The technology sector in the Asia-Pacific region, China in particular, is fast becoming a key contributor to the innovative forces that are reshaping the global insurance market. It is important, however, to distinguish online insurance, which is leveraging existing products onto a different distribution platform, with genuine technological innovation across all components of the insurance value chain, such as pricing, claims, distribution or customer service. The growing presence of China’s technology giants (Tencent, Alibaba and Baidu) across these segments is perhaps the clearest indication of their influence on the future direction of the insurance industry.
The lack of legacy systems in China, an ability to deploy the latest technological advances, a large, digitally connected population, and a willingness to explore new products and business ideas are significant factors in driving technological development in the country’s insurance sector. The rapid proliferation of mobile phones and digital devices in China is on a scale unlike anywhere else in the world, and has provided companies with a substantial quantity of data that is waiting to be tapped. Recognising the huge commercial potential, China’s technology giants have moved quickly to secure joint ventures and partnerships across the insurance industry. As illustrated in Figure 8, these investments span both the life and P&C sectors in domestic and foreign markets.
This trend is indicative of the growing appetite of Asian investors for InsurTech companies. For example, an array of cross-sector investors such as Ping An, Tencent and Alibaba raised a total of CNY 5.8bn of financing for Zhong An in 2015. Two years later, Zhong An completed an IPO for CNY 17.5bn on the Hong Kong stock exchange, the largest amount of capital raised to date for an online-only P&C insurer.
These transactions also set China’s insurance sector apart in attracting alternative capital. In other developed markets, alternative capital is supplied largely by pension and hedge funds seeking diversification. Today, this typically means investing in property-catastrophe risks through insurance-linked securities (ILS) or sidecar vehicles. In contrast, alternative capital in China to date has primarily originated from, and been invested in, the domestic technology sector through a combination of joint ventures, partnerships or acquisitions.
Nevertheless, the rapid rise of InsurTech in China cannot be explained solely by large, high-publicity transactions alone. This point is supported by data in Figure 9, which shows the amount of capital raised for private and non-listed Chinese InsurTech-related companies since 2012, and the rapid increase in the last two to three years to reach CNY 1.6bn in 2017 (following a peak of close to CNY 2.0bn the year before).
FIGURE 8: SELECTED INVESTMENTS MADE BY CHINA’S TECHNOLOGY GIANTS IN THE LAST 36 MONTHS
NOTE: Includes outbound investment activity by the subsidiary companies of Tencent, Alibaba and Baidu SOURCE: JLT Re, CB Insights, Businesswire, South China Morning Post
FIGURE 9: CAPITAL RAISED FOR NON-LISTED CHINESE INSURTECHS 2012-2017
SOURCE: Tsinghua University, PBC School of Finance
To date, online insurers have been the main beneficiaries of investments, followed by intermediaries or distribution platforms and other tech-enabled companies that focus on innovative solutions such as telematics or predictive modelling. At a time when insurers are facing margin compression, much of the focus in the InsurTech space is on reducing expense ratios, particularly in personal lines. Start-up firms are also focused on facilitating enhanced customer experiences and improved distribution. This has led to a greater emphasis on customer segmentation to drive premium volume growth via tailor-made products, as insurance policies are increasingly transacted online.
However, the recent struggles experienced by Zhong An and other online-only insurers show that business plans based on selling low-cost, short-term products in high volumes without an agency force are not without challenges. Online platforms such as Ant Financial and Tencent may charge channel fees as high as 37% of premiums3 and are a major contributor to the thin or negative profit margins of online insurers. In 2017, Zhong An reported an expense ratio of 74% and a combined ratio of 133%4, perhaps calling into question whether online distribution can reduce expense ratios for such insurers.
Although online-only insurance is still in the early stages of its development cycle, these insurers are finding they are not exempt from many of the day-to-day challenges faced by conventional carriers, such as consumer education, policyholder retention, data privacy and regulatory compliance. Just like the lessons learnt from the dot-com bubble two decades ago, access to large piles of capital can never be a long-term substitute for generating underwriting profits above costs of capital.
3 SOURCE: Financial Times
4 SOURCE: SNL