Ant Group (Part 7) - Decoding the Success of a Miniscule Behemoth (Insurance Markets Edition)
In Part 7 of the Ant Group series, we provide a backdrop of China's insurance markets and discuss the factors that precipitated Ant to succeed as the leading digital insurance services platform provider in the country.
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The Chinese Insurance Markets
A common theme in our analysis of Ant, which should be present in any analysis involving China, is the huge rise in income resulting from the country's rapid economic expansion. Personal disposable income in mainland China increased by an average of 5% to 6% year-on-year during the 2015 to 2019 period. However, the insurance penetration rate in China has always been signficantly lower than those of other G20 countries, with total insurance premiums representing only 3.6% of the country's GDP in 2015, compared with 7.3% in the US and 10.0% in the UK.
There are a few reasons explaining the low insurance penetration rate.
Limited Knowledge of Insurance Products
Traditionally, the Chinese people were not very aware of insurance product options, particularly those in lesser tier cities and rural areas.
Trust Gap Between Buyers and Sellers
In addition to the classic information asymmetry problem that characterizes most insurance markets, there is also a deep-rooted trust gap between insurance buyers and sellers in China. Over the years, there were a substantial number of scandals that have surfaced where customers were unknowingly misled into buying insurance products that they didn't want or that weren't suitable for them. Moreover, since there was no convenient or efficient method of comparing different insurance contracts, insurance buyers often ended up paying unnecessarily high premiums, while payouts were not always received as expected due to ambiguous contract wording and misrepresentation. Because of these factors, the general public didn't have much faith in insurance sales agents and generally shied away from buying insurance products, while more affluent consumers sought offshore sources such as Hong Kong for their insurance options.
Limited Insurance Product Options
Products offered in China's insurance sector originally only included those spanning the traditional areas of life, health, and property and casualty. This limited selection of product offerings could not meet the Chinese people's changing demands as the country rapidly modernized and evolved.
In Step InsureTech, Haoyibao, and Xianghubao
Ant launched a scenario-based online insurance product in 2010 back when the company was still a part of Alibaba Group. The product was meant to complement Alibaba's e-commerce services, where the insurance would cover buyers' shipping costs for returning products bought from Alibaba.
InsureTech wasn't launched properly as a platform until much later on in 2017, after Ant had become a separate entity and CreditTech and InvestmentTech were already established (see Part 1 for more detailed information on Ant's lines of business). The initial launch included a small number of insurance offerings, although the platform didn't get popular until 2018 with the launch of Haoyibao, a health insurance program, and Xianghubao, which is discussed below.
Ant's InsureTech platform (excluding Xianghubao) functions as an online platform connecting 90 insurers with an extensive customer base. Users who want to buy an insurance product are given a customized selection of contracts to choose from, all of which are presented in a very transparent and easily understandable manner that allows for quick and efficient comparison across products.
The scope of insurance products available don’t only include the traditional life, health, and property and casualty areas, but also newer, more innovative products that better suit the modern consumer's lifestyle.
Insurance products are either offered solely by partner institutions via the Ant platform, or developed jointly by Ant and partner institutions. For example, the current most popular product on InsureTech is Haoyibao, a health insurance developed jointly by Ant and PICC. The difference between products that are offered solely by partner institutions and products that are offered jointly by Ant and partner institutions is that the latter can only be bought on the Ant platform.
Ant also offers a quasi-insurance product, Xianghubao, as discussed below.
Xianghubao, which translates to "mutual aid", is an insurance-like program launched in 2018. Members of the Xianghubao program pay dynamically adjusted monthly contributions to a mutual aid pool of their choice, and can withdraw money when the necessary conditions arise. Contributions paid to the Xianghubao program are significantly lower than most standard insurance contract premiums, since Xianghubao benefits greatly from economies of scale with almost 109 million users as of November 2020.
As of the 12 months ended June 2020, InsureTech generated RMB52 billion in insurance premiums and contributions, thereby being the largest insurance services platform in China. Revenues from InsureTech totalled RMB6.1 billion as of the six months ended Q2 2020.
Both market factors and individual company factors contributed to Ant's success as a digital insurance services provider.
The primary market factors that contributed to Ant's success in the insurance industry include China's increasingly affluent population and the resulting increase in people's levels of health awareness, as well as the greater accessibility to healthcare services that came about as the country developed. China's modernization also meant that consumers had changing needs for a wider range of insurance products.
#1: Increasingly Affluent People + A Growing Middle Class
As has been stressed many times throughout the Ant series, China's increasingly affluent population and growing middle class has contributed greatly to the increase in demand for financial and insurance products. From the start of the century to 2015, China's middle class grew from 29 million (i.e. 2% of the population) to 541 million (i.e. 39% of the population), which reflects one of the fastest middle class growth rates in the world. This explosive growth in wealth translates to a huge rise in demand for insurance, as more people are willing and able to take on the protection needed to cover for unexpected life events.
#2: A More Health Conscious Population + Wider Availability of Healthcare Services
As the Chinese people grew richer, they became more health conscious. As the country itself developed, healthcare services became more widespread, even to those in more rural areas. Severe illnesses such as cancer were no longer a death sentence, as people had the means to seek out appropriate treatment. To cover for the costs of such expensive treatments, people turned towards insurance.
