Peer to peer insurance (question for a class) | Hacker News Reader

Peer to peer insurance (question for a class)

4 pointsensophic5 comments

(I asked this a couple of days ago, but I'm going to ask for more feedback now that I have more specifics.)

I'm writing a business plan for an entrepreneurship class, and I want to know what you think about the idea. Particularly, I'm interested in what you would think of the idea as a customer, because the customers will be from small communities, including startups.

The business idea is a peer-to-peer insurance company that creates marketplaces in small communities. Community members would be able to select pre-defined contracts (for health insurance, life insurance, etc.) and divide them into units. Other community members could then act as insurers. For example, you could create a health insurance contract for yourself with a $1,000 per month premium and a $10,000 per month maximum coverage and divide the contract into 100 units. Each person who takes part in insuring you would receive a $10 per month premium from you and would be responsible for up to $100 per month in coverage.

I understand that there may be lots of issues with this idea due to industry regulation, legal issues, breaking into the industry, etc., but I'm most curious about how peer-to-peer insurance would work in small startups. What do you think?

Thanks, EN

Your example's math seems wrong: the $10,000 maximum coverage could be hit by multiple people, so I'd be liable for potentially $100 x 100 in a given month.

More broadly, health insurance brings up the problem of asymmetric information. If I already know (or suspect) I have some illness, I would join this group just before I go in for expensive care, exploiting the risk-bearers. Some ways to avoid this problem: phase in benefits, force full medical disclosure to you, be able to detect fraud.

One possible benefit: if geographically organized, the community could negotiate bulk discounts from local hospitals and doctors. The business could make this mostly automatic -- grow your community, keep your community healthy => get better rates at the local docs.

Personally, peer to peer insurance sounds like a gamble.

As I understand it, insurance companies hire armies of actuaries to determine risk plus the risk is spread out among many accounts, many make a little bit of money, some cost a bunch, but statistically makes a net profit. I suppose each investor would be his/her own actuary.

And how do you handle all that private personal information that insurance companies require from applicants to determine risk, like family history of cancer, just for one? or risky personal activities, like sky diving? Oh, and what about insurance fraud or moral hazard?

Yes, this one is a serious can of worms to be opening. In addition to the points you raise there is also the issue of re-insurance and regulation. If you can't get someone to cover your obligations if the odds come out against you then this is a non-starter, this is where re-insurers come in out in the real worlds and they aren't going to deal with a scheme this small so you will need something else to back your gambles. The insurance market is also heavily regulated because people actually depend on the services and the government sometimes ends up on the hook when these companies fail.

To be completely honest, I can't see any way that this would A) be allowed to operate as a legal business, or B) not face some catastrophic failure down the line that actually hurts real people.

One late night thought: something that could come out of this that is peer-to-peer, loosely interpreted, would be to have online peer groups to pool together resources to get better insurance rates, basically create your own social network group plan.

Sounds like what Zopa is doing with peer to peer lending.

As long as there is a central clearing organization that guarantees the payoff and assuming this p2p model results in better rates, I don't see why it wouldn't take off.

The execution would be a major hurdle though.

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