Reinsurance

Global Insurance Market Opportunities

The potential of industry 4.0

What’s going on in China’s InsurTech space?

Hanna Wang, FCAS, FRM

Head of Strategy and Project Management, Reinsurance Solutions, Greater China, Aon

Over the past decade, the Chinese insurance market has grown rapidly. With a 13% Compound Annual Growth Rate according to the China Banking and Insurance Regulatory Commission (CAGR), it is the second largest insurance market in the world with 10% market share and is forecasted to become the largest by the mid-2030s – overtaking the current leader, the United States, which holds 39% market share based on data from the Insurance Information Institute.

Chinese InsurTech has already undergone tremendous development, driven by the change in customers’ behaviors, technology advancements and regulatory tailwind.

  • The change in customers’ behaviors: the fast adoption and intensive use of e-commerce and online payments has empowered online insurance distribution, particularly for customers aged 20-40 who are used to making purchases via digital touchpoints. Numerous digital applications are helping customers to become better informed as to the benefits of insurance, as well as supporting insurance purchases and claims settlements.

  • Technology advancements: the past two decades have equipped insurers with the tools to cater to customers’ needs. Many insurers and distribution channels adopted the belief of ‘digitize or die’.

  • Regulatory tailwind: the government has played an important role in supporting the integration of technology and data analytics into insurance. In 2014, the Mass Entrepreneurship and Innovation Campaign was introduced by the Chinese government, followed by a series of policies to incentivize entrepreneurs, unleashing their vitality and creativity. InsurTech, as one of the popular areas, attracted talent and investment as reported by market research firm iResearch Inc.

Online Insurance Market Landscape Overview

The InsurTech landscape can be discussed from the perspectives of technology, value chains or players. Consider the application of online insurance as an illustrative example of InsurTech, as it is the most intuitive way to navigate the space.

Overall online insurance penetration

Online is a must for insurers in China. Currently, 70 (out of 88) P&C insurers and 62 (out of 96) Life&Health insurers have adopted online channels. In 2019, overall online premium penetration reached 6.3% (including 7.2% P&C, 6.0% for Life&Health). Online channels are gaining popularity, and while many started before regulatory supervision was well in place, regulations have been catching up: since 2015, a series of online insurance regulations have been established to curb misconducts in areas such as product design, marketing, and service. The decrease in 2017&2018 was due to the tightened regulations on online sales of motor insurance and saving-type life products. In 2019, the total premium bounced back, which attributed to the high growth of non-motor business and protection-type life products.

Types of Online Channels and Business Mix

Online channels consist of insurers’ own platforms (websites, apps and official accounts on social media) and third-party platforms with an insurance intermediary license, e.g. internet giants with massive traffic.

Under Property and Casualty (P&C) business, motor insurance customers tend to focus more on the quality of offline services and prefer to buy from insurers’ own platforms, instead of through third-parties’ (which represent less than 10% of total online motor premium). Due to the regulation headwind mentioned earlier, however, the motor business saw a return to traditional channels and online premium penetration dropped to only 3.4% in 2019 (compared to 11.6% in 2015). On the contrary, third-party platforms contribute 60%+ online premium for non-motor business, which has achieved 90.8% CAGR during 2014-2019 and highly relies on the fragmented e-commerce scenarios, for instance shipping return policies for online shopping, travel insurance, and short-term health insurance. These products are designed with straightforward features, small ticket size and low requirements on offline services. Thus, third-party platforms with huge amounts of traffic are perfect for distributing these non-motor products.

Similarly to non-motor insurance, third-party platforms also dominate the online distribution of Life and Health (L&H) business (87.2% in 2019) as insurers have traditionally focused on their offline agency force and do not want to create the internal competition that may arise if they invest too much in their own online platforms. Although life and annuity are still the top two online products (65% + 19% in terms of premium), health insurance has achieved the highest growth at 119% CAGR (2015-19). Health insurance is a typical product that is sold under unique online scenarios that naturally trigger insurance purchases, such as medical crowdfunding platforms, where some patients cannot afford their medical bill and seek help from the crowdfunding platforms. Donators on these platforms are touched by the patients’ experience and, raise awareness of insurance necessity and more inclined to buy insurance for themselves and families.

Third-Party Sales Platforms

Many innovations of online distribution originated from third-party platforms with huge traffic and unique sales scenarios. As a result, these channels have strong bargaining powers and request high commissions. For example, some platforms charge 90+% for travel insurance and 50%+ for health insurance. Many practitioners believed this situation is analogous to car dealers for motor insurance, where the bargaining power is always there as it is the most productive point of sales.

