ZhongAn: A new generation digital insurer

Karel Cool, Christophe Angoulvant and Brian Rogers

Karel Cool, BP Chaired Professor of European Competitiveness and Professor of Strategy at INSEAD; Christophe
Angoulvant, Senior Partner and Global Head of Insurance at Roland Berger, and Brian Rogers, Research Editor at
Swiss Re Institute

Investment in InsurTech continues unabated

Today, most insurance companies have an online presence and communicate with their
customers through mobile apps. They have monitored their customers’ habits and adopted an
omni-channel strategy to interact with them. Many have been spurred by the increasing
pressure from InsurTechs, i.e the new ventures that combine digital prowess and opportunities
for disruption or new value creation in insurance markets. According to CB Insights, the
number of investment deals reached a five year high in 2017 at 202, up 31% in value from 2016
(see Figure 1).

Figure 1: Global InsurTech investments ($ million). Source: CB Insights1

Most InsurTechs focus on efficiency improvements

Digital innovation activity is affecting the insurance value chain either upstream (administration
and claims management) or downstream (distribution and customer relations)2. A recent
count3 found that 60-65% of all investments by (re)insurance companies have taken place in
ventures focusing on “technological upgrades”, which eye operational efficiencies such as faster
claims settlement (e.g. Snapsheet), machine learning towards fraud detection (e.g. Shift
Technology), and data mining and analytics (e.g. Cytora). Unicorn Zenefits, perhaps the best
known, offers a cloud-based human resources platform focusing on payroll, benefits and other
HR systems, allowing users to manage everything from one dashboard.

1
CB Insights, Fintech trends to watch in 2018, January 2018.
2
C. Angoulvant, K. Cool and B. Rogers (2017). Insurtech Is Hitting Critical Mass, INSEAD Knowledge, November
2017. https://knowledge.insead.edu/blog/insead-blog/insurtech-is-hitting-critical-mass-7791
3
Willis Towers Watson – CB Insights, Quarterly Insurtech briefing, January 2018.
https://www.willistowerswatson.com/en/insights/2018/01/quarterly-insurtech-briefing-Q4-2017

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Customer-facing disruptions are the minority

Only 30-35% of InsurTechs were found to focus on more radical, disruptive models, innovating
new business models, sometimes putting them in competition with incumbents. Cuvva, the
mobile-only insurer from the UK4 is such a player. Its pay-as-you-drive insurance by the hour is
an extension of available insurance policies in the UK and as such complements incumbents. Its
subscription-based car insurance policy, which allows users who pay a minimal monthly fee to
top up their insurance when the car is driven, is a disruption and promises a face-off with
incumbents. Other such ventures are Trov, a California-based start-up that covers its users
against accidental damage, theft, loss to electronic devices at triple the usual speed. The
company can process claims submitted via a smartphone in minutes, rather than in weeks.
Ladder, another California start-up, allows consumers to get a life insurance quote within five
minutes. The term life insurance policies are easy to purchase and easy to change should the
customer's life circumstances change.

A minority of ventures focus on radical innovation and disruption

Some InsurTechs, such as ZhongAn, are already shaking up the industry. The Shanghai-based
non-life insurer is at the forefront of a very different way of imagining and delivering insurance.
Launched in 2013, the company has already reached a market cap of $US13.6 billion on the
Hong Kong Stock Exchange, where it started trading in late September 2017, and has sold over
7 billion policies to 490 million customers.5

ZhongAn is the first mainland insurance company in China to be granted a license to operate
without physical outlets. China's insurTech market is expected to hit 1.4 trillion yuan (US$
211.66 billion) by 2021, with four technologies set to reshape the industry: artificial intelligence
(AI), internet of things (IoT), big data and cloud computing.6

A new vision of insurance

Traditionally, nonlife insurance has focused on major risks (e.g. car accident, home fire, etc.)
that take place infrequently. By paying an annual premium, customers get peace of mind -- or
forego insurance when premiums are too high.

