when they came up with the idea of collectively insuring their goods in case of shipwreck. Each wrote his name under the ship and goods he was willing to insure, creating the term “underwriter.”

Peer to peer insurance is essentially a throwback to those days — just with bigger groups, and with cars and houses instead of creaky ships. P2P insurance companies seek to simplify insurance by stripping away all the overhead and returning profits to members. All participants pay a certain amount for insurance, then claims are paid out of the pooled funds. If claims exceed the money available, reinsurance (basically, insurance for insurance) should pay the difference.

What are the pros of peer to peer insurance?

  • peer-to-peer insuranceYou can file claims with less hassle. Traditional insurance companies have a strong incentive to avoid paying claims: every dollar they can avoid paying in claims is a dollar of profit for them. P2P insurers don’t have that profit motive, so they promise to pay claims quickly and without haggling.
  • Your premiums may be lower. Imagine how much traditional insurance companies spend on employees, advertising and other costs. P2P insurance strips much of this away. Lemonade, the pioneer peer-to-peer insurer in the U.S., takes a fixed 20 percent of premiums to pay salaries, tech expenses and profit. Another 40 percent pays for reinsurance. The rest goes to pay claims.
  • You can get some money back, or do some good. Some models of peer-to-peer insurance take any money that’s not used to pay claims and return it to participants at the end of the year. Lemonade does something a little different. It asks policyholders to select a nonprofit cause they care about, and then groups all supporters of that cause together. Any leftover money from that group’s premiums, minus the claims paid out, is donated to the nonprofit.

What are the cons of peer to peer insurance?

  • Peer to peer insurance isn’t necessarily cheaper. Lemonade advertises renters insurance from $5 per month and homeowners insurance starting at $35, which sounds pretty low. However, your rates may be higher. “While our prices tend to be cheaper than the more established players, that won’t always be the case,” the company says.
  • You’re not guaranteed to get money back. You may be tempted to go ahead and pay higher insurance premiums. After all, you’re going to get a refund at the end of the year, right? Not necessarily. If too many people in your group file claims, all the money will get used up.
  • It’s not available everywhere. As of spring 2017, Lemonade is available only to New York residents, and only offers renters, condo, co-op, and homeowners insurance. Peer to peer car insurance is available in other countries, but not yet in the United States.
  • It’s all digital. To keep costs down, Lemonade conducts almost all of its communication online. If you need to file a claim, you to submit it via an app and record a short video describing what happened. For emergencies, such as fire or water damage that leaves your home uninhabitable, you can call the company for a faster response. But if you cherish your relationship with your insurance agent, you won’t get any warm fuzzies from P2P insurance. Lemonade replaces brokers with AI robots.
  • It’s still a new experiment. Established insurance companies have decades — if not centuries — of experience assessing and paying claims. Plus, traditional insurance carriers financial stability to pay out claims even in disastrous years. Peer-to-peer insurance doesn’t have the same track record.

Other ways to save on insurance

Only time will tell if peer to peer insurance is the best way to insure cars and homes, or if it’s just a short-lived experiment of the digital age.

In the meantime, there’s a proven way to save big on your car insurance: Get several free quotes from Compare.com. Lock-in the best policy for you in just a few minutes!

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Based on a survey of 100 California Residents. Average savings determined via a comparison of their selected policy against their self-reported annual premium.