Disrupting Insurance with Friendsurance

Are we about to see a flowering of P2P insurance startups?

In France, insPeer was recently named a finalist in des Grands Prix de l’Innovation de la Ville de Paris. Not yet ready to launch (and reportedly still fundraising) they will be enabling people to come together to reduce the deductible costs in the event an insurance claim is made.

In the UK, Guevara is coming up to public launch. It offers group buying for car insurance. You will join a group and pay premiums into your group’s pool. Losses will be paid out of that pool and anything left over will reduce your premium payments (and everyone else’s) for the next year. If claims are very low, Guevara projects pool participants could save up to 80%.

The oldest and best established of the P2P insurance platforms is Germany’s Friendsurance, founded in 2010. With Friendsurance, people come together online and create their own risk pools. Friendsurance offers electronics, household, personal-liability and legal-expenses insurance. Large claims are still covered by traditional insurance carriers but small claims and your deductible are covered by your group. At the end of the period, if claims are small or non-existent, you get a refund.

Friendsuarnce has raised an undisclosed amount of capital in three separate rounds. Among its backers is e.ventures. Friendsurance has 40 employees and is headquartered in Berlin.

Tim Kunde, Founder of Friendsurance, agreed to answer our questions.

Q.   Tim, at its core, insurance all about pooling of risks. Are you simply boiling the mutual insurance company down to its essence, removing a lot of overhead, and passing the savings on to consumers?

A.   There is a certain similarity to the mutual insurance, since both Friendsurance and mutual were inspired by how insurance began when people in small groups such as families or village communities supported each other in damage events. That was simple and efficient but the extent of coverage was limited.

Today big insurance companies can cover claims of every amount. But administration, marketing and fraud puff up costs. According to the European insurance and reinsurance federation Insurance Europe, Europeans spend 1843 € for private insurance on average. But many insurances are never or only rarely used. However, insurers don’t reward caution and fair play – even though this means less work and lower costs for them. That’s why we developed our claims-free bonus, which allows policy owners to get some of their premiums back if no claims are submitted. This makes insurances a lot cheaper.

Q.   Who are your customers today?

A.   In general, Friendsurance addresses everyone who has a property insurance and wants to be rewarded if there are no claims.

Q.   Research shows that younger, more affluent consumers are most willing to consider innovative insurance products. Looking at your demographics, have you found that to be the case?

A.   Yes, most of our customers are younger than 45 years and very online-affine.

Q.   How are groups formed? Can I band together with all the members of my college class, or all the people who live on my street?

A.   To form the groups, Friendsurance connects policy owners with the same insurance type (e.g. home contents). Alternatively you can create your group individually and connect with people you know – you can invite friends and family or match your Facebook and LinkedIn contacts with the Friendsurance members.

Q.   Is there an optimal group size?

A.   The groups have between 4 and 16 members – depending on the insurance type. The group is the key to premium cashback: Policy owners form small groups, and a part of their premiums is paid into a common pool. If no claims are submitted, the members of the group get some of their money back at the end of the year. Small claims are settled with the money in the pool. In the event of bigger claims, the insurance company pitches in. In any case, policy owners always enjoy full coverage.

Q.   If I join individually, how am I assigned to a group?

A.   An individual group is easily created online within a few minutes – just like Facebook or LinkedIn.

If you don’t want to build up your group manually in the beginning, you can get assigned. This is done using a number of parameters to ensure that you start saving money as fast as possible.

Q.   What metrics can you share on the growth of the business?

A.   We have a growth rate of 20% per month.

Q.   What percentage of your customers receives cash back?

A.   In 2013, more than 90% of those who took advantage of the claims-free bonus received some of their premiums back.

Q.   And, on average, how much do people receive back?

A.   In the property insurance line the average cash back for people who were insured the whole year was 33% of the paid premiums.

Q.   How are you marketing Friendsurance?

A.   We do a lot of online marketing. In November we will also start a cooperation with the biggest daily newspaper in Germany.

Q.   How are claims handled?

A.   In the event of a claim the policy owner gets in touch with Friendsurance. Our customer service will support him reporting the damage to the insurance company. When a claim is submitted it is displayed in the personal account of all group members – without giving any details.

