The Great Fire of London was finally extinguished 350 years ago today. New insurance structures emerged in the aftermath of the Great Fire – which bear striking resemblance to some of the contenders disrupting the insurance market right now.

A number of InsurTech startups are seeking to do for insurance what peer-to-peer (P2P) arrangements did for retail banking – fundamentally change the business model of an industry by removing slow and costly middlemen. These startups have proposed a new solution to the age-old problem of mitigating risk: P2P insurance pools.

P2P insurance pools can be structured in a number of different ways. Here is one example: a group of people with a need for the same type of insurance is brought together (using an online service). They form a pool into which they each contribute an amount of money. Some of this money is used to buy a conventional group insurance policy providing cover for them all. The rest is maintained in the pool. Any claims which arise are paid using the pooled cash first. If this runs out, the insurance covers all subsequent claims. If the pooled monies do not run out, the pool members benefit, either by receiving a cashback payment or having to pay less into the pool for future years’ cover.

Are P2P insurance pools really a new idea?

Following the Great Fire of London, insurance companies and mutuals began to form specifically to protect property from fire. Many of these early insurers were mutual societies, designed to help their members manage their risks. A feature of these societies was that they pooled funds to deal with any damage occurring. Some would even maintain a private fire brigade, paid out of the pool of premiums, to reach the insured property should fire break out.

One of these insurers, the Sun Fire Office, included in its proposal form the following statement:

For the farther encouragement of all persons there are actually employed in the service of the office thirty lusty able-body’d firemen“.

Having had cause to look at a number of proposal forms in recent times (given the advent of the Insurance Act 2015) we can’t say many modern proposal forms contain anything so evocative!

Insured properties were then identified by iron or lead “fire marks” over doorways. This often led to the bizarre spectacle of rival gangs of firefighters rushing over to blazing buildings only to stand idly by as the building with no mark, or the fire mark of a different company, burned. Thankfully, fire brigades began to combine and to recognise that it was best to put all fires out as soon as possible, rather than let them grow into conflagrations which threatened to destroy insured properties. The problem was of course finally solved with the creation of the modern fire and rescue services.

How will disruption fit into the modern regulatory regime?

So the idea of individuals grouping together to pool risk and cash is not a new idea. But, irrespective of any historical parallels that might be drawn between fire protection mutuals and modern P2P pools, P2P pools undoubtedly represent a business model that is significantly different to the insurance industry’s current model, under which risk-weighted premiums are paid to an insurer and invested to fund claims and shareholder dividends, all within a highly regulated environment which protects the interests of the insureds.

One of the challenges for both industry participants and regulators is how P2P pools will fit into the modern regulatory regime, which is understandably built around the industry’s current model. Given the clear benefits of the model for consumers, it is in everyone’s interests to work this out and to open up the market to these contenders.

  • P2P pools will no doubt be lobbying the regulators and Government to make legislative changes in their interest and to clarify the precise regime that will apply to them. Successful engagement with Government by P2P lenders led to the creation of the Innovative Finance ISA, putting P2P lenders on an equal footing with established lenders.
  • We hope to see some of these innovators coming through the FCA’s regulatory sandbox.

P2P pools might not be completely original, but they are certainly very different to the current business model in the insurance industry. That presents challenges for them as well as great opportunities – but without a focussed approach to tackling regulation, those opportunities might not burn so brightly.