Part 1 of this article provided background information about how the life insurance industry in China has evolved and the need to develop new ways of doing business. This second part details the hurdles to be overcome as the industry works toward a better future.
Many companies have started the transformation journey to return to profitability, but unfortunately the transformations have not hit the mark in most cases, with uncoordinated action plans and poor results. The root of the problem actually lies in the misunderstanding of what this transformation requires, as evidenced by a disconnect between strategy and tactics, a loss of focus between channels and customers, and an imbalance between investment and efficiency.
Tactical Diligence Versus Strategic Laziness
Everyone is talking about transformation, and many enterprises are supporting strategic transformation. But most of them are actually trapped in the tactical level of change—such as multichannel strategy, superior growth and cultivation of agent strategy, training system and other reform programs—which does not bring about real transformation. The common feature of these efforts is a lack of higher-level, big-picture thinking to consider the future development of enterprises and industries, making it easy to fall into the blind pursuit of tactical diligence without an effective strategy underpinning it. If you want to really think about the future of a company or industry from a strategic point of view, then you must have an epiphany of thought that touches the soul, and any of the points mentioned here can be effective.
Directions of Analysis
First of all, the analysis of different elements is crucial to determine direction. Only when our direction is right can we capture the possibility of a promising future. The three important directions of analysis we will discuss are the economy, the life insurance industry and consumer demographics.
- Economic analysis. This is simply an assessment of the future international and domestic monetary, fiscal and other related policies, as well as the direction of the overall economy. This is not limited to what the focus of the economy will be in the future and whether Vision 2035 will be realized; more importantly, it is a prediction of the overall future growth rate, which will affect the level of interest rates that the country can potentially offer and afford (i.e., the prediction of the level of cost of capital). Because interest rates are a key factor in the life insurance industry’s business, they are in a sense the core variable that can affect the industry’s future direction and level of growth.
- Industry analysis. Currently, the process experienced and perceived by both actuaries and those in the life insurance industry is the process that a developing life insurance industry must go through. Everyone is pleased to talk about the history of the industry from 0–1 and 1–100, but there are currently no words to talk about the development of 100–n, as this is something that will take generations to accomplish. Therefore, if we analyze the life insurance industry properly as a whole, then the perspective and thinking on the operation will change accordingly.
- Insurance consumer population analysis. In general, actuaries deal with technical-level outputs, such as birth rates, aging and demographic structure transformation, studying a lot about the total population but relatively little about the insurance consumer population. Due to the complexity and intersectionality of insurance and its combination of social security and finance characteristics, companies have different definitions of the insurance consumer population. For example, the health insurance consumer population represented by critical illness or millionaire medical is not at all the same as the wealth management consumer population. Therefore, in the future, it will be important for the development of the industry and individual insurers to exert more effort in basic research areas, especially the insurance consumer demographic.
The second aspect of understanding what is necessary for systemic change is self-awareness (as opposed to awareness of the external environment), which is a key point that every company needs to consider when conducting strategic planning. Since ancient times, it has been said that those most closely involved in a situation cannot see it as clearly as those on the outside. Most people take delight in talking about macro, industry and others, but once it comes to self-analysis and self-cognition, they will try first to make their own mistakes sound less serious and reduce them to nothing. They cover up problems or poor performance and jump directly to talking about strategy, which is not desirable. Self-assessment can be done from three perspectives: industry status, shareholder conditions and accumulation of experience.
- Industry status. The correct understanding of your own company’s status in the industry is an essential point. Just as different social systems and different industries have different base points for salary, it is important to set suitable benchmarks for yourself based on your own market share, sustained performance and stability of business structure.
- Shareholder conditions. Shareholder conditions are a core element in self-analysis. There is often a gap between the ideal and reality, and reaching the height of your company’s power in the existing limited environment and conditions already indicates success. However, many companies that advocate “strategic transformation” are too idealistic and imagine heights that may be impossible to reach in the future. Therefore, over time, problems are constantly exposed and gaps that are difficult to fill open up. Understanding shareholder conditions can help prevent these challenges.