Q.   Does the P2P model inherently result in a better loss ratio? One premise of the P2P model is that peer pressure within the group reduces the risk of fraud and cuts down on small claims. Have you seen this borne out? I don’t believe this has been true in P2P lending, though originally that was the hope.

A.   Yes, we see that our concept reduces fraud: We have around one third less claims than usual.

Q.   How can people be sure that the folks in their pool aren’t turning to the P2P model because they represent a bad risk?

A.   Black sheep are no threat to the concept: On the one hand you never pay more with the claims-free bonus than without – even if there is someone with many claims in your group. On the other hand you can change the members of your group on monthly basis.

Q.   Do you believe better risks will migrate to P2P and other innovative business models and traditional carriers will suffer from adverse selection?

A.   As the claims-free bonus can be used for existing insurances, also traditional insurance companies will profit from it: It reduces fraud and at the same time it reduces the costs for the handling of small claims.

Q.   You guarantee that members will never pay more than they are currently paying. How do you lay off the risk that losses will exceed premiums?

A.   We can guarantee that you will never pay more with Friendsurance than without because in case the pool is empty a special insurance will pitch in.

Q.   You are working now with dozens of traditional carriers. What was their initial reaction and how have you won them over?

A.   Today we cooperate with more than 50 insurance providers in Germany. But it took some time to find partners. As a newcomer in an established branch you are either dismissed or taken even too seriously. The only way to overcome this is to consistently work on relationship building and to prove that you are a reliable partner.

Q.   What kind of reaction are you seeing from insurance brokers and agents?

A.   We are also cooperating with other brokers. They profit from the high customer satisfaction and the thereby increased loyalty of the clients.

Q.   Do you see limits to the P2P model?

A.   The way we see it the P2P model can be extended to many other insurance lines as well as other markets.

Q.    Do you expect to reach the point where some communities can completely self-insure against certain kinds of risk? Is that the objective?

A.   The objective of Friendsurance is provide the best insurance coverage at best price. Completely self-insuring can be an option for smaller risks, but our experience is that people like having a traditional carrier in the background.

Q.   Is there anything about the regulatory environment that makes Germany a particularly attractive place to launch Friendsurance? Does German law make a specific provision for insurance between individuals?

A.   No. As in every country also in Germany there have been regulatory challenges we had to overcome.

Q.   What type of license is Friendsurance required to have?

A.   The Alecto GmbH which is the company behind the Friendsurance brand has a broker license according to § 34d Abs. 1 GewO.

Q.   Do any jurisdictions appear particularly unfriendly to this type of insurance?

A.   No.

Q.   After Germany, which markets are next?

A.   Friendsurance has always been planned as international project. We are currently checking expansion possibilities in other markets.

Q.   What’s next for you in terms of business lines? Auto must represent a very sizable opportunity.

A.   So far the claims-free bonus can be used for personal liability, home contents, and legal expenses insurances. We are also checking other insurance lines, among them car insurances.

Q.   Would life insurance require a change to the business model?

A.   An adaption of the business model would probably be necessary as the mechanics in life insurances are quite different from those in property insurances.

Q.   How are you using or planning to use connected homes and the internet of things?

A.   These developments can complement our offer, e.g. by making it easier to report a claim or to even prevent one.

Q.   You have raised capital from venture investors in Australia, Hong Kong, What are the advantages, and drawbacks of having such far-flung investors (and presumably board members) for a startup that is operating solely in Germany?

A.   The biggest advantage is to get new impulses and ideas on how this very new idea can be further developed and improved. The biggest drawback obviously is distance and time gap, but both can be overcome very well with modern communication technology.

Q.   Is the global nature of your investor base a clue as to the breadth of your ambition?

A.   We do have an international ambition, but are building Friendsurance up step by step.

Q.   You haven’t disclosed the amount you’ve raised, though it is widely believed to be millions of Euros. Why so secretive?

A.   As a first-mover, we are simply being cautious as to how many business details we share with the public. We will be happy to share more when the time is right.

Q.   Are you hiring?

A.   Yes, we have already more than 40 employees but we are still hiring.

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