Peer-to-peer insurance guidelines by the Bank of Lithuania – a sustainable way of market entry for innovations
Today, the Bank of Lithuania published the peer-to-peer (P2P) insurance guidelines, which present its assessments, insights and recommendations on InsurTech financial innovations to the financial market, potential providers of P2P insurance services and consumers.
“The purpose of the guidelines is to promote secure development of financial technologies in the area of insurance by clarifying the conditions for the provision of P2P insurance services and creating possibilities for consumers to use the new service, by emphasising its differences from conventional insurance services and by indicating risks,” said Jekaterina Govina, Director of the Financial Market Supervision Service of the Bank of Lithuania.
The Bank of Lithuania prepared these guidelines after the assessment of the P2P insurance platform tested at the central bank’s financial innovation sandbox.
P2P insurance is based on the sense of community and is therefore similar to, for example, peer-to-peer lending platforms, whereby people are lending to each other. In the case of the P2P insurance platform, its participants (residents or businesses) join into communities united by similar interests and share risks by pooling funds. Loss compensation decisions are made by the community’s members themselves. If unused funds are still available in the pool after the compensation of all losses, they are returned to the community’s members. This may serve as an alternative risk management measure to conventional insurance, increasing supply and boosting competition in the insurance market.
This service is similar to conventional insurance services, however, due to a different way the risk is assumed as well as different content and volume of commitments, the P2P insurance contracts are not considered to be insurance contracts and are not subject to the requirements of the Republic of Lithuania Law on Insurance. Therefore, the Bank of Lithuania does not supervise these services. On the other hand, if the P2P insurance market grows, the regulation of these activities by law will be considered.
P2P insurance service providers should inform consumers about these differences, while consumers should understand and evaluate them before purchasing the services.
P2P insurance services may be offered only for the protection of low-value property interests related to the damage to or destruction of property or civil liability.
P2P pool funds should be kept in a separate account and used only for meeting the liabilities arising from P2P insurance contracts. Contributions to this pool should be based on the mathematical modelling, so that the risk of potential losses in the P2P insurance community is adequately assessed and sufficient funds to compensate them are collected. To prevent the shortage of funds in the pool, the P2P insurance service provider may insure it additionally.
In addition, managers and shareholders of P2P insurance service providers should be of impeccable reputation and properly qualified so as to ensure appropriate management of their company and meeting of obligations under contracts.