Insurtech in the US and China: Transformation in Waves
We compared insurance and technology applications in the sector to sharpen our view of these two big economic participants.
Since the Coronavirus first exploded in China and began to spread through many other countries, how insurance companies react has become a matter of global concern. The market value of many insurance giants has shrunk. South Korean insurance companies have suffered a huge decline, with Hanwha Life Insurance, the second-largest life insurer, carrying only 1/10 of its book value; similar trends are affecting insurance companies in the United States and Europe.
As technology is bringing innovation to the finance industry, insurance is also leveraging it a lot. According to the CB Insights report, global investment into the insurtech sector hit an eight-quarter peak in the fourth quarter of 2019, with a near total of USD 1.83 billion. In addition, the US startups attracted more investment than the rest countries in the world with a 63.3% occupancy. For category, personal insurance is the most welcomed with 46.4% investment, following insurance operations of 32.4% market share.
As regards technology application into the insurance industry, many well-known growth areas have penetrated, such as AI, blockchain, cloud computing, big data and the Internet of Things (IoT). In the value chain, we see a profile that mainly includes product development and design, set price and underwriting, sales channels, client service and claim settlement. Several technologies are being applied to each link. For example, AI is used to replace the manual operation process in the compensation stage, and the cloud algorithm is used to identify accident photos and give accurate loss determination.
Taking the insurance industry as a first entry point
As insurtech is actually the technology application in the insurance industry, the entry point will be comparing industry differences in these two biggest participants – China and the US.
The three largest companies in China's insurance market are Ping An Insurance, China Life Insurance Company and People's Insurance Company of China, while in the US we find Berkshire Hathaway, UnitedHealth Group and Anthem, according to market value. The incumbents in China's market mainly get profits through life insurance and property insurance, while the incumbents in the US focus much more on medical insurance than China's market.
In addition, the medical systems in these two markets are almost totally different. The US is famous for having the highest medical expenses, and medical insurance is the main revenue for hospitals and doctors. Medical insurance is mainly commercial insurance in the US. Moreover, family doctors account for 21.4% of the total number of doctors. But in China, the story is different. The government will take part of medical insurance as basic expenses, such as outpatient and medicines, which aim to cover everyone in the country – then comes commercial medical insurance. And the largest revenue of hospitals is medicine. According to statistics (in Chinese), the top three hospitals account for 40% to 50% of their total revenue, while grassroots public hospitals account for 70% to 80% and public hospitals occupy nearly 70% of total hospital numbers. A family doctor is still a new concept for many families in China and their first choice for medical treatment is to go to a hospital immediately.
Insurtech current situation
As for the insurtech industry, China and the US show various features and are in different development races.
Firstly, the US market for insurtech mainly focuses on client services and risk control, while China's insurtech is booming in almost every area and the sales channels side is the main innovation point currently. Incumbents in China are facing a transformation from a traditional style to more digital and artificial styles, but the incumbent's scale decides that it's going to be a long process.
Second, the Chinese market combines more closely with other fintech sectors such as mobile payment, so internet players also take a place – i.e. Ant Financial – and the wave of Internet penetration generates even more new insurance products.
Third, some insurtech business models in the US have generated a remarkable performance based on good business models, such as unicorn Lemonade. The company's core assets are risk control and AI processing which topped USD 57 million in revenue in 2018. China's insurtechs are mostly on the way of finding lasting profitable models (except big players); some companies have invested a lot into technology and need to be tested by the market. Since the beginning of 2019, a total of 14 insurance technology startups have successfully obtained (in Chinese) financing, with a total amount of more than CNY 2 billion. However, no one is profitable yet, 17 Mutual Aid enterprises were shut down due to not having profitable business models.
Why insurtech differs a lot
Besides the differences already existing in the insurance market, other factors also shape the structure and characteristics of the insurtech world.
First, the United States has the stock market, and China is the incremental market. The insurance depth in China is nearly 4.12, while in the US it was about 7.18 in 2018; and the insurance density of 2018 in China was about USD 400 and USD 4216 in the US. China is still a very emerging market with large room for development. As for revenue income, over half comes from life insurance and then property ones with 28.33% occupancy.
Second, the Chinese market is now in a transfer period of client acquisition for brokers, and the expansion of the number of people cannot bring in new customers, and it needs to enhance the level of professional quality. As of the end of 2018, there were (in Chinese) nearly 12 million insurance agents. However, the one-year retention rate of agents is less than 50%, and the loss rate of individual insurance companies in the first year is as high as 80%. High loss rates just make experienced brokers less and less, so how to improve their retention rate and train more experienced brokers becomes the key of higher quality client service.
Third, the start of the Chinese insurance market compared to that of the United States is nearly two centuries late (compared with insurance depth and density) The development of the insurance industry is proceeding synchronously with insurance technology, and the catching-up process will not be over too soon.
At last, the overall development trend of China's fintech industry is stronger than that of the United States. So different sectors such as mobile payment will cooperate with insurtech to speed up industry change and build fintech ecosystems.
The future is on the way
While developing the incremental market, China should also pay attention to the stock market, prompting customers to reinsure; in addition to technology investment, it should also pay attention to profit models (SMEs, startups). The insurance demand in the US market is nearly carving out, simplified processes and enhanced services, or is made up of actors seeking overseas development opportunities in emerging markets.