You own a picnic supply company and have a real fear that fire ants will one day overrun your factory and carry off your inventory. To hedge against that possibility, you buy a traditional insurance policy. You pay premiums for years. However, the attack of the fire ants never comes. You paid those premiums for nothing...you lose out on all that cash you paid.
That situation describes a traditional approach to insurance. Peer-to-peer insurance works differently. There is no insurance company there to keep your payments. The money you pay goes into a pool shared with similar people holding policies (other picnic supply companies/fire ant phobics).
Basically, you and your peers are combining cash into a shared pile that can be accessed in bad times, like a fire ant attack. The money that doesn't get spent on claims either stays as a cash reserve, or gets returned to members through rebates or lowered premiums.
Meanwhile, rates can be lower than traditional insurance, because there are no profits interfering. On the downside, it's hard to create a large enough risk pool with a peer-to-peer network. Without the intervening company, getting to the appropriate scale can be difficult.
