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Could the peer-to-peer movement change insurance?

Peer to peer insurance

Peer-to-peer (P2P) insurance, also known as social insurance or person-to-person insurance, is spreading through Europe and could arrive in the U.S. by the end of 2015. These insurance networks group members together with people they know or with people who have similar risk profiles. This allows policyholders to make informed decisions about their insurance spending and potentially get money back.

P2P insurance is used for auto, health, homeowners and personal-liability insurance, and even legal expenses, in several European countries. In the U.S., the concept of sharing the cost of insurance premiums or deductibles is new to many, but it has the potential to change how people protect themselves and their assets.

What is peer-to-peer insurance?

Traditional insurance pools everyone together, paying little attention to how safe or healthy you are compared to everyone else. P2P insurance puts you in a much smaller group, which limits risk. P2P coverage groups can be comprised of people you know or strangers with similar policies and risks.

The money contributed by group members pays for the claims. Limiting the members of the group allows you to eliminate the high costs of insuring people who are more likely to file a claim. If there are no claims or only a small portion of the money is used, group members receive money back or roll it over into next year's coverage.

Brigitte Madrian, a behavioral economist at Harvard University, thinks social insurance will limit risky behavior. In an article interview with CNBC, she explains how: If your insurance cost will increase or you'll get less money back because a friend on your network files a claim, you're likely to encourage that friend to act responsibly. Madrian believes this peer pressure will ultimately discourage risk-taking and could lead to lower insurance premiums.

How's it working in Europe?

The approach to P2P insurance depends on the company. Some companies collect insurance premiums directly and use that money to pay claims; others require members to pay their own private insurance premiums but create a social network to help cover deductible costs.

InsPeer, in France, offers a Web-based service that groups friends, family members or like-minded policyholders based on similar social profiles. InsPeer offers the service for auto, motorcycle and homeowners insurance policies. Members keep and pay for their current insurance policy, but they help pay the deductible for group members if needed. InsPeer members further reduce their risk by choosing how much money they will contribute to each group member. This service is particularly helpful for people with low-premium plans, which usually have high deductibles.

InsPeer is free if your group never files a claim. In the case of a claim, the company keeps a percentage of the money you collect from your network.

Friendsurance, a popular social insurance company in Germany, offers household, personal-liability and legal-expense coverage. Policyholders pay their premiums directly to Friendsurance. The company is an independent broker that works with about 60 insurance providers, according to its website. Friendsurance policyholders are grouped with other people who have similar types of insurance, rather than friends or family. A portion of the policyholder's premium is used to pay for the insurance, and the rest is put into a "cash-back pool" for the group.

This pool pays small claims and deductible amounts. Whatever's left in the pool at the end of the year is divided among the members. According to Friendsurance, 80 percent of the company's customers receive money back.

Guevara, in the U.K., allows members to join a public group based on a car insurance quote or form a private invite-only group with friends with which they feel comfortable sharing insurance risk. Premiums are paid directly to a Guevara group pool, which is used to pay claims.  Instead of giving members cash back, any unused funds roll over into next year's coverage.

What will social insurance do for my rates?

Insurance rates are determined by how risky insurance companies think it is to cover you, based mostly on demographics, location, lifestyle and history. Shrinking the pool of people you're compared to lets you prove you're not a high risk. The fewer claims your group has, the less money you'll spend with peer-to-peer insurance.

The goal of social insurance is to give people more control over potential insurance costs, cover deductibles, encourage safe behavior and lower rates. As P2P insurance companies in Europe continue to mature, other markets will assess it as a viable option for policyholders.

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