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How long can China’s insurance agents last?

Technology and regulation are recreating the value proposition for Chinese insurers and their distribution forces.

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The shakeup of China’s insurance industry wrought by technology may be just getting started, which puts a spotlight on the fate of the 7 million agents selling products throughout the country.

They are on the front lines of an industry that in 2017 underwrote Rmb3.1 trillion ($500 billion) of premiums, a figure that has been growing strongly: life insurance premiums grew by nearly 28% last year, according to Willis Towers Watson.

Given that insurance penetration is very low, 2.3% for life and 1.8% for property and casualty, according to DBS research, China is set to see its insurance sector expand at a massive scale. Can it also digitalize at the same time?

According to some speakers at last week’s Internet Insurance Summit organized by All-Gen Group in Shanghai, at this rate, China will become the world’s biggest insurance market by 2025.

Foundations of sand
But beneath the headlines, local executives acknowledge that the industry is poorly run. It is highly concentrated, with China Life, Ping An and Anbang accounting for about half the market share (according to DBS; the estimates vary). Shareholders remain largely local provincial or city governments, and big state-owned enterprises.

There is little variation of product, and service is considered poor. The most aggressive players, private-sector conglomerates such as Anbang and Fosun, have been brought to heel in the wake of financial engineering that caused regulators to balk.

The sorry state of the industry has been made clear with the announcement last month that Beijing is merging the China Insurance Regulatory Commission with its banking counterpart. The new entity will report to the State Council but the functions around writing new laws and regulation will shift to the People’s Bank of China.

In light of the larger heft of the banking industry, government moves against the freewheeling overseas investments by insurance conglomerates, and the disgrace of former CIRC head Xiang Junbo (brought down last year in corruption charges), this is going to create a new landscape for the insurance business.

Tech shakes up insurance
What will be the role of insurtech? Insurance and banking products are likely to see some kind of merger, suggesting that bancassurance will play a relatively bigger role in sales versus tied agents.

But big tech competitors say there is no future for human intermediaries.

The rise of WeSure – the insurance business just launched on Tencent’s WeChat messaging platform – as well as Zhong An Online P&C and Ant Financial – makes it easy for these challengers to argue that agents are irrelevant.

Premiums among online-only providers have been modest so far, at just Rmb8 billion in 2017, and none of these companies has yet to turn a profit. But insurtech is booming. There are many startups, such as OK Chexian and Elephant Insurance, finding niches they can service.

The big internet finance companies are looking at bigger game
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And the big internet finance companies, having established beachheads in areas such as motor accident, are looking at bigger game. They are combining artificial intelligence, cloud computing, big data and the internet of things to redesign product, sales and marketing. Vehicle insurance, insuring IoT device safety and using blockchain to move into insuring equipment or contracts overseas for the Belt-and-Road Initiative are likely segments for expansion.

What digital disruption means
These trends apply to traditional insurers too, but technology will disrupt their ability to rely on standardized products and processes. The traditional industry is B2B, with insurers focused on corporate agencies or banks as their channels. But digital and the ability to personalize offerings is turning insurance into a B2B2C model, and the big players are not ready for this transition.

Nor are agents, whose value proposition is going to come under greater pressure from internet companies, with their ecommerce and messaging ecosystems, and from small insurtechs that can bring great customer experience to specific segments.

Digitizing knowledge and customer experience will overtake the primacy of traditional insurance principles or their operations- and process-driven structures.

Digitalization makes it possible to sell low-premium but high-frequency policies
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This will also apply to products, suggesting agents cannot assume that they will remain important for complex and long-term life policies, for example.

Indeed, digitalization is making it possible now to sell low-premium but high-frequency policies, for which no agent is necessary. It’s not just consumer-friendly concepts such as Zhong An’s flight-delay insurance: this new trend applies to things like freight insurance too, a segment previously ignored by most insurers but now gaining steam as big data and cloud computing make it economic. But again: no agents involved.

Another disruptor: regulation
Regulation is going to accelerate these trends. The subsuming of CIRC as the junior partner in a banking super-regulator implies that reporting standards, accounting methods and regulation may become more bank-like, creating a shift in how risk is perceived. Insurers think in terms of premiums; banks look at deposits and capital funding, and premiums are just one means of generating fee-based revenues. Long-term insurance products will be judged more in light of their financial risks to the institution, and selling such products will be accounted as a distribution cost. Insurers will be under pressure to become more efficient.

Regulation is going to accelerate these trends
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Digitalization will become a greater priority, therefore, and it can be used to make long-term, complex products shorter in duration and simpler to account for. If blockchain-based insurance ever takes off in China, this will also mean policies can be tokenized – fractionalized and easily tranched into smaller products.

Advances in A.I. and chatbots in particular will reduce demand for face-to-face interaction. This will surely spell trouble for the majority of agents, who tend to be low quality.

New products, new value
Products and personalization shift new sales away from policies meant to cover possible accidents. Wearables and telematics are about prevention, reducing the need to pay high premiums for after-the-fact coverage. If this type of thinking becomes popular with consumers and businesses, it’s easier to imagine insurance becoming more integrated into daily life – in which case there will be less need for an agent to sell a complex, high-premium product.

Internet finance and insurtech are bringing new ways of thinking to China’s rather backward insurance industry. The pure digital providers are unlikely to see agents removed from the scene entirely, but they should help push the industry toward relying on just high-quality intermediaries.

Agency forces are barriers to value
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Ultimately technology is being used to create value – differentiated products and services. Agency forces, as things stand today, are barriers to value, but necessary to insurance companies’ sales.

This problem is not unique to China. It plagues all the world’s primary insurers. But China has built the world’s most advanced internet-finance industry, particularly in payments. Can it both dramatically grow its insurance industry while also transforming it into a digital leader? To do so will mean being ready to marginalize the majority of its agents – something no foreign insurer has yet to attempt. If China’s industry does make this shift over the next few years, it will once again force the rest of the world to take note, and change – or risk being overtaken.

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How long can China’s insurance agents last?