#3: Evolving Consumer Lifestyles
As China rapidly developed, the Chinese people's lifestyles evolved dramatically. Whereas in the past buying an insurance product would not have crossed most people's minds, the Chinese people have become more financially savvy as they look for ways to plan for major and minor unexpected life events. These structural changes in people's lifestyles resulted in a surge in demand for a wider range of insurance products to meet the needs of the modern consumer.
A wide range of company factors altogether contributed to InsureTech's success.
#1: Integration with Alipay
InsureTech's integration with Alipay means Ant has access to a broad customer base that the company can analyze to determine customers' needs and develop sophisticated risk models. Ant can also easily promote InsureTech to existing Alipay users since both share the same application platform.
#2: Educating Consumers
One of the most important factors behind InsureTech's success is Ant's initiatives to educate consumers on how insurance contracts work, as well as the potential insurance options consumers have based on their life circumstances. Users can also submit their own questions for personalized product recommendations from certified actuarials through the InsureTech platform via the Alipay app.
#3: Digitally Accessible and User-Friendly Platform
With a digital platform, buyers can easily access and compare a wide range of insurance products. This is significantly more convenient than the traditional approach of buying insurance contracts at a physical branch, which didn't allow for an easy method of product comparison and could also be very time-consuming especially for people living in more remote areas.
#4: Clear Representation of Products
Insurance products offered on the Ant platform are presented in a transparent and easily understandable manner, so users know exactly what they are getting into when they choose an insurance contract. Moreover, users who have purchased an insurance contract can leave the reviews on the InsureTech platform, which potential insurance buyers can browse as part of their decision process. Overall, these factors helped to reduce the trust gap between buyers and sellers.
#5: Reaching Out to the Underserved
Although the Chinese people have become increasingly wealthy and many are willing and able to purchase traditional insurance products, nevertheless, there is still a significant proportion of the population that find insurance contracts too costly to afford. Ant has increased insurance accessibility to these underserved consumers through the development of a quasi-insurance product, namely Xianghubao, which functions very similarly to traditional insurance products but require significantly lower premiums, albeit with more limited coverage. The contributions required for Xianghubao are approximately only RMB100-150 per year, although the maximum coverage amount is only RMB300,000, significantly lower than the coverage provided by traditional insurance contracts.
#6: Innovative Products to Meet Evolving Consumer Needs
Apart from the traditional life, health, and property and casualty insurance contracts offered on the InsureTech platform, Ant has also kept up with changing consumer needs by coming up with new innovative products including insurance coverage for credit card theft, phone screen damage, auto insurance, travel-related insurance, education insurance and insurance for pets.
#7: First-Mover Advantage
Ant was one of the first tech companies to launch a digital platform for consumers to shop for insurance products in 2017. As such, the company benefited greatly from having a first-mover advantage, a position which Ant further solidified by leveraging InsureTech's integration with Alipay to expand their insurance product user base.
Ant hasn't stated the company's vision with regards to the future of InsureTech. However, we do think Ant's digital insurance services platform still has the potential for significant growth, at least within the next five years. The reasons are discussed in this section.
The main market factors that we expect to support continued growth in China's insurance markets include the continued growth in wealth of the Chinese people, the country's aging population, and the early stage nature of China's insurance industry.
China's Middle Class Will Keep Growing
As China's economy continues to expand, the Chinese people are expected to keep getting richer. The central government is continuing to implement economic initiatives to lift more people out of poverty, while rising income levels as a result of economic growth mean China's middle class will continue to grow. As of October 2020, the Brookings Institution predicts that within seven years time, 1.2 billion people in China will be in the middle class, where a middle class person is defined as those who earn between $11-$110 a day in 2011 purchasing power parity terms.
An Ageing Population
China's average life expectancy has increased from 67 years in 1986 to 77 years in 2020. With an aging population and an overall rise in longevity, the Chinese people are becoming increasingly concerned about planning for the future, including taking on the protection needed to cover for unexpected events.
An Industry in its Infancy
The insurance industry in China is still in its infancy, with not many consumers knowing about financial or insurance products. However as the country continues to modernize and develop, a greater number of people are becoming aware and adopting the habit of financial planning, including the purchase of insurance contracts. As the internet penetration rate in China continues to grow, especially in rural areas, digital platforms in particular are expected to become an even more popular choice for consumers to source their insurance solutions.
Given these factors, the Chinese insurance markets are expected to grow considerably. Oliver Wyman predicts insurance premiums to double from a 2019 level of RMB4.3 trillion to RMB8.6 trillion in 2025.
InsureTech's key strengths going forward primarily include its integration with the Alipay system, as well as Ant's continued first-mover advantage as a digital insurance services platform provider.
Integration With Alipay
Even though more and more Chinese consumers are taking on insurance products, there is still a very large number of people who have never even considered getting an insurance contract. Since the Alipay app has a wide outreach with 711 million monthly active users as of June 2020, Ant has a key advantage over future competitors through this channel where the company is able to reach out to a very large potential customer base.
Continued First-Mover Advantage
As of the end of 2020, Ant still maintains a solid first-mover advantage with very few competitors in the industry. Since reputation plays an important role in attracting and retaining users, even with the entry of new competitors we expect it would take a certain amount of time before those potential competitors can establish a strong position as another digital insurance services platform provider.
Check out the entire Ant Group series here:
Ant Group Updates:
Investing in China (Equities)
Investing in China (Fixed Income)
Glossary of All China-Related Terminology:
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