The Society of Actuaries (SOA) held a Risk Management Seminar in Xi’an on Sept. 5, 2019. During the seminar, guest presenters expressed their opinions and had a wonderful discussion about risk management and the future of China’s insurance industry. Here is a summary of the major points, which represent only the personal opinions of the guest presenters.
- Lynn Lin, FSA, FCAA, chief risk officer, AIA Co., China
- Wang Qing, FSA, chief actuary, Agricultural Bank Life Insurance Co. Ltd.
- Zhao Yuping, FSA, chief actuary and chief risk officer, Sunshine Life Insurance Co. Ltd.
- Anthony Wu, FSA, president assistant and chief risk officer, AXA Tianping P & C Insurance Co. Ltd.
- Karen Tan, FIA, chief risk officer, Reinsurance Asia, and managing director of Life & Health Reinsurance Risk Management, Swiss Re
Lynn Lin: In recent years, China’s insurance industry has made great progress in risk management. All presenters here are senior risk management professionals and have witnessed or participated in the development of risk management in China’s insurance industry. Please share your valuable insights and experiences with us today.
Mr. Wang, as a senior chief actuary and a former chief risk officer in our industry, could you please share your general view on risk management in China’s insurance industry?
Wang Qing: Although risk management in China’s insurance industry started relatively late, regulators and the C-suite have attached great importance to risk management work. Regulators constantly are standardizing and improving regulatory systems, such as solvency and asset-liability management. They have advanced detailed requirements for system integrity and compliance effectiveness and have established a comprehensive reporting system, all of which has played an important role in promoting risk management effectiveness in the industry. However, I think there is still room for improvement in risk management across the entire industry, where further study and the accumulation of experience are needed.
At present, most companies only calculate risk exposure and duration gap. However, in China, due to the lack of relevant financial instruments, among other reasons, most insurance companies have not yet taken actions like risk hedging. Moreover, because China has fewer long-term assets and asset duration is shorter than liability duration in the industry, this results in relatively high reinvestment risk. Judging from recent treasury bond rate trends, there is a certain downward trend. I suggest that insurance companies do more sensitivity tests to determine the impact of falling interest rates on solvency and assets and liabilities.
Lynn Lin: Thank you, Mr. Wang. Mr. Wang just mentioned the interest rate risk that life insurance companies face. To prevent interest rate risk, we need to make efforts on both the asset and the liability sides. There is a question on the liability side that I would like to ask Mr. Zhao about: How, from the perspective of product design and sales management, can we understand emerging refined insurance consumption demands, changes in future sales teams, and the impact from new technologies and new platforms?
Zhao Yuping: When customers come from different channels and have different characteristics, they also will have different preferences and different needs. Today’s customers are younger and younger, and they also are more professional. Their insurance requirements and consumption habits have changed considerably compared with what they were a few years ago. Furthermore, customers increasingly are concerned about more generalized insurance products, such as disease prevention, health management, pensions and the like. Insurance companies need to make changes to adapt to these transformations.
From a channel model perspective, the separation between different sales channels needs to be eliminated so we can contact customers from every direction to sell life insurance products. From an organizational perspective, future organizational structures will tend to be flatter, and agents will be more specialized. Moreover, insurance companies can attract customers and enhance customer loyalty by improving their interactions with customers and adopting distinctive, differential strategies. Furthermore, companies can better understand customers’ needs through big data. At present, internet platforms have had a great impact on traditional insurance. Not only can internet platforms be positioned as sales platforms, but they also can be used to consolidate data to make more customized products and more accurately identify the risks of different groups.
Lynn Lin: Thank you, Mr. Zhao. As Mr. Zhao said, the development of internet insurance will greatly impact the traditional life insurance industry. I would like to invite Mr. Wu to share the challenges and opportunities that the development of internet insurance will bring to traditional insurance companies, and how property and casualty insurance companies can compete with life and health insurance companies in the health insurance field.
Anthony Wu: In terms of challenges, the internet insurance market has now entered a fiercely competitive, almost cutthroat, stage. Internet insurance companies have rather high technology requirements. Only internet insurance companies with large business scales and long-term continuous operations can spread those fixed costs, convert the continuous technology investments into profits and, eventually, convert losses into profits. Information security, network security and protecting customers’ personal data are also challenges for internet insurance companies.