- Accumulation of experience. Behind every successful company lies the power of experience, which is not achieved overnight. Each time an enterprise goes through ups and down and eventually survives, it builds the strength of its foundation. This sounds like a simple truth, but you must observe your company closely—especially when it suffers a failure—because how you recover from failures shows the state of your foundation. Companies that have strong survivability are those with teams that have gained experience over the past 30 years. In fact, the external environment over the past two years has not been bad, but why do the situations of various companies and their teams vary so greatly? For example, despite the economic downturn in recent years, demand for wealth management has been rising, with residential deposits increasing by $10 trillion in the first half of 2022 alone, according to the People’s Bank of China. But the only ones who can realize the $10 trillion dividends are the best companies and the great talents in the best teams because the opportunities are available to those who are prepared.
Once we have a deep self-understanding, we are calmly able to analyze the deep model of cognitive misconceptions. In the past two years, most companies have not been dealing with a self-revolutionary deep cognitive transformation, but rather with what could be called “continual hang-in.” For example, the perception of agent numbers is very controversial. The market reality has long told us that the number of nominal agents will not exceed 3 million in the future, excluding the low-quality agents under the huge-crowd strategy. In fact, only 1 million are productive agents, and the number of full-time agents who rely on this work for survival is only about 300,000 to 400,000. This means the number of active marketers in the life insurance industry has shifted from a 1% model to a 1‰ model.
Here is a simple analysis of the concept of 1% and 1‰. At present, China’s urban population is around 800 million or 900 million, and the number of active agents has reached 8 million to 9 million, which is 1% of the urban population. The overall situation is one of supply promoting demand. However, observing the more developed European and North American markets during the same period, the proportion of urban population is high and the noninsurance consumer population relatively small due to mature industrial development. The number of agents in the United States fluctuates between 300,000 and 390,000, which is exactly 1% of 330 million people. Most of these agents work full time and enjoy a higher level of income and industry status than their Chinese counterparts. Given this comparison, if we look at the current Chinese middle-class market, the number of agents is roughly 300,000 to 400,000 based on the size of the new middle-class population of 300 to 400 million. To a certain extent, Chinese insurance companies have now reached the 1‰ model. But nominally they are not yet recognized by everyone, or due to various structural factors and face-saving project factors, the industry still needs to maintain the number of people at around 3 million to 4 million, which is a point that must be noted at the cognitive level of the deep model.
A Shift in Channel Strategy Versus a Lack of Customer Strategy
The current transformation results of most companies focus on channel strategy, as evidenced by the trend of using personal agency and banking and postal channels. The life insurance industry has been replacing customer strategy with channel strategy, treating the channel as the first “customer” and the real customer as the second customer.
Figure 1: Life Insurance Channel Popularity
Source: China Insurance Yearbook, Huachuang Securities Research
“Customer-centric” is a common term, and it is obvious from analyzing mature companies that operate stably in mature overseas markets that these companies pay close attention to the market and customer segments, which are at the core of any industry. However, due to the special nature of the Chinese insurance and finance industry and its rapid development, many companies have enjoyed the dividends of the full range of channels, so there is still a mindset that channels are the driving force of all results. This is not to say that the channel is unimportant, but the rough and expansionary competition stage has passed; the next is the era of customer service and a focus on the customer, which should serve customers well along with the powerful channel. Building a superior customer service structure is a watershed for future business growth and can even influence the development of the overall industry.
Why will it be so important? Future competition in the industry will be between insurers that study the customer well and those that ignore the customer, following two completely different schools of thought. The difference between these two schools may be even greater than that between the Qi and Sword factions within the Huashan school of martial arts and may eventually determine the fate of companies or even the industry.
If you look at mature companies in mature markets, you will find that they generally attach great importance to marketing and customer service, and like the fast-moving consumer goods industry (FMCG) and retail industries, they invest heavily in them. But we have not fully reached this stage because, in addition to the late stage of channel development, there may still be room for recognition that customer service is more important than any channel. We have to realize that although the channel is very important, we can’t denigrate or ignore marketing and the customer. We can’t stay mired in one-way thinking. The times of relying on a fixed move to solve a problem are gone, which means even if a company has an experienced work force, a lack of customer service and in-depth research into customer needs may result in failure.
Product and Cost Investment Versus the Improvement of Operating Efficiency
In the past two years, many companies’ balanced budgets began to reappear with cost overruns. Although the actual problem is that the cost imbalance is caused by a decline in internal and external operating efficiency, many companies are thinking “backward”: they believe efficiency is declining because they are not spending enough.
