InsurTech startup InsurePal is developing an insurance platform that aims to revolutionize the industry’s model for risk selection and fraud prevention by “social proofing” insurance products.
With a pilot for motor insurance due to be launched in the UK within the next six months, InsurePal’s blockchain-harnessed platform is designed to be used by insurers that want to sell “distributed social proof insurance,” which, in essence, relies on the friends and family of policyholders to help with assessing risk.
InsurePal co-founders Matt Peterman and Tom Volk believe existing industry models for doing business need to be challenged and are ripe for disruption. They are convinced that their innovative peer-to-peer insurance model will create a better way for insurers to assess risk while at the same time providing more affordable premiums for customers.
They emphasize, however, that InsurePal is a disrupter that aims to work within the insurance industry, rather than in competition with it. “We want to partner with traditional insurance companies and provide them with a tool to do a better risk selection with our innovation: the social proof,” said Volk.
Peterman and Volk are industry veterans, each with 15-plus years of experience under their belts. As a result, they have seen firsthand the industry’s seemingly intractable problems with fraud, risk assessment and escalating claims. (See related article, which provides a brief overview of Peterman’s and Volk’s careers, when they decided to develop a new model for insurance).
For the past five years, Peterman has worked for a company that specializes in fraud detection and underwriting for large insurers such as Allianz, Fosun and Groupama. In this work, he has seen “outrageous” fraudulent claims that create huge costs for the insurance industry. For example, out of an average annual auto premium of $1,000 in the United States, about $600 to $700 is paid in claims, and approximately 10 percent of those claims are fraudulent, said Peterman, who is also InsurePal’s CEO.
To combat this problem, insurance companies are investing millions in big data, the Internet of Things (IoT) and telematics, which track driving behavior using connected technology installed in customers’ cars, said Volk. “In addition, they want to connect to your Facebook and dig into your privacy as much as possible to better assess you as a risk and properly calculate your premium,” he added.
Volk acknowledged that telematics is reducing fraud. “But the downside of telematics is that it is privacy invasive and costs money,” which further adds to premium prices.
Insurers are trying to overcome poor risk management with the use “of expensive, privacy-invading technological solutions and tracking methods,” commented Peterman in a blog he authored on the InsurePal site, titled “The dusk of incumbents is the dawn of InsurePal.”
Despite all the industry’s investment and innovation, Volk said, it has had limited success combatting fraud—and premiums will likely keep rising unless a more effective business model can be found.
A better model will be based on social proofing, which provides a more effective, less expensive and non-intrusive solution to risk assessment—and ultimately reduces premiums for good drivers, said Peterman and Volk in an interview with Carrier Management, the sister publication of Insurance Journal.
Social Proofing Explained
Volk explained how social proofing would work in auto insurance, which is the first product the company will offer with partner insurers in the U.K. To illustrate the concept, he described a responsible driver named John who pays $1,000 every year for his car insurance, despite the fact that he has not had any at-fault accidents in years.
On the other hand, InsurePal could provide John with a much better deal, reducing his premium by $400, as long as he can get a friend or family member—an endorser—to vouch for his good driving record.
When John gets his friend Mary to be his endorser, she immediately receives an upfront reward of $100 worth of InsurePal tokens (IPL tokens), which can be instantly sold for cash on the token exchange where IPL is listed or invested in InsurePal services. The InsurePal website describes the IPL token as “the fuel of InsurePal platform, used by clients and third parties worldwide.” (See below for more details about IPL tokens.)
In this model, Mary gets an immediate bonus while John ends up with a cheaper premium. For her participation in the deal, Mary must assume limited financial responsibility for a third-party deductible—in this case $550—if John files an at-fault claim.
The insurer, using the InsurePal platform, will only deduct the $550 from Mary’s credit card if there is an at-fault claim. “To be John’s endorser, Mary has to be pretty sure that she is endorsing a diligent and responsible person, otherwise she will be losing money,” said Volk.
Volk noted that this third-party deductible is similar to a co-signed loan in banking, when parents co-sign loans for their children. With the InsurePal concept, however, the co-signee is only exposed to the limit of the deductible, rather than the full amount of the insurance liability.
Volk explained that the $550 charge is calculated from the $400 that John saved, Mary’s $100 worth of IPL tokens and a $50 penalty. The excess above that amount is covered by the insurer, Volk continued.
