Lithuania is a European jurisdiction that wants to support innovation in financial services. As part of the European Union, the small baltic country has the opportunity to be more agile within the regulatory realm in contrast to larger EU member states. This past week, the Bank of Lithuania published guidelines for peer-to-peer (P2P) insurance including recommendations on Insurtech financial innovations.
The guidelines follow a P2P Insurtech platform participating in Lithuania’s Fintech Sandbox program.
Jekaterina Govina, Director of the Financial Market Supervision Service of the Bank of Lithuania, commented:
“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 emphasizing its differences from conventional insurance services and by indicating risks.”
P2P insurance is similar to peer-to-peer lending. Individuals may provide coverage for a policy – somewhat similar to what “names” did at Lloyds.
In the case of the P2P insurance platform, investors may join and share risks by pooling funds. The Bank explains that loss compensation decisions are made by the community’s members. 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.
The Bank states that 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.
The guidance indicates that 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 are expected to 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 modeling, 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 directly.
The Guidance for P2P Insurance is available below.