Open enrollment season is here, which means many organizations and their employees are selecting health insurance plans – and dealing with rising premium costs.
In traditional insurance plans, monthly premiums are paid to an insurance carrier. The carrier then pays out claims filed by covered individuals using those premium funds. The increasing overall cost of healthcare means a heavy financial burden for enrolled employees, and often an even bigger burden for their employers who help pay premium costs.
While a traditional plan is the most common for employers to offer, it's certainly not the only option. One potentially more affordable alternative for small businesses is peer-to-peer (P2P) insurance. Here's what you need to know about it, and how to decide if it's right for your business.
What is peer-to-peer insurance?
According to Investopedia, P2P insurance is a "risk-sharing network where a group of associated or like-minded individuals pool their premiums together to insure against a risk." Unlike a traditional insurance model, in which a large group of individuals with varying risk levels are covered under the same plan, P2P insurance lets you select your insurance pool – be it friends, family members, or simply people with whom you share interests and activities.
"By selecting one's pool members, the insured is assuming responsibility for the group's risk profile. This selection technique would motivate an individual to initiate a pool that has a low risk outcome, and hence, low cost for the members," writes Investopedia.
Additionally, instead of keeping unused premium funds as profits like traditional insurers do, P2P insurers return any remaining funds at the end of a coverage period to the pool's members. If the claim payouts exceed what's available in the pool during a given coverage period, a reinsurer, which assumes a part of the risk in exchange for a share of the insurance premiums, will cover the difference.
What are the benefits?
Kyle Hoffman, vice president of customer success at Insureon, noted that, while the core concept being used by P2P insurers is not new, new entrants like Lemonade and Guevara are offering new distribution channels: online direct to consumer. This improves interactions between insurers and the insured "by leveraging new technology like automation, AI and modern CX [customer experience] concepts, and enhancing the benefits returned to insurers in years where there are a few claims," he added.
Hoffman noted that very small businesses can benefit significantly from a P2P insurance model. These microbusinesses are often less complicated to underwrite, since there are fewer individuals to insure.
"Microbusinesses – companies with less than 10 employees – are the perfect target for P2P insurers because it's a large and growing segment of the market that has traditionally been underserved by brokers and carriers," Hoffman told Business News Daily. "As P2P insurers become more established and sophisticated, they'll likely move up channel to serve larger businesses who yield better unit economics."
According to Hoffman, the major benefit of P2P insurance is the value it places on growing.
"In contrast to a stock carrier, which effectively serves its shareholders, P2P insurers as mutual insurance companies seek to deliver value to their policyholders," he said.
P2P insurers are looking to build their competitive advantage with a low cost, which is frequently the first and foremost consideration for small businesses, said Hoffman. However, prudent insurance purchasers will thoroughly assess the coverage being offered and the carrier's ability to pay claims and balance that with the cost of the insurance, he said.