Paul Schulte: Chinese online insurer leaves traditional rivals in the dust

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Paul Schulte: Chinese online insurer leaves traditional rivals in the dust insurance

Zhong An is the largest insurance company in the world that you have never heard of.

It is an "anywhere, anything, anytime" insurance company with no agents. It receives its data on individuals and companies from its well-placed shareholders: Alibaba Group Holding, Tencent Holdings and Ping An Insurance Group. It has access to a vast treasure trove of data, allowing it to pioneer new ways of calculating how to protect people, and its shareholders, against bad outcomes.

Zhong An Online P&C Insurance is a purely online entity with 1,500 employees, of whom 60% are engineers and 100 are data scientists. In just three years, this small organization has sold 5 billion policies. It sold 200 million alone on Nov. 11, 2015, China’s annual Single’s Day e-commerce festival.

The company has accumulated more than 400 million new customers over the past three years and has a suite of more than 200 products. In the fiscal year ended in June, the company took in about $450 million in premiums. Its net income quintupled from a year before and its claims ratio, which measures claims paid out in proportion to premium income, was 60%.

This is a company which has no marketing fees, no offices and no physical paperwork. In effect, the cost of processing a new customer is zero. Its only cost is data. And it has access to some of the most powerful data sets on earth with Alibaba and Tencent. In addition, in Ping An, it has a major partner which is arguably the most technologically savvy traditional insurance company. All told, Zhong An has the backing of the three famous but unrelated Mas in China – Peter Ma of Ping An, Jack Ma of Alibaba and Pony Ma of Tencent.

Zhong An has an innovative range of products. Its largest segment is shipping returns insurance, which makes up half of its current business. For a low price of 0.60 yuan (9 cents), Zhong An will cover the cost of sending back an online purchase if a customer is not satisfied. The company sells one of these policies, which does not cover reimbursement for the purchased items themselves, every 10 seconds.

Its second most popular product is travel insurance, which pays out in case of air accidents or flight delays. It even has machines installed in airport terminals where policyholders can claim 300 yuan each during delays. Another type of policy covers travelers and landlords using Airbnb-style home-share services. Zhong An also sells health insurance, including specific policies for maternity care, critical care and pediatric services.

How can Zhong An tell the difference between a fraudster and a decent risk? It is building up a vast data pool on hundreds of millions of people in China through their activity with internet services such as Tencent’s Wechat social network and Alibaba’s popular online shopping sites Taobao and Tmall. Zhong An is also the second company to have gotten access to the credit bureau under the People’s Bank of China, the central bank, which tracks data on 300 million people. In addition, the company also draws on the expertise of Ping An to help it create accurate algorithms for individuals and companies.

The technology employed by Zhong An has been built from scratch. It features an internally built core system, highly scalable and flexible for creating new products. The company can roll out a new product within a week. Traditional insurance companies are limited by IT providers providing only standardized service. Zhong An has recently created subsidiaries to build blockchain and artificial intelligence capabilities.

Ping An has a good reputation of being ahead of the game when it comes to technological innovation. But the Zhong An venture involves a whole new level of sophistication thanks in part to senior managers who previously spent years at Google.

With such infrastructure and expertise behind it, Zhong An is able to glean data from many sources to ascertain the level of risk associated with those who might be deemed risky customers. Do they change phone numbers often? Do they have multiple phones? Do they often go out late at night? What are their contacts like? Do they adhere to contracts? Do they move frequently? What are their social media or search habits?

China is using this kind of data to create a ratings system called Sesame Credit. This system, which lies inside the Alibaba network, allows Chinese people to receive easy access to visas, discounts on hotels and waivers on deposits for car rental, among other benefits.

As more and more Chinese travel overseas, they are bringing Zhong An with them. In 2015, more than 120 million Chinese traveled overseas and spent $105 billion, according to the China Tourism Research Institute. These numbers will only grow and these travelers will demand the same automatic service from Zhong An in Los Angeles or Sydney as they do in Beijing. This will create momentum for Zhong An as a first-mover.

There could be trouble stemming from Zhong An’s shareholding structure. Each owner has a relatively small stake and could decide to leave the partnership if there were a dispute. The departing partner might consider building its own online insurance business, but this seems unlikely due to the serious reputational risk.

Some observers worry about the possibility of fraud, mismanagement or similar unforeseen circumstances bringing an end to Zhong An’s rapid growth, but this is a risk every fast-growing company faces.

A bigger risk is that a traditional insurance company might try to sabotage Zhong An. Some insurers, worried about their long-term outlook competing against such an advanced rival, may seek relief from regulators who could tip the playing field.

Zhong An could wipe out many market incumbents because its business model is so low cost. Traditional insurance companies need to get into high gear or they will be left behind.

Zhong An has reportedly already chosen banks to sponsor an initial public share offering in Hong Kong. Watch for it next year.

Paul Schulte is the founder of emerging markets research group Schulte Research and the Schulte Institute for Financial Innovation and a research fellow at Hong Kong University of Science and Technology. He was previously head of global banking strategy at CCB International Securities.