Peer to peer insurance

There is a new insurance trend called “peer to peer insurance.” What’s this all about?

Peer to peer insurance is when people team up with their friends and relatives to create their own mini insurance companies. By doing this, they take responsibility for their individual risk and can be much more selective about who they share their coverage with.

The way insurance has worked traditionally is by pooling a large number of people, no matter their risk. Because the insurance company would arrange everything, policyholders did not necessarily care what kind of risk their fellow insureds possessed.

With self insurance, things are changing. Being responsible for their group members’ risks, people become more selective about who they choose to include. This means you can collaborate with like minded individuals with shared interests and similar insurance exposures.

In other words, you only invite people you trust to your pool. Here’s a simple example how this new type of insurance might work in practice.

Your teenager has a smartphone. His or her class has 20-30 students, let’s say. Most of the other kids probably have their own smartphones and tablets. You could design a self insurance plan to protect these expensive devices. Everyone is in it together.

Let’s say you insure the phones against theft, loss and damage. If something happens to someone’s phone, the entire class is in it together. If no one breaks or loses their phones, no one pays. This lowers your group’s risk level and costs.

But you must also consider the opposite scenario: what if everyone breaks their phone? Or at least, a high enough number to “break” your plan? You must determine a threshold above which any claim would break the bank for your group.

Replacing one may not be a big deal for a class of 30 policyholders, but five or more broken phones may be too much.

Fortunately, the solution is simple: you approach an insurance company to insure your group upward from your threshold. In our example above, the students would be insured from the sixth phone onward. Establishing a threshold also helps lower the group’s assets. Less assets to insure means lower rates.

One of the benefits of self insurance plans is that policyholders can save by setting aside money they normally would have paid in premiums.

Before you rush to self insure, a note of caution: self insurance works for smaller items and you must still go for “traditional” insurance for larger assets.