ZhongAn has pioneered a very different vision of nonlife risks and insurance. It observed that
people often encounter minor frustrations or “pain points” - e.g., returning a package by mail,
dealing with train and airport delays, cancelling participation at events because of bad weather,

4
B. Rogers, K. Cool and C. Angoulvant (2018). Disrupting the Car Insurance Industry, INSEAD Knowledge, January
2018. https://knowledge.insead.edu/blog/insead-blog/disrupting-the-car-insurance-industry-8126
5
https://www.cbinsights.com/research/zhong-an-ipo-data/

6
L. He (2017), ZhongAn, China's largest online insurer, sees Ping An as an insurtech rival it can learn from, South
China Morning Post, 7 December 2017. http://www.scmp.com/business/companies/article/2123211/zhongan-
chinas-largest-online-insurer-sees-ping-insurtech-rival

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or not be able to see their preferred doctor, etc. While one can live with these pain points,
ZhongAn realized that many of these risks could be covered by an insurance policy, and that the
cost would be minor if each event was priced separately.

Its most popular product has been the Shipping Return Policy. In the Chinese context, buyers
are often concerned about the origin and quality of the products they buy. To remove the
anxiety of return shipping costs, ZhongAn developed a policy for buyers who wish to return
unsatisfactory products, and a policy for sellers to cover the shipping costs of a replacement
product. The cost is a mere RMB 0.15-3.3 (€ 0.02 – 0.4) per policy for sellers, and RMB 0.2-9.9
(€ 0.03 - 1.3) per policy for buyers.

Given that many face frustrating pain points every day, insurance can thus become a repeat-
purchase product rather than a one-off annual expense. In 2016, the average customer bought
10.3 policies from ZhongAn; the average premium per customer increased from RMB 4.0 in
2014 to RMB 9.9 in 2016. Most insurance companies do not sell more than 2 policies per year
to the same person.

So, the company set out to de-risk multiple, seemingly insignificant events. Instead of charging
one annual lump sum covering all such events, it devised policies tied to each event. It has been
offering these policies at premiums that are so low that they can be paid from “pocket money”
- hence the name “pocket insurance.”

Boosted by the leading ecosystems

The micro-premiums only become significant if the volume of transactions is significant.

ZhongAn’s founding investors include Alibaba, Ping An, and Tencent, the major ecosystems and
competence centers in e-commerce, insurance and social platforms. ZhongAn saw the
opportunity “to offer ecosystem-oriented insurance products and solutions in different
consumption scenarios.”7 By being a close complement to the ecosystems of the partners,
ZhongAn has made it possible for shoppers and sellers to buy and sell multiple, specific
insurance policies to de-risk their billions of transactions.

A similarity may be drawn between ZhongAn’s business model and the original Google model in
web search and transactions. Google’s AdWords and AdSense programs have allowed many
millions of people to advertise their products and services at a very small cost to many millions
of customers, thus enabling transactions. Prior to these programs, similar transactions were
much more difficult to complete as advertising on alternative media was prohibitive for small
transactions.

Similar to Google, ZhongAn’s business model has enabled millions of transactions between
buyers and suppliers by de-risking the transactions at a very small cost.8 This creates benefits

7
ZhongAn Global Offering, Sept 18 2017.
8
ZhongAn also provides customer credit, credit insurance and many other services.

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for buyers and sellers, and thus for the ecosystem, which in turns draws in more buyers and
sellers, thereby accelerating the growth of the ecosystem. ZhongAn in turn benefits from these
positive effects, which is why its growth has been accelerating.

Technology, extensive user data and artificial intelligence

As a technology-driven insurTech company, ZhongAn relies on big data analytics in every step of
the insurance value chain, including product development and innovation, pricing,
underwriting, risk management, claims settlement and customer service.9 The billions of
transactions with the millions of people allow ZhongAn to collect extensive data on the
behavior of their customers. By learning what these types of customers do in particular
situations, the company can react by offering “scenario driven” customized products.

