The entire concept of insurance is based around large numbers of people getting together to share risk. But the network doesn't normally talk. We're anonymous customers in some company's database.
That's fine for most situations—but anonymity arguably leads to higher costs. If you don't know (and have empathy for) other people in the pool, you're more likely to make a bigger claim than the situation calls for, or even embellish your accident report a little. After all, it's just some big bad company you're affecting, not anyone you know directly.
Could socializing insurance lower costs for everybody? A three-year-old insurance startup from Berlin thinks so—and, in fact, it's proving it. Having signed up thousands of customers for its peer-to-peer insurance platform, it says premiums are typically 50% below what other companies charge.
When someone signs up for Friendsurance, they join with a group they already know or people they select from a list the company provides. They pay a premium upfront. But if no one in the group makes a claim within the year, everyone gets reimbursed. The group handles small claims itself, and an insurance company backing the arrangement steps in for bigger claims. If 10 people are each paying 50 euros annually, the maximum in-group claim would be something like 500 euros.
Co-founder Tim Kunde says there are two main reasons people save. First, friends are less likely to cheat on each on other. "All of a sudden, it's not just the big insurance company I'm hurting, it's concrete people I connected to and that I know have a disadvantage now." The optimum group size is 10, he says.
And two, people are good at making assessments of each other, and will probably pick people who they think will make less claims. Kunde says Friendsurance, which is an intermediary for actual insurers, passes on 20% to 40% fewer claims than other companies.
Kunde says it took a long time to convince the insurance industry to co-operate with Friendsurance. The company has had to tweak the model a lot to make it effective. But now he feels confident he has something that can grow further. The site currently offers four insurance products, including third-party liability and household insurance, and is looking at expanding into car insurance and other markets.
Friendsurance currently has a "good five digit number" of customers (it won't say exactly how many), most of whom are in the 20- to 40-year-old age group, Kunde says.
It will be fascinating to see if Friendsurance, or similar ideas, gain traction. Peer-to-peer insurance seems to make sense for all sides. It might also be possible to go further than Friendsurance and set up a wholly-peer-based system (with no outside insurer). That's what Peercover, a U.S. startup that launched in September, is doing (founder Jared Mimms calls Friendsurance "false prophets"). But, as yet, it's too early to say whether something like Peercover will succeed. Friendsurance got where it is today as much because of the persistence of its founders, as the originality of the idea.