In this article on InsurTech innovation case study of Ant Financial’s Mutual Protection Health Plan by Mr James Liu, President, Insurance and Financial Practitioners Association of Taiwan (IFPA), and Founder of Phew and PruWell, he shares his insights.
Ant Financial enters health insurance
There are indeed some exciting innovations that are worthwhile to explore further.
On October 16, 2018, Ant Financial— an affiliate company of the Chinese Alibaba Group – teamed up with Trust Mutual Life Insurance Company to launch a very innovative health insurance plan, named “Mutual Protection.”
Members would be paid an insurance benefit of CNY300,000 (US$43,428) upon being diagnosed with cancer or any one of the 99-plus critical illnesses.
The cost of becoming a Plan member is nil.
Yes, nil. Zero.
Anyone below age 60 with a credit score of more than 650 with Ant Financial, could log onto AliPay and click the Mutual Protection button to become a Plan member.
Within the first three days of its launch, more than 3.3 million people signed up and became members of the Mutual Protection plan. In one month, there were more than 20 million members of Mutual Protection. It was considered by many to be a revolution in the health insurance industry. There were many praises from the general public as well as many questions raised by insurance professionals.
Members only pay when a fellow member is eligible for a payout. Plan members pay the same flat fee - equal to the average costs of the insurance benefit payments plus 10% administration expense charges.
It was estimated by the platform that the average cost per individual would be as low as CNY20~40 per month, while the benefit payment would be as high as CNY300,000.
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As an InsurTech startup entrepreneur, I was very much impressed. I applauded such a disruptive-innovation effort by Ant Financial. At the same time, as a former life insurance executive and actuary, I could not help but ask myself some burning questions:
* How would the Plan manage the most critical risk aspect in life and health insurance, that is, adverse selection by high-risk customers?
People who do not feel well have the strongest incentives to buy life and health insurance. Although the Plan had the typical protection designs of a 90-day waiting period and a simple health declaration statement to alleviate the risk of adverse selection, anyone in the health insurance business long enough would know these typical product designs were not sufficient.
The risk of adverse selection from consumers actively seeking and buying health insurance was too high, unless there’s some kind of data analytics other than a credit score to determine the health risk profiles of the consumers.
Alternatively, the Plan could be aggressively aiming to increase its membership size to a size closer to the entire general population, such that most risks would be diluted or averaged out.
* If the percentage of high-risk members (e.g., ill or old) is much higher than what the company had expected, how would the cost to be shared by low-risk members (e.g., healthy and young) remain reasonable and acceptable?
The cost would likely have to increase, as the low-risk members would have to heavily subsidise the high-risk members.
If so, what would stop those low-risk members from shopping around for another plan? Perhaps there would be a cap by the Plan on the overall cost shared by members, and any excessive costs would be absorbed and subsidised by the company as a "startup" cost.
* The Plan seemed to guarantee insurance coverage renewability till age 60. How about coverage after 60, when the need for health insurance would become even stronger?
* Is this a health insurance product or in essence a P2P health insurance platform?
Ant Financial re-structures the health insurance plan into a P2P platform
Forty-one days after the launch of the Mutual Protection plan, it was shut down by China Banking and Insurance Commission on November 27, 2018.
Trust Mutual was fined CNY930,000 on account of unjustified fares and unbalanced information disclosed to the public.
The “Mutual Protection” plan was then renamed “Mutual Treasure” and became a P2P platform directly under Ant Financial (as opposed to previously being a Plan of a subsidiary insurance company).
There are now about 60 million members of Mutual Treasure. Also, there is a cap on annual cost sharing of CNY188 per annum. (Note that this is even lower than the cost estimates of the original “Mutual Protection” plan; I assume that the objective for doing so is to employ a low-cost strategy to quickly increase membership size.)
In addition, there is now a new plan for people who are 60 years of age or older, although with lower benefit payments of CNY100,000 per incident. Ant Financial itself announced that it would absorb any benefit payment costs if they should exceed more than RMB 188 of flat fee per person.
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In terms of the product design and membership increases, these are indeed good improvements. We shall all welcome the continued innovations in InsurTech development. At the same time, I believe there are still some possible issues for all of us to further study:
* Is the new Mutual Treasure an insurance or not?
If so, would it be subject to the long-term sustainability spirit of insurance regulations requiring solvency capital, catastrophe reinsurance, certain degree of guarantees on coverage renewability and premium rates, just like any other typical health insurance products which are so required?
* Hook vs standalone sustainability
It is a common practice in the internet business for a company to offer free or low-cost products and services, as a “hook” to attract traffic sessions and thus generate income from advertisements or cross-selling other more profitable products.
But in the case of an insurance company, there is an important nuance: Every insurance product is priced to be stand-alone and profitable in itself, so as to comply with the regulatory spirit of doing long-term sustainable business for the public good.
With that said, shall insurance companies be allowed to sell loss-generating products in the hope of cross-selling other more profitable products at a later stage?
If not allowed, how could insurance companies fairly compete with tech firms?
If allowed, how would the success of cross-selling other more profitable products be ensured?
And to what extent would the profits from other product lines be taken to subsidise the loss-generating products?
Moreover, if the level of cross-subsidy is significant, would such a practice be fair to the buyers of those profitable products?
I believe digital transformation and technology improvement by incumbent insurance companies will continue. At the same time, there will be many more very innovative ideas from the tech giants and InsurTech startups, with increasing understanding of the risk management aspects of the insurance business. On the regulatory fronts, we will face unique and diverse challenges. It is indeed an exciting time that we all live in.
Mr James Liu is President, Insurance and Financial Practitioners Association of Taiwan (IFPA), and Founder of Phew and PruWell. PHEW is one of the brands operated by PruWell International which builds digital platforms that “connect consumers with the right insurance products at the right time”.
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