At the product level, facing a lack of main products, poor sales performance and decreasing value, many companies are taking measures to increase investment expenses to solve the problem. But a product strategy that is too aggressive can bring long-term interest rate risk for consumers, sacrificing long-term interests to obtain short-term premium growth. Some insurance companies have launched high interest rate products to attract more customers and collect more premiums, but the China Insurance Regulatory Commission has a regulatory red line to the interest-rate ceiling, and once a company reaches this red line, the punishment can be harsh. At the expense level, in addition to internal incentives and staff inputs, bank agency fees have increased, and external expenses have been rising due to serious industry competition. The subsequent investment cost is even higher and reflected not only in increased individual salaries or bonuses, but more in the expansion of numerous branches and departments. Declining sales make it politically correct for agents and other people within the industry to complain loudly about the lack of competitive products, and this contributes to a considerable amount of unnecessary investment in noninsurance services. Many insurers blindly enter fields with which they are not familiar and for which they have no aptitude. It is impossible to tell how much insurance can be promoted, but the poor operation of nonprincipal business can be expected. This greatly hinders any improvement in efficiency, which in turn leads the enterprise into a state of fee differential loss for a long time. Therefore, we should be able to grasp the essence of the problem from the phenomena that result: what really needs to be improved is operating efficiency, and it is mainly reflected in the following four aspects:
- Internal staff efficiency. Compared with the current level of Chinese economic development and the stage of life insurance development, the efficiency of China’s life insurance industry has a lot of room for improvement. According to data from the China Banking and Insurance Regulatory Commission published in the Insurance Yearbook, the total assets of the insurance industry are about $26 trillion at present, the number of internal staff is 1 million and the per capita assets are about $26 million. In contrast, the total assets of the banking industry are between $340 trillion and $360 trillion, which is about 15 times those of the insurance industry, but the number of bank employees is about 4 million and includes a large number of expatriate bankers. Even so, per capita assets still reach about $85 million. Taking interest rate spread as the main source of profit, the banking industry earns $85 million in assets per capita, while the insurance industry earns $26 million in assets to support the 1 million internal staff. Although such a comparison is not comprehensive, the difference in efficiency can be seen clearly.
- External staff efficiency. In the case of agents, the new policy premium industry produced about $260 billion in 2021, but the number of agents is about 4.5 million, with a per capita new policy production capacity of less than $60,000. Most agents do not treat this career as a full-time job, so their efficiency is very low. Strictly speaking, the current per capita new policy productivity rate is far below the minimum baseline of the insurance industry, let alone the ideal state we are looking for.
- Infrastructure efficiency. Insurance industry total assets are $26 trillion, the number of institutions is about 45,000 and the assets per branch are about $570 million. Banking industry total assets are $340 trillion, the number of operating branches is 160,000 and the assets per branch are $2.1 billion, which is about four times those of the insurance industry. Therefore, whether due to the inefficiency of its structure, internal staff or external staff, the insurance industry is far behind the other financial industries.
- Capital efficiency. Because of the various internal inefficiencies, capital efficiency cannot be improved. Even though the leverage ratio of the insurance industry has been boosted by C-ROSS II, it is generally lower than that of banks, and the return on equity (ROE) is more volatile. With the changes in industry capital and products and the difficult period of transformation, the ROE may be even lower in the future, which means the insurance industry is becoming less and less attractive to capital—a fatal problem. The growth of the insurance industry relies not only on the huge demand for insurance and the joint efforts of people working in the industry, but also, and more importantly, on the support of capital. Without this support, it is impossible to promote the growth and expansion of the industry. The rapid development of China’s insurance industry has enjoyed the dividends of domestic and foreign capital and gained a large number of employment and high-salary opportunities. But the expectations of fast-paced growth and the approach of storytelling and dream-making has failed in the past 30 years. If the value of insurance is no longer there, then all the capital dividends will naturally disappear as well.
Going back to the discussion of life insurance business returning to profitability, the industry has experienced a golden age of rapid development over the past three decades, but it is now experiencing chaotic and confusing predicaments. How can we break through to the next point of strength to return to the industry’s original mission? What kind of attitude should we take to address the future and recreate the value of life insurance business? Part 3 of this article will address these issues.
Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries or the respective authors’ employers.
Copyright © 2023 by the Society of Actuaries, Schaumburg, Illinois.