Decentralized Insurance and Risk Sharing
Peer-to-peer multi-risk insurance and mutual aid
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.
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.
S. Abdikerimova, R. Feng. (2019) Peer-to-peer multi-risk insurance and mutual aid. Download
Peer-to-Peer risk sharing
In contrast with classic centralized risk sharing, a novel peer-to-peer risk sharing framework is proposed in the work. The presented framework aims to devise a risk allocation mechanism that is structurally decentralized, Pareto optimal, and mathematically fair. An explicit form for the pool allocation ratio matrix is derived, and convex programming techniques are applied to determine the optimal pooling mechanism in a constrained variance reduction setting. A tiered hierarchical generalization is also constructed to improve computational efficiency. As an illustration, these techniques are applied to a flood risk pooling example. It is shown that peer-to-peer risk sharing techniques provide an economically viable alternative to traditional flood policies.
R. Feng, C. Liu and S. Taylor. (2020) Peer-to-Peer risk sharing with an application to flood risk pooling. Download
Decentralized insurance and optimal risk pooling
Decentralized business models are increasingly common around the world with the rise of sharing economy. In contrast with the classic server-client model where service is provided only by a central authority, new decentralized models allow peers to act as both servers and clients on an as-needed basis and interact directly with each other. It has often been argued that decentralized business models are more cost-efficient, democratically inclusive, and responsive to consumer demands than classic centralized models.
While insurance is no exception to the decentralization movement, it is not well understood in the literature how decentralization is used to re-shape the mechanism of risk pooling, which is quintessential to insurance business. This paper presents various new forms of decentralized insurance arising from industry practice and develops a quantitative framework in which they are compared on a spectrum of decentralization. As a result, optimal risk pooling strategies are analyzed in order to understand peers' rational economic behaviors.
Manuscript will be available online soon.
This research project is supported by a research grant from the Casualty Actuarial Society.