How is the premium determined? InsurePal will, based on the pricelist submitted by the insurer, do a classical calculation of the price quotation, just as insurance companies do every day for traditional motor insurance. “Then, we undercut the price with the social proof,” Volk said.
If John can get two people to vouch for him, he will save even more money on his annual auto premiums because he is more trustworthy than someone else who has no endorsers, said Volk.
“If your friends trust you, we trust you,” he said, repeating one of InsurePal’s catch phrases, used in its marketing.
Further, Mary and John can adjust the amount of the deductible. “Mary can say, ‘Yes, I trust John, but I don’t want to take a $550 exposure; I’ll take a $100 exposure instead,” which Volk explained would reduce John’s premium discount and Mary’s reward in IPL tokens.
In addition to allowing John to find more endorsers to further cut his insurance premium, InsurePal also will accept mutual endorsers, or couples. Mary and John can mutually endorse each other, as an example. The policy due dates don’t need to overlap, Peterman explained.
While InsurePal’s initial focus is on at-fault jurisdictions across the globe, Peterman explained that social proofing still would be effective at reducing premiums in no-fault jurisdictions such as those in 12 U.S. states, but with a smaller overall effect. However, by helping with underwriting and risk assessment, social proofing would help insurers offer a slightly better rate to drivers, he explained.
Psychology of Social Proofing
Social proofing works because if you know your friend is on the hook for the financial cost of the deductible, “you will be more careful,” Volk emphasized, explaining that customers will be less likely to file smaller claims because they won’t “want to jeopardize the friendship or emotional relationship they have with the guarantor.”
Another effect of social proof is cherry-picking, because bad risk clients will get fewer or no endorsements, said Peterman.
Social proofing will help reduce claims frequency, which in turn “provides enough savings that we can give out pretty big discounts to our customers,” he continued.
“Our idea is to offer a significantly lower premium to all insureds that get a proof of trust from one or more people,” said Peterman in the article he authored. During the interview, he said that social proofing generates a “Social Proof Trust Score,” which indicates the level of trust these policyholders get from their community. The score helps the insurer using InsurePal’s platform with its risk assessment.
“Social proof is peer pressure put to good use. It motivates beneficiary behavioral patterns and changes groups and even society for better without aggressively invading privacy,” said InsurePal on its website.
Peterman and Volk are so convinced that social proofing will revolutionize the industry that InsurePal has filed for a patent in the United States and worldwide to cover any combination of insurance and third-party guaranteeing.
One of InsurePal’s principal target groups is millennials because as young drivers with no claims history they “pay tremendously high insurance premiums,” said Volk. They are treated as bad risks until they prove that they are diligent and responsible, he said, explaining that parents or relatives of millennials and their friends would be the endorsers.
Parents generally know which of their children are responsible and could even endorse one child and not another, he said. “One kid may like to party a lot and behave irresponsibly, while the other child is really responsible and doesn’t drink and drive.” With his parent’s endorsement, Volk added, the responsible child will have much lower auto premiums with InsurePal.
The social proofing concept also would work well for people who make lower salaries—who are good drivers but must work hard to pay the bills at the end of every month, including the high costs of their auto insurance.
Peterman cited a conversation that he and Volk had with a San Francisco taxi driver. “We asked the driver, ‘How much do you pay for your insurance?’ The driver said: ‘Three thousand dollars,’ although he had not had one at-fault claim in the past five years. When asked if he could find an endorser, the driver said: ‘Yes, I could find people to endorse me.’ With InsurePal insurance, this driver would receive significant annual savings in his auto premiums,” Peterman noted.
Mutual Roots of Insurance
Social proofing is nothing new, Peterman and Volk emphasize. It actually harkens back to the roots of commercial insurance when shipowners in Edward Lloyd’s coffee house in London—the precursor of Lloyd’s of London—decided to band together to share, or mutualize, the risk of shipping goods to the New World and back. Volk explained that these shipowners knew each other and knew very well which of their compatriots were responsible, maintained their vessels and hired good captains. “If one owner stopped being diligent and responsible, stopped maintaining ships, or hired bad captains, they would expel him [from the risk],” he said.
Over the years, however, insurance evolved and became centralized, with the insurance company doing the risk assessments and pricing, Volk explained. “The idea was lost that if you cheat the insurance company, you also are cheating all your peers who have to pay higher premiums because of your bad behavior.”
Key to the company’s social proof insurance is the blockchain technology that the platform will harness. InsurePal aims to be among the early adopters of blockchain technology in InsurTech, to offer modern insurance at an affordable price…,” said Peterman in his blog on the InsurePal site.
