Traditional insurance brings together large groups of people to share risk, and it works well enough. By accumulating thousands of premiums into one pool, insurers can always cover claims while keeping prices relatively stable even when there are some large payouts.
But you could say the model isn't particularly fair. Inevitably, the person who makes no claims pays too much relative to their individual risk, and the person who makes lots of claims pays too little. Often, pricing isn't personalized or only is a little bit. For the most part, it's averaged across the pool as a whole.
What's unusual about peer-to-peer insurance is the process becomes transparent. People form small pools among themselves, and because you know your friend, you know a little something more about the risk they present (like whether they're likely to have a car accident). And, you can also affect the outcome. For example, you can reduce your premium by making sure your friend drives safely, or by stopping them from making a claim when they shouldn't.
Insurance is a stodgy, slow moving industry, so peer-to-peer policies aren't widely available yet. But it is an idea that's growing. Last year, we came across Friendsurance, which successfully pioneered the model in Germany. And now there's a new brand from England, called Guevara, which is doing something similar.
When you join Guevara, you either set up a new group and invite in your friends, or you let the company select a group for you. You then pay a premium, which goes towards payouts, and you can vote people out if they're not pulling their weight. The best bit: If there's money left over at the end of the year, it's rolled over, and the price for everyone goes down (Guevara takes a cut, of course, and handles the claims process).
Each group has a message board where members can discuss how to limit costs. For example, you might know a repair shop that has cheap prices for paint jobs, so the group can collectively save money. Guevara claims customers can save up to 80% if nobody in a group makes a claim, though it's still early days. The startup only launched at the end of June.
It will be interesting to see if peer-to-peer insurance takes off in the same way as other categories in the peer-to-peer marketplace have (like, say, Airbnb rentals). Or whether it's just inherently too boring. At least the Marxist revolutionary brand name, after Che Guevara, ought to get some attention.