Dynamic pricing and solvency of peer-to-peer insurance: a framework for transparency, risk sharing, and financial sustainability

Abstract This paper explores various peer-to-peer (P2P) insurance models with a focus on dynamic pricing and solvency. To address individual peers' solvency risks, it assumes that premiums or contributions are paid ex-ante. The study examines three P2P models: full risk transfer, partial risk transfer with aggregate stop-loss arrangements, and full risk retention within the community. The analysis introduces an extended risk-sharing model incorporating aggregate stop-loss arrangements, evaluating how varying excess points affect the coverage ratio, a critical measure of a scheme’s solvency. The paper evaluates solvency criteria for P2P schemes and highlights the scalability and flexibility of P2P arrangements in mitigating insolvency risks. The paper further proposes dynamic pricing models for P2P insurance, leveraging credibility theory to enhance transparency. These models enable participants to benefit from direct and indirect cash-back while allowing the scheme to achieve desired solvency levels.