The term ‘peer-to-peer insurance’ describes a model in which an insurance pool comprises individuals with similar interests, or ‘peers’, who do not necessarily know each other.

Premiums collected from members of the pool are used to pay the claims its members make, but — unlike in traditional insurance — any remaining funds at the end of a year of account are returned to policyholders.

In the case of Lemonade, policyholders are asked to nominate a charity to which they would like any money left in the pool at the end of the year of account to be donated.

Policyholders who have nominated the same charity are part of the same pool, and claims made by these policyholders are paid out of this pool. 

A reinsurance agreement covers situations in which claim payouts exceed remaining funds in the pool._[1]

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