China worth risk for foreign insurers

E-commerce transactions reached 461.2 billion yuan ($75 billion; 56 million euros) in the second quarter of 2013, a year-on-year increase of 84.3 percent. And soon the Chinese mobile telecoms industry will leapfrog the West and roll out 4G, satisfying Chinese consumers’ thirst for digitization.

How can foreign insurers take advantage of this phenomenon?

Among the foreign entrants to the motor market, eight insurance companies have compulsory liability underwriting licenses, and many life insurance joint ventures have been in play for several years although they have less than 5 percent market share in total.

But these foreign players are sitting on a competitive advantage. Because their operations are small, they can develop distribution channels to bypass the traditional market dominators and get straight to the consumer first.

They can do this by embracing the digital opportunity to create innovative online distribution models, with competitive benefits that attract and lock-in buyers.

Foreign insurers also have a huge advantage over domestic ones in risk selection ability. For years, they have been practicing risk selection and sophisticated pricing with many varied and correlated risk factors. With the adoption of the online distribution model, advanced risk selection will be easy, as the quote and buy functions can be configured accordingly. They can collect the necessary information, take on better customers and avoid poor ones.

Foreign insurers, however, may not be able to benefit fully at present from individual customer risk-based pricing in some areas, such as motor and the more-regulated life products.

Competing on service

Foreign insurers can also compete well on service, an area where there is a substantial gap between supply and demand.

The domestic insurers are not complacent. In the top echelon of the industry at least, they are looking to become more customer-centric. Once they move, they will move fast, but with their traditional distribution and business models, it will take them a while to adapt.

While they do, there is a window of opportunity for foreign insurers to expand their business and online models, and quickly roll out superior service models to attract customers. And by being largely online, they would also have a significant cost advantage, which could lead to lower product prices and attract more customers.

If we turn to the dynamics of the China’s economy, growth in the tier 1 and 2 cities will be modest, and they will become strong insurance retention and switching markets, playing to online models.

In the next five to 10 years, China’s domestic development will be driven increasingly by the lower-tier cities, and the large domestic insurers will find it difficult to quickly deploy their rigid distribution models in these growth areas.

For example, recruiting and retaining skilled agents is one of the biggest problems today for the industry, and it’s hard to imagine that staffing tier-3 and 4 regions will be any easier.

Again, the savvy insurer should build up alternative or open new channels of distribution in these emerging provincial economies. But they will need their own additional provincial licenses, partner with provincial insurers, or move substantially online.