By the end of 2017, the company had close to 300 insurance products that it could offer and
customize into thousands of insurance solutions10 depending on the scenario that a given
customer faces at any given moment (e.g., flight delay, cancellation, unexpected weather that
spoils an event). Its proprietary cloud-based platform, Wujieshan, plays a central role. It can
instantaneously make an insurance proposition using its many insurance solutions and its
knowledge of the situation that the customer is in. For example, it is able to track whether a
customer has checked in for a flight, is on board, and faces an unexpected flight delay. This may
automatically trigger a proposition from ZhongAn for flight delay insurance. In case a delay is
longer than the insured time, the customer can be instantaneously compensated in its WeChat
Pay account (from Tencent) or AliPay account (from Alibaba). Claims are typically processed
within 3 days.

Getting critical mass in the market for ecosystems

Getting access to the major platforms has allowed ZhongAn to grow at a spectacular rate. The
success of Alibaba's e-commerce sites has also given it the credibility to play the same role on
many other, smaller and more specialized platforms. The number of ecosystem partners in
ZhongAn's network has steadily increased over the years - from 20 (2014) to 71 (2015) to 177
(2016) to about 199 (2017). These include Mogujie, Ctrip, Didi Chuxing, Xiaomi, Ant Financial
and Bestpay.

ZhongAn’s ultimate goal is to be able to bypass the booster platforms and to deal with the
customer directly. This is very similar to the strategy of online travel sites such as Expedia and
Booking.com, which lure travelers to their sites or apps directly, versus getting them through
the search engines of Google or Bing, thereby avoiding the hefty search fees of these sites.
ZhongAn’s expansion strategy is shown in Figure 2.11

9
Credit Suisse Analyst Report, November 2017.
10
Different by the terms of the insurance, the scope and the price
11
ZhongAn Global Offering, Sept 18 2017.

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 Figure 2: The evolution of ZhongAn's ecosystem

One of their stand-alone products offered directly to customers is its “Generic Version of
Shipping Return Policy”, launched in October 2016. During a monthly policy period, customers
with this policy are entitled to three kilograms of shipping returns purchased across any e-
commerce platform for a fee of RMB 9.9.

“Fast insurance”

Just as Zara and H&M pioneered fast fashion, ZhongAn has innovated “fast insurance”. The
time to develop a new product is typically less than a month, about 5 times faster than a
traditional insurance company. It can be as short as a couple of days when it concerns an
integration of existing products into the systems of partners.

The product development and deployment across the ecosystems is driven by a staff that
consists of engineers and technicians (50%) and those with a finance background (25%). The
R&D spending of approximately 6% of premiums written12 is unheard of in the industry.

12
This is RMB 214 million in 2016.

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Product development and deployment is supported by a cloud based infrastructure that is able
to handle massive amounts of transactions simultaneously. For example, during a popular
festival week in 2016 (Double 11 Shopping Festival13), it processed over 200 million policies in
one week, with peak processing volume reaching about 13000 policies per second.

How successful is ZhongAn?

The premium growth of the company has been nothing but spectacular. Premiums have risen
from RMB 794 million (2014), to RMB 3408 million (2016) to RMB 5957 million by the end of
2017. It has been growing in many insurance segments, including insurance for consumer
electronics, consumer finance, travel, heath and auto. This is in spite of intense competition
from rival online insurance startups such as TH.cn, Yi An and An Xin, and other insurance
companies, including its founding partner Tencent.

Its fast growth has come at a hefty price. Its expense ratio14 stood at 35.2% in 2014 and
jumped to about 65% in 2016, and 76.5% by June 2017. For a company like Allianz, the global
expense ratio in non-life insurance hovered around 28% in 2016. Admiral, the leading low cost
nonlife insurance company in the UK, reported an expense ratio of 16% in 2016 (15% lower
than the UK average).

The expenses of ZhongAn include the very hefty fees to its founding partners (“consulting fees
and service charges”), which stood at about 30% of gross premiums written in 2016. These fees
are for delivered services (e.g. insurance competence from Ping An), and to compensate the
founding partners for the traffic generated by their websites. If ZhongAn could eliminate these
charges, its expense ratio would fall to about 35%, much closer to Allianz's expense ratio.15

ZhongAn’s loss ratio,16 which stood at 73.4% in 2014, had dropped to 42% in 2016, and stood at
52.8% in June 2017. This compares to Allianz’ loss ratio in nonlife of about 65% and Admiral's
loss ratio of 77%. The focus on pocket insurance likely contributes to this lower loss ratio.
However, the combined expense and loss ratio still stood at 107% in 2016, and had gone up to
129.3% by June 2017, indicating significant losses as ZhongAn pursues its expansion.