At the same time, the third-party platforms need to continuously focus on the insurance conversion rate to monetize their traffic - pressing higher requirements on insurance innovation to cater to customers’ evolving needs. Take health insurance as an example, in addition to standard risks, many special segments need tailor-made products such as medical products for children, as China has 250 million population below the age of 15.

InsurTech Key Players

The InsurTech market is composed of three major players: risk carriers, distributors and tech enablers.

Risk Carriers

Risk Carriers are traditional and online insurers committed to, and making sizable investments in technology strategy. Insurers’ total investment (3) in InsurTech exceeded USD 4bn in 2019 and is estimated to be USD 7bn+ by 2022.

For example:

Traditional leading insurer, Ping An has emphasized its position as a technology-empowered company, investing USD 7bn in the past 10 years and committing to investing another USD 15bn over the next decade.

Online insurer, Zhong An, has seen exponential premium growth since its establishment in 2013, becoming China’s 11th biggest P&C insurer (out of 88) in only seven years, mostly driven by innovations in products, distribution and operations partnerships.

Distributors

Third-party sales platforms include internet giants (utilizing their large volumes of traffic) and internet start-ups (which create unique scenarios, triggering insurance purchases).

For example:

Xiang Hu Bao is Alibaba’s online health mutual platform, covering the critical illness risks of its members. In about one year, Xiang Hu Bao has attracted more than 100m members, thanks to over 700m Monthly Active User (MAU) of Alibaba.

Shuidi, an internet start-up founded in 2016 with healthcare crowdfunding, has a mutual and online insurance sales platform with 100m users. It started from crowdfunding with free commission. Through crowdsourcing, patients unable to afford their medical expenses can seek fundraising support from their community. In doing so, the request triggers the awareness of potential donators to the situation and calls their attention to the importance and need for medical insurance. As a result, donators are more inclined to join the healthcare mutual or buy health insurance. It is a typical case for online scenario-based insurance selling.

Technology Enablers

Many start-ups identified the opportunities in addressing specific pain points in insurance operations, for example policy issuing, risk management, claims service, and data analytics. Typically, the founders of these start-ups were insurance practitioners which have a good understanding of the operational challenges and how to offer a solution. At the same time, Chinese insurers and sales platforms are, in general, open to partnerships with third-parties, instead of building everything in-house.

How are the different InsurTech players working together for the online insurance distribution? The chart below shows their roles in the process.

How COVID-19 impacted the space

The outbreak of COVID-19 disrupted different aspects of many business, and the Insurance space is no exception – it severely disrupted the Chinese New Year offline sales campaign of insurers. However, it also brought an unprecedented opportunity for online insurance sales, evident in the statistics disclosed by leading sales platforms, for example:

Shuidi, an internet start-up with healthcare crowdfunding, mutual and insurance business saw its insurance customers surge from 40m in 2019 to 100m by Q2 2020.

Wesure, an insurance sales platform with 80m+ users under tech giant Tencent, said the insurance conversion rate increased significantly on its platform post COVID-19, from roughly 5% to 10%+.

Aon believes growth in online distribution can be attributed to:

  1. Increasing difficulties in offline distribution due to social distancing and lockdown. Given its ‘contactless’ nature, online channels took over part of the offline transaction volume.
  2. Innovative distribution approaches, such as livestreaming insurance sales, gained popularity amongst the younger generation.
  3. The pandemic increased the public’s awareness of the necessity of health insurance, (also observed after SARS in 2003). This awareness increase translated into 20% growth in sales versus the 6% of the overall insurance market during the first half of 2020 (1). We believe the elevated insurance awareness will bring even more opportunities in the health insurance market in the years to come.

Overall, COVID-19 has created opportunities, as well as higher requirements for the insurance industry. At the same time, regulators are modernizing their policies to keep abreast of the trend. For example, in May 2020, the regulators set the target to digitize at least 80% of P&C business by 2022. This will further reinforce insurers’ determination to invest and transform. One of top 15 P&C insurers has paid USD100m(5) for cloud services. We believe this will be the direction that insurers are going to follow.

Again, ‘digitize or die’ is further underlined. Instead of just claiming the technology strategy or using it as a marketing gimmick, more real advancements are expected to adapt to the new normal post COVID-19.

About the Author

Hanna manages the business growth projects for Greater China and supports formulating strategic direction for the Business Units. Hanna is also a qualified actuary of the Casualty Actuarial Society (FCAS) and certified Financial Risk Manager (FRM). Previously, she worked as an actuarial consultant for insurance M&As in the APAC region.