Peer-to-Peer Insurance with Social Networks : Centrality and Moral Hazard

Peer-to-peer insurance is an emerging phenomenon in the InsurTech industry worldwide. By gathering communities of participants who have acquaintance with each other, peer-to-peer insurance has been providing cheap insurance coverage that is believed to be largely associated with the social network. This paper analyzes the issue of moral hazard associated with the framework of peer-to-peer insurance from theoretical perspectives. We investigate how the social network within the community affects the participants’ incentive to spend effort on precautionary loss prevention. Using a quantitative framework to study the peer-to-peer insurance model’s mechanism, we present the Nash equilibrium of participants’ efforts when participants have homogeneous or heterogeneous centrality. In addition, we also investigate how participants’ tendency to spend effort in reducing risk is affected by some features, like the cost associated with effort and deductible for risk transfer