Imagine joining a social network that's not for pictures of people's kids and pets, but for home and car insurance.
That kind of thinking is at the heart of several "peer-to-peer" insurance startups, which promise a less bureaucratic and expensive way to share risk. It's an idea that's gaining traction in the United States and Europe. But as Canada's insurance industry readies itself for digital disruption, one regulator warns that some customers could get burned by unlicensed and unregulated businesses.
This new way of protecting against health, travel and job-loss risk is emerging as financial technology advancements force more banks and investment firms to rethink the way they attract and serve clients. Companies such as Amazon, Netflix and Uber have proven that entire industries can be uprooted by the right digital concept, and the country's largest insurers are watching closely. They have also been investing in new systems to improve and simplify their application and claims processes.
Peer-to-peer insurance is a form of risk sharing where small groups of people gather through apps or online. Typically, participants decide what kind of losses they want to protect against, and what kind of claims will be allowed. By stripping out the administration costs and broker fees that large insurers are saddled with, these upstarts pledge to reduce monthly premiums and put more of customers' money toward covering losses. Since participants often know each other, this model could also help reduce fraud.
But last week, Quebec's financial sector regulator, the Autorité des marchés financiers (AMF), warned consumers to be careful when using these platforms.
"Consumers could be exposed to losses, for example, if pool participants unreasonably refuse to pay a claim or if the pool has insufficient funds," the AMF said in a release. "In addition, in the event of insolvency, losses would not be covered under current compensation regimes, since they only protect consumers who have taken out insurance from an insurer licensed with the AMF."
Sylvain Théberge, a spokesman for the AMF, said his organization is monitoring the situation but wouldn't point to any businesses in particular.
In the past six months, peer-to-peer insurance has attracted more attention. A New York-based startup called Lemonade Inc. raised $13-million (U.S.) last year and is expected to launch south of the border as a licensed, peer-to-peer property-and-casualty insurance carrier in the coming months. Its business model has yet to be revealed, but it promises to make the claims process more transparent for consumers whose lives have handed them lemons. Berkshire Hathaway Inc. and other reinsurers signed on earlier this year to back Lemonade should losses climb higher than expected.
The best-known peer-to-peer provider is German company Friendsurance. It operates as a broker with insurance partners, and it rewards groups of customers with cash at the end of the year if they make no claims.
But new entrants could face regulatory hurdles, have trouble building trust with consumers or have difficulty breaking into the market. Google Inc.'s experience in the sector proves it's not easy to change customer behaviour. A little over one year ago, the Internet search giant launched a website called Compare to help people analyze car insurance options in the United States and Britain. But the website wasn't as successful as Google hoped and it was shut down in March of this year.
Not everyone is convinced that the advent of these tech-driven insurance providers will lead to meaningful change for the industry.
"If you strip away the technology and the social networks, I do wonder if this really is new. Is peer-to-peer insurance an innovation? Or is it an adaptation that really takes our industry back to its roots," David McGown, senior vice-president of strategic initiatives at the Insurance Bureau of Canada, said in a recent speech in Toronto. "What is clear is that innovators and disruptors are pushing the model, and the pressure to adapt is gaining traction. It's evolving and evolving quickly," he said.
The bureau is not yet aware of a peer-to-peer insurance business operating in Canada.
Editor's note: The spelling of David McGown's last name has been corrected in the online version of this story.