Peer-to-Peer Multi-Risk Insurance and Mutual Aid

Abstract

Peer-to-peer (P2P) insurance is a decentralized network in which participants pool their resources together to compensate those who suffer losses. It is a revival of a centuries-old practice in many ancient societies where members care for each other's financial needs in the event of misfortune. With the aid of internet technology, P2P insurance is becoming a transparent, high-tech and low-cost alternative to traditional insurance and is viewed by many as a huge disruptor to the traditional insurance industry in the same way Uber is to the taxi industry.

Despite the fast-changing landscape in this field, there has been no previous academic literature on the theoretical underpinning of P2P insurance. This paper presents the first effort to build the framework for the design and engineering of mutual aid and P2P insurance. Most of existing business models in practice, whether traditional or P2P, are developed to insure against a particular risk, such as critical illness, accidental deaths, property damage, etc. However, even with the same type of risk, not all peers can be of the same loss distribution due to different age cohort, health status, or property conditions, etc. While differential pricing has well developed for traditional insurance, the fair allocation of cost for P2P insurance is not yet well understood. This paper presents a variety of P2P insurance/mutual aid models that facilitate the exchange of multiple risks and enable peers with different needs to financially support each other in a transparent and actuarially fair way.

Keywords: peer-to-peer; insurance; decentralization; disintermediation; mutual aid; law of large numbers; insurtech fintech