Picture this: a platform offering you the opportunity to cover a shop owner in Europe against natural catastrophes for a return above 5% – would you invest?
Since the financial crisis of 2008, investors are in search for new, sustainable investment opportunities while creating positive change to society.
One successful example is crowdlending, which matches entrepreneurs in need of financing with investors willing to lend money for a return. In 2015 alone, the world invested USD 25bn in projects through this type of investment. What is happening in banking, has not been replicated in insurance – yet.
Are we stuck?
Today, the value of insurance is unclear to many. Our first purchasing experience is usually mandated by law when we want to drive a car or rent an apartment. This leaves the lasting impression that insurance is a burden, and not a benefit. As consumers, the lack of transparency prevents us from appreciating the costs of the various insurance services, resulting in irritation when facing rate increases. Moving along the value chain, conflicting interests can arise as the claim assessor and the risk carrier are often the same entity.
To an investor, insurance is no different than any other industry: accessing the value of a company is done by purchasing corporate securities. The investor is then exposed to market risk and does not directly access the insurance risk value, trapped under a thick layer of costs.
Unlocking the insurance value
Suppose that investors are able to invest directly in risks: couldn't this greatly benefit the insurance industry?
First, direct investors would expect more clarity from the peer-to-peer insurance platform in the way services are billed, allocating a price for risk carrying as well as for distribution, underwriting, modelling, claim assessment etc. – effectively clarifying the risk value chain.
Second, by dis-associating claim assessor and risk carrier functions, the crowdfunded insurance concept removes the alleged conflict of interest from the insurance model.
Lastly, the diversification of investors' profiles could very well lead the industry to offer new products, similar to what has fueled the growth of crowdlending –more agile and reactive offers than the ones of traditional banks.
For an investor, crowdfunded insurance would have two key benefits. It would create a socially positive asset class, channeling capital directly where financing is needed. It would also bring the benefit of diversification – a flooded shop having little to do with financial markets.
The road ahead
Aside from technological considerations, three factors for success stand out :