Mutual peer-to-peer insurance: The allocation of risk

Abstract

• We analyze the conditional mean sharing rule in peer-to-peer insurance. • We increase the conditional mean contribution with a safety loading term. • We show our model’s effectiveness by two examples: dependent and independent risks. This work focuses on a modern typology through which mutual solidarity in the insurance sector finds application: peer-to-peer insurance. This cooperative insurance model arises from the translation of the sharing economy concept into insurance risk management, and it is realized thanks to the use of digital technology connecting policyholders and sharing risks. The participants to a peer-to-peer insurance scheme share the first layer of their cumulative losses, while it is possible to transfer to a third part the higher layer. To enter the mutual group, each participant has to pay an initial contribution based on a risk-sharing rule that has to be intuitive and transparent. According to the most considered conditional mean risk-sharing rule, the participant has to contribute with an amount equal to the expected value of the risk he brings to the pool given the total loss distribution. We propose to modify the conditional mean risk-sharing rule with an ex-ante contribution that takes into account a safety loading to hedge the possible fluctuations of total losses.