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. The rise of P2P insurance in Western countries, such as Friendsurance and Lemonade, has been viewed as a disruption to the traditional insurance industry in the same way Uber is to the taxi industry. A similar business model of mutual aid, such as the model developed by Xianghubao, has become popular in the East. It is a model designed to provide financial support to those in need and to distribute the cost among all participants. Despite the fast-changing landscape in this field, there has been scarce literature on the theoretical underpinning of P2P insurance and mutual aid. This paper presents the first effort to build a unified framework to quantify and assess the exchange of risks in a network of participants from different risk classes. Under this framework, the paper aims to address several essential research questions, including the fair exchange of heterogeneous risks and the optimality of algorithmic designs under various criteria. The modeling of multi-risk exchange is done with a P2P network structure. We show that these network structures not only can be used to explain the current practice in the industry, but also provide new tools to develop better designs. The paper concludes with a comparison of traditional insurance and P2P risk sharing from the standpoint of stability and cost reduction.