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15 Jan 18 09:43

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 :

  1. A significant community of investors. For an insurance platform to be reactive enough, 3000 individual investors supported by leading incumbents would be sufficient.

  2. Differentiation from traditional insurers. Platforms will need to collaborate with those who innovate across the insurance value chain (new products, parametric triggers, claims automation) to address unserved or under-served consumers.

  3. The third and most critical factor is the adoption of the crowdfunded insurance concept by leading insurers, that acknowledge the potential to re-invent their business beyond the immediate equation (new capital = new competitor).

Although innovative, crowdfunded insurance is based on resilient insurance principles. In a way, the model has been tested since the late 17th century, when the Lloyd's market was first set up. Since then, it has demonstrated its agility and durability. Our aim is to adapt this model to our modern needs. And by putting investors in the shoes of insurers, they can also experience first-hand the fundamental value of insurance: make the world more resilient.

So, would you invest?

Category: Other


Remaury - 16 Jan 2018, 9:17 a.m.

Great idea. Innovative.

Jason Taylor - 16 Jan 2018, 2:37 p.m.

Very interesting thought! Crowd lending and sharing have been applied across multiple industries in a disruptive manner.

Could the insurance industry also benefit from a "shared risk" approach?

Gabor - 17 Jan 2018, 11:20 a.m.

An interesting proposal which triggered further thoughts on my end:

What about a 'risk (stock) exchange' where individual and insitutional investors can participate directly in risks rather than companies. For example buying a number of units ($1000 each) of a certain risk (e.g. losses from an earthquake in Italy) at a pure market price (bid/offer) when a consumer = 'policyholder' requires say 300 units of such cover or if another investor wants to sell them? Investors could then also invest in some types of ETFs = bundled risk portfolios (e.g. all European earthquake, North American wind & flood or Global nat cat risks), short-sell certain risks, or buy options of those 'risk shares', etc etc. This would be a logical convergence of current stock markets with current ILS trading platforms. Re/insurance companies could become quasi rating agencies that rate these risks based on model sophistication, claim assessment, market dynamics, market conduct, ... plus provide stability to the system in case of unforeseen cat events, basis risk or reduced market liquidity.

Daniel - 24 Jan 2018, 1:55 p.m.

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