Last Updated 1/7/19
Issue:Peer-to-peer (P2P) and crowd-based business models have disrupted a variety of industries in the past few years, including transportation, hospitality and financial services. The insurance industry is at the center of these business innovations as both an adopter and a provider of risk-transfer and indemnification.
Crowdfunding is a form of alternative finance employed for the funding of a project or venture by raising money, typically online, through many small payments by a large pool of people. There are three main crowdfunding types, donation-based, reward-based and equity, with the first category typically used by nonprofits and charity and humanitarian organizations.
Although crowdfunding is not necessarily a new concept, its implementation in business has helped support new innovative start-ups and new products to fill existing gaps. Crowdfunding has become one of the most popular ways to financially support a variety of businesses or projects. Through crowdfunding, innovators can reach new unserved or underserved market segments for their products and services whereas individuals can raise the necessary funds to access previously inaccessible products and services. The strength of crowdfunding is reflected in the tens of billions already raised globally with more than half of that in the United States. According to the World Bank, the crowdfunding market as a whole is expected to hit $90 billion in volume by 2020.
Overview: An increasing number of insurtechs active in improving the delivery of insurance products through technology look to crowdfunding methods to address consumer needs, especially individual disability benefits, health insurance and retirement security. The popularity and proliferation of sharing economy arrangements have also compelled insurers to explore the usefulness and applicability of alternative funding techniques to serve customers in that space.
Through crowdfunding, insurers attempt to reach consumers for whom premiums may be unaffordable or may not have planned or lack the ability to plan for retirement or unexpected life events. As such, crowdfunding based insurance products are aimed at uninsured and underinsured segments of the population.
According to a Cognizant study, there is potential for insurers to use crowdfunding for a number of traditional transactions among them group employee benefits, education funds and health insurance. Around the world, insurance, financial services and e-commerce sites have already started offering crowdfunding as an alternative to fund expenses. At the same time, crowdfunding insurance cannot be a universal approach applied to all lines of business.
Among the benefits of crowdfunding for insurers may be increased revenue as the customer base is enlarged, enhanced brand prestige, improved policy retention through prefunding, superior reach for underinsured populations. For consumers, crowdfunding could allow better access to insurance products and more affordable coverage, especially for the unserved and underserved population.
As more companies employ crowdfunding techniques, an important issue is the availability of insurance for these companies and their investors. Current Directors and Officers Liability (D&O) insurance policies for privately held companies were not originally designed with crowdfunding offerings in mind. It is not clear how insurers that have issued such D&O policies will manage claims alleging negligence or fraud on the part of companies or their management in crowdfunding offerings. Efforts are made to customize D&O policies for the crowdfunding exposure and even some development work is underway on new crowdfunding policies or bonds.
An industry-first insurance product designed to protect investors on equity crowdfunding platforms against issuer fraud has recently been launched by AIG. The crowdfunding product, which is currently available only in the UK and Canada, offers protection against the theft of issuer assets by issuer directors, officers, or general employees causing a loss to investors. The insurance policy does not address mismanagement, negligence, bad decision making, and general incompetence.
Status: The NAIC Innovation and Technology (EX) Task Forceis the forum for the discussion of such innovation and technology developments in the insurance sector as crowdfunding. All new products, services and distribution platforms are studied in order to see how novel approaches in selling and delivering insurance may impact consumer protection, privacy, insurer and producer oversight, marketplace dynamics and the state-based insurance regulatory framework.
The issue for insurance regulators is to be sure all innovators fully comply with consumer protection laws. Often insurance start-ups are not familiar with state insurance regulatory standards. The goal of the insurance regulatory system is to make sure state laws and regulations are being followed.
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