From P2P insurance platforms to smart insurance contracts – a regulatory perspective.


P2P insuretech platforms are P2P Mutuals with or without re-insurance.

In this article we explore how these platforms are currently being regulated at a high level. We also explore the notion of disintermediation of insuretech platforms themselves through smart contracts and consider what would be the regulatory implications.

First – what types of P2P insuretech platforms are there?

P2P Mutuals
Mutuals are essentially pots of money filled by members. If a member suffers a claimable loss then the member will claim from the pot. Obvious limitation is that it is restricted to the amount in the pot.

P2P Re-insurance
If more money is needed to cover a loss then the members will seek to get further insurance to cover the additional loss. Most insuretech models do a bit of both; you join a small Mutual and add funds, part of your funds is added to pot and part of your funds is used for (re)-insurance fees.

Combination of both
Guevara and Friendsurance specialise in the P2P Mutual/re-insurance model. Guevara is regulated by the FCA for “advising, arranging, assisting in performance of a non-investment insurance contracts”. Slight difference with Friendsurance is that no-claims equals to cash-back at the end of the year for the members of the Mutual, whereas Guevara provides a discount on next years’ premium.

P2P Mutuals targeting specific consumer insurance barriers
Some insuretech models focus on removing a financial barrier in consumer insurance, such as having to pay for an ‘excess’ or ‘deductible expense’. This is where an individual pays for an insurance contract but can only claim on the contract if that person first pays an ‘excess’. This is the focus of Inspeer in France and Peercover in New Zealand; you create your own P2P Mutual to cover the ‘excess’ on another insurance policy. You draw from the Mutual when you need to claim on the corresponding insurance policy. Inspeer appears to be regulated under crowdfunding laws in France and Peercover is not regulated per se but participates in a New Zealand financial complaints scheme.

EU Fragmentation
Guevara is regulated essentially as an insurance broker in the UK and in France Inspeer seems to be regulated as a crowdfunding platform doing insurance. Similar business models may elicit different reactions from regulators within even the EU Single Market.

This level of fragmentation is not a particularly good sign for fintech companies, as it detracts from the advantages of being licensed in one state and servicing automatically the rest of the EU (so-called ‘passporting’). In effect, licensed P2P Insuretech platforms may face barriers from other EU states where the host state has imposed additional requirements, such as to obtain a crowdfunding licence when they are an insurance broker in their home state. The EU is unlikely to resolve this fragmentation in the short term and even recognises that member states may “impose justified and proportionate measures in the general interest such as for investor protection”.

In some markets, insuretech emerges without any regulatory oversight. China has a number of P2P startups operating without any licensing. TongJuBao is a P2P insuretech platform that creates Mutuals for traditionally un-insureable events such as kidnapping. This platform is unregulated in mainland China as is deemed private P2P contract between people.

Disintermediation through blockchain tech

As a countertrend against fragmented regulation and no regulation, is the disintermediating phenomenon of blockchain technology.

As insuretech platforms battle with regulatory uncertainty, blockchain technology is seeking to cut out the middle man completely, essentially removing the traditionally regulated targets in a normal financial world: the broker, even the insuretech platform.

To clarify, the traditional financial world regulates intermediaries. But what if you took out the intermediary altogether? What if the intermediary was simply a piece of code that everyone runs on their own computer? This is the world of smart contracts/distributed applications living on distributed ledgers.

Why take out the intermediary? An intermediary offers trust and convenience in a contract. However, there is a rationale that a smart contract offers enough transparency, as the code is available to be reviewed before entering into the contract; also the need for trust is displaced if the outcome is predictable.

How would this smart insurance contract look like? It is an open source piece of code that you sign and others sign. No-one in particular runs the code, no-one in particular writes the code. The outcome of the contract such as an insurable event is determined by oracles (third party sources of information needed to execute a smart contract). Insureth is an attempt to create essentially insurance contracts as distributed computer programs; with no intermediaries. The oracle states whether a flight was late or not and executes the code.

From smart contracts to Decentralised Autonomous Organisations

Now let’s extrapolate this further.

The world has seen the first distributed application, referred to as a Decentralised Autonomous Organisation (DAO), raise over a $100m. The DAO is a distributed program; you send in Ether it gives you DAOtokens which represents your voting power in the organisation. Its function is as a VC fund but with direct democratic control of its members. Members decide to vote with their DAOtokens on projects presented. If they vote in favour of a project then their funds are allocated to the project by the DAO.

It is a VC fund without any intermediaries. No fund manager.

Interestingly, the whole project resides on the need for direct democratic control. Most likely, we will see DAOs move into the P2P insurance market. If you look at the Peercover model; it prides itself on the idea of democratic arbitration. Peercover will pay out from the Mutual if a majority of the members say so. This can effectively be replaced with a DAO which is programmed to allocate funds based on majority decisions of the members. Meaning the DAO can essentially arbitrate on insurance claims.

That said, there are limitations; not least because DAOs do not have independent legal personality (although that will change shortly, so watch this space). But also because certain pure P2P models may reach a threshold where the participants themselves may need to be regulated.

For example, P2P lending: the platforms may be regulated but the lenders may not be. The absurdity is such that if the lenders lend without the P2P platform then they would need to be regulated. The platform obviates, to a large extent, the need for the participants to be regulated. When you extrapolate the same to insurance and have P2P underwriters of insurance contracts then you may be creating a situation where every party to a contract may need to be regulated.

In conclusion, P2P insuretech is about creating Mutuals with or without re-insurance. The platforms are regulated in slightly different ways in the EU and may not benefit from the completeness of the Single Market. Other countries have stepped away from regulating P2P insuretech businesses, however, it is uncertain what will be the repercussions for consumers. As a countertrend to fragmented regulation and non-invention by regulators is disintermediation through blockchain technology. It is not infeasible for insurance smart contracts to start to emerge in the context of DAOs as ways to explore and experiment with P2P Mutuals but there may be limits on scalability, as participants themselves start to be captured by regulatory requirements.

For smart contract legal advice contact diacle.