In terms of opportunities, internet insurance can reduce the transaction costs of insurance sales. Digital technology enables internet insurance companies to better understand customers’ information, improve risk management capabilities, achieve more accurate pricing, make sales fast and convenient, and deepen consumers’ willingness to buy insurance.
For property insurance companies, because of the fierce competition in the auto insurance market, they need to sell short-term health insurance products to survive. This is a great challenge, but it also brings opportunities to them. Selling short-term health insurance products can optimize the business structure of property insurance companies and provide customers with comprehensive products. When promoting short-term health insurance products, they also can make use of the large number of customer resources accumulated while selling property insurance products. Property insurance companies also can refine the market, refine the risks and provide customized products for specific customers.
Lynn Lin: Thank you, Mr. Wu. In addition to the development of internet insurance, changes in international regulatory standards also have had a profound impact on the insurance industry. I would like to invite Ms. Tan to share her views on global regulatory changes, different market characteristics and interest rate trends from an international perspective.
Karen Tan: When Europe started to get hit by declining interest rates, the companies with better-managed portfolios started to decrease their interest rate guarantees, from high guaranteed interest rates to low guaranteed interest rates—and moved from traditional life insurance to investment-linked insurance—to have consumers bear more of the investment risks. China’s insurance industry has enjoyed high interest rate levels for the past few years; however, from a macro-economy perspective, I personally think that China’s interest rates are likely to continue to decline.
Insurance companies should take more measures when dealing with falling interest rates. Currently, insurance products related to investment savings with high guaranteed interest rates have begun to be replaced by guaranteed insurance products. In a low interest rate environment, we need to make sure that the balance sheets can cope with large short-term fluctuations that could occur at any time, so I suggest that insurance companies make stochastic or sensitivity tests on financial market variables.
I also have observed an increase in conduct regulation focusing on sales behavior toward consumers. Insurance companies understand risks and products better than consumers, so we need to provide consumers with a deeper understanding of the risks and products. Some regulators have begun to require insurance companies to take timely corrective action and to compensate policyholders when they have been treated unfairly.
Lynn Lin: Thank you, Ms. Tan. Finally, I would like to invite all of our guests to share their views on how insurance companies can meet InsurTech challenges, and how to formulate appropriate development strategies to cope with the various risks we are facing currently.
Wang Qing: I have very little contact with InsurTech, so I don’t have much to share. I would like to add some ideas about interest rate risk. If China’s interest rates continue to fall, insurance companies may increase the proportion of nonstandard debt assets to obtain higher investment income, so they may face higher investment credit risk in the future. Moreover, falling interest rates also will exacerbate the risk of duration mismatch in the future.
Zhao Yuping: As for InsurTech, if the InsurTech industry knows more about insurance risks than insurance companies do, then it may be a big threat to the traditional insurance industry. However, if it is nothing more than the commercialization of data flow or the application of other technologies, it may only be technical support to the traditional insurance industry, which would have positive effects.
In addition, most of the annuities and critical illness insurance products that many insurance companies sell are traditional insurance products. If we consider designing more participating insurance products in the future, then we can effectively reduce the long-term interest rate risk, which requires the industry to better manage customer’s dividend expectations.
Thirdly, at present, the long-term critical illness risk concentration in China’s market is very high. In other countries, especially in the United States, most types of insurance coverage products are one-year medical insurance, disability income insurance and the like. In the future, we can consider using medical insurance or disability insurance to gradually replace long-term critical illness insurance—to provide better protection to customers and effectively reduce the long-term critical illness incidence risk in the industry.
Anthony Wu: I don’t think InsurTech is simply the introduction of internet technology into the insurance sales model. I think it’s more about the application of technologies. I think the insurance industry should develop a long-term, digital strategy for digital technology. We should combine digitalization with marketing and establish digitalized channels centered on the needs of customers. For example, we can use InsurTech to capture the unfulfilled risks and requirements of consumers to design customized products. We can use InsurTech to further understand customers’ credit risks and behavior patterns to strengthen the risk management ability of insurance companies and price more accurately. We also can use InsurTech to analyze consumers’ consumption preferences and consumption tendencies to develop marketing policies.
Karen Tan: InsurTech has been widely used in sales channels and will be promoted on a larger scale. When using FinTech for analysis, the key focus should include data ethics and how personal data is used. InsurTech has brought many exciting revolutions to the industry, but I think the insurance industry needs to respect consumers and use these tools carefully.