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In contrast to traditional insurance, peer-to-peer (P2P) insurance is a risk-sharing network in which a group of people pools their premiums to protect themselves against risk. Peer-to-Peer Insurance removes the inherent conflict that exists between a traditional insurer and a policyholder when the insurer keeps premiums that are not used to pay claims. In certain areas, peer-to-peer insurance is referred to as "social insurance."
Without the assistance of a third party, policyholders authorize new insurance applications. The policy or its pool of premiums are not under the control of any individual or group of individuals (i.e. board of directors). The pool of capital is available to all policyholders, but only a majority or supermajority can choose to use it for reasons other than paying claims. Any surplus funds created by investing premiums would be paid as rebates to all policyholders.
Individuals or economic actors come together and pool their resources for mutual help via peer-to-peer (P2P) insurance. The main distinguishing aspect of this model is that it permits the establishment of firms without the need for centralized authority. While these types of business models may have attracted attention in the past, the issue of trust in transactions between unmediated parties has remained unsolved until recently. The solution is blockchain technology, which offers a secure and automated transaction environment. When the business model and technology are combined today, P2P insurance has the potential to be really disruptive, and may merely be a foreshadowing of things to come, as the practical necessity for an intermediate insurance firm fades.
In the case of P2P insurance, claims would be handled automatically when proper circumstances are matched, rather than being approved on a case-by-case basis through traditional underwriting. Premium payments would be made possible using digital wallets, which are digital escrow accounts that store fixed-valued exchangeable tokens. In this scenario, all payments would be made with platform-specific tokens, significantly lowering transaction costs while ensuring that no user's exposure exceeds the amount they put into their digital wallets. Both the raising of claims and claim payments would be automatically enabled, executed, and recorded by blockchain technology.
Many insureds who rely on traditional insurance plans are aware that they are not always in their best interests. P2P insurance enables groups of people with similar interests to reveal capital waste that may occur with traditional insurance techniques while also bringing them together as a community. This is a community that works together for the benefit of everyone engaged, with the same aims in mind. P2P insurance is a strategy of protecting the community and, in certain ways, allowing everyone insured to carry responsibility for risk materialization in a community of persons where there is a shared feeling of caring for other individuals.
The P2P might be of the broker or carrier kind, depending on whether it is enabled by an insurance broker or an insurance firm. A broker enables the P2P structure in the broker type, while reinsurance is handled by a third-party insurer. In the case of a carrier, the insurer enables the P2P structure while also providing reinsurance. The attractiveness of having premiums or partial premiums returned has encouraged the formation of firms such as Lemonade in the United States and Friendsurance, PeerCover, and Riovic in Europe. Recent arrivals in the P2P arena, such as Teambrella and VouchForME, illustrate that P2P insurance is developing and still hasn't had its last say by utilizing upcoming technologies such as blockchain and smart contracts.
Peers control every decision by voting on it, and they are allowed to instantaneously delegate their votes to other peers, forming trust chains. Every reimbursement payment made to a peer is actually a payment of premiums made by other peers. Despite the fact that the overall amount of premiums is not predetermined, peers have complete discretion over their expenditure. The treatment requirements would be applied to all policyholders, removing conflicts of interest and greatly reducing the costs on all stakeholders in the insurance ecosystem.
P2P insurance is supplied by members who are all exposed to similar risks. They have a more defined process for payments and joining criteria. Members are aware of who is entering the group, who is claiming, and how much money remains in the pool.
Traditional insurance companies are subject to the complexity of rules and regulations at the national, state, and local levels. They have significant operating expenditures to support these policies. Peer-to-peer insurance, on the other hand, is straightforward and governed by few rules. Because the organizations are generally made up of only a few people, the operating costs are likewise kept to a minimum.
Making claims is simpler with peer-to-peer insurance since there are fewer procedures. Because it is frequently digitized, payouts are generally paid within minutes. Traditional insurance payouts might take months or even years in some circumstances. Payments are frequently not digitized and involve a significant amount of paperwork. Before the insurance company can evaluate the worth of a loss, the policyholder must first prove it.
Members of a peer-to-peer insurance pool may be familiar with one another. They will be aware of incidents that need claims, so a member will not have to prove much.
Because it has reduced operating expenses, peer-to-peer insurance has cheaper rates than traditional insurance. Where there are few members, insurers may not require workers or even an office. These expenses dramatically lower the premiums that members must pay. These funds are frequently used to purchase reinsurance.
We aim to leverage distributed ledger technology (DLT) to create Covest Finance Protocol in order to overcome the challenges of P2P insurance in the aspect as follows:
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