Comparisons of expense and loss ratios are complicated because companies may not be in the
same insurance lines and countries, and may sell insurance at different prices, affecting
premiums and thus the cost ratios that are expressed as a percentage of premiums. However,
to the extent that ZhongAn can reduce its expense ratio, it has a very good chance of becoming
more profitable than traditional insurance companies, similar perhaps to Expedia, Booking.com,
Google and other major internet giants. It is pursuing this direction by diversifying away from

13
A national bachelor party frenzy that takes place on November 11 (Double 11)
14
Ratio of expenses (administration, sales and distribution, etc.) to gross premiums written
15
Chinese companies cannot pay out dividends to shareholders as long as they lose money. It is possible that the
fees to the founding shareholders have a dividend component.
16
Ratio of claims paid to policy holders over gross premiums written

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the core ecosystems, by benefiting from economies of scale as it grows, and by expanding into
insurance lines with lower expense ratios such as health.

Impact on the insurance industry

As ZhongAn gains more traction in the pocket insurance market and diversifies across insurance
product lines and ecosystems, it is to be expected that it will continue to innovate and create
new products in the large segments of the insurance industry. The car insurance market is one
such segment. ZhongAn has already pioneered a platform integrating some car manufacturers,
online dealers, after sales services, ride hailing services, car financing, and of course car
insurance. The customer can find personalized “scenario based” offers, including usage-based
insurance.17 The company is using machine learning and analytics tools to improve the
customer shopping experience, and customers are responding. ZhongAn’s car insurance
premiums in January 2018 were impressive, amounting to roughly 70% of the premiums earned
for all 12 months of 2017.18

ZhongAn is still a very small player in the land of the insurance giants. But so was Expedia and
Booking.com ten years ago compared to the travel giants American Express, TUI, Carlson
Wagonlit, Thomas Cook, etc. ZhongAn combines a number of key strengths: 1) a technological
prowess based on an understanding of data analytics, artificial intelligence, dynamic pricing and
cloud based computing; 2) an understanding of the customer’s digital purchase decision, across
many markets, 3) insights into critical mass dynamics and strategy, and 4) a CEO Jin Chen on a
mission to “redefine insurance.”

When innovation or disruption and critical mass dynamics are united, the pace of change in the
industry can become exponential, as we have seen, for example, in the travel and media
industries. Of course, many high-flying companies do not make it because of management
mistakes, a business model that is not robust, or changing market conditions. The roller coaster
success and failure of peer-to-peer lender LendingClub in the US is a visible reminder.19 Their
major dependence for funding on institutional investors proved a major handicap when these
investors left LendingClub, causing a collapse in its stock price and outlook. Similarly, if ZhongAn
fails to reduce its dependence on one or more of the founding partners, its spectacular success
could be threatened in a similar way if one or more partners decide to severe ties or compete
directly with them.

17
http://www.scmp.com/business/companies/article/2131948/big-data-and-ai-future-car-insurance-according-
chinas-first
18
http://www.scmp.com/business/companies/article/2131449/zhongan-generates-70pc-2017-car-insurance-
premiums-just-one-month
19
https://www.forbes.com/sites/chrismyers/2017/02/07/3-reasons-why-fintech-is-failing/#195c5f2e7229

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However, the business model of ZhongAn has many elements that are sustainable and
replicable in other geographic markets. Germany's massUp is seeking to develop a similar
model in the German market.20

ZhongAn would not be where it is without the massive power and support of Alibaba, Tencent
and Ping An. However, other combinations of partner companies could also have spawned a
new generation digital company. Insurance incumbents today need to think beyond the
comfort zone of their “online offer” and analyze how they can be part of the redefinition of the
insurance industry. Digital efficiency upgrades are obvious requirements. Growth innovation
strategies are tougher, but possible, and often lead to a much bigger payoff.

20
Willis Towers Watson – CB Insights, Quarterly Insurtech briefing, January 2018

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