Blockchain—the current technological buzzword—also is known as mutual distributed ledger technology, which provides shared records of transactions that reside in multiple locations and have no central ownership. Additions and corrections can be made, but there’s always a permanent record of the original document.
InsurePal’s blockchain-harnessed platform powers the ledger that is distributed among its customers, hence its offering of “distributed social proof insurance.”
Social proofing is a process that is, by its nature, decentralized and is therefore perfect for a blockchain, Peterman said. With the traditional insurance market, a customer’s personal data is held by the insurer on a centralized basis, he explained. However, with InsurePal’s blockchain platform, the customer will retain the data and the social proof endorsements and will be the only person who has the key to it. “Whenever you want to submit some of the data to the insurance company, you provide the key for a single, limited access to your data.”
Blockchain’s immutable record is a secure way to store the social proof into the distributed ledger and will bring personal data back from insurance companies to users, said InsurePal on its website.
For the Future
InsurePal plans to expand social proof insurance from motor insurance to life and health and property—all dependent on endorsements from the customers’ trusted social network.
“Social proofing works with life insurance because your friends know if you smoke or not, or if you go to the gym and exercise,” explained Volk. “Your friends will know if you have a gym pass but don’t actually exercise.”
InsurePal also is planning to use social proofing to insure business transactions across the globe, supported by blockchain-based smart contracts.
For example, if a person living in central Africa sells a mobile phone to someone in Albania on eBay, eBay acts as a third-party guarantor of the transaction. Using InsurePal, however, any two parties could do business together without an intermediary like eBay, as long as the transaction is insured and they have social proofed endorsements and a Social Proof Trust Score. Then, instead of eBay, their local insurers, insuring their liability, would act as guarantors for the transaction.
InsurePal’s blockchain business transactions module, using a smart contract, would permit two parties to form an upfront agreement in which they specify the terms and conditions of their transaction, the penalty for breaching a contract, and what to do if a dispute can’t be resolved, according to a commentary on the InsurePal site. Both parties would agree that the final compensation for any breaching of the agreement is a financial compensation up to a maximum fee agreed upon in the contract.
If their contract is breached, insurance pays the penalty partly from an InsurePal insurance pool and partly by collecting deductibles from the endorsers of the party causing the breach, according to a white paper titled “Distributed Social Proof Insurance,” which was authored by Peterman and Volk and is available on the company’s website.
“By insuring the financial compensation of an unrealized deal to the injured party, we will establish trust among all the stakeholders and greatly accelerate the quality and quantity of all future blockchain business transactions,” the white paper said.
This module for blockchain business transactions insurance will be available in six to nine months, Peterman and Volk affirmed.
Also key to the InsurePal model are the InsurePal (IPL) tokens, the currency behind the insurance transactions. First, they will be used to provide endorsers with their reward, which can be sold for cash on the IPL exchange.
The tokens also are the currency used to buy InsurePal’s products. The InsurePal platform uses different incentives to motivate participants, the website said. “Discount conversion to tokens will be incentivized, therefore InsurePal will have to convert a significant percentage of each new premium into IPL tokens and give them back to the policyholders and their endorsers,” it added. “All third parties selling their social proof insurance will also be obliged to use IPL tokens and trade them on exchanges.”
Peterman described IPL tokens as crypto-tokens, housed on Ethereum’s blockchain platform. They are unique to InsurePal’s platform.
When asked if the InsurePal tokens could escalate in value, similar to bitcoin, a representative said that the company does not speculate about the price of the token.
However, Peterman noted that the tokens are digital and can be split into smaller parts, which “means that as a reward in case of growth of IPL token, endorsers get a fraction of a token, not the full token.” (The value of the token will be defined by consumer demand and will rise and fall in value).
InsurePal has raised $18 million in recent token sales. People participating in the sale bought IPL tokens up front, which can be used later to buy insurance products from the InsurePal platform, said Volk. He noted that the sale was “extremely successful” and, in fact, was oversubscribed by $114 million, which had to be returned to participants.
The funding will be used to roll out the next phase of the company’s evolution, which is to offer U.K. motor car insurance via a managing general agent as its licensed insurance partner or through a partnering with a licensed insurer.
Peterman said they have had discussions with various insurers, reinsurers and consultants who have checked out the InsurePal model and believe that it works.
“Now it’s up to us to prove that it works. We are pretty convinced that this model will be the next big thing,” said Volk.