China’s Life Insurance Industry: Part 3February 2023
As stated in Part 2 of this article, the transformation and upgrading of the life insurance business is a difficult process. A reshuffling of the industry is inevitable, but no matter how difficult it is, there is a consensus among industry professionals that the trend of returning to the roots of insurance is irreversible. In the process of complex differentiation, it is the only way for life insurance companies to continue firmly along the road of high-quality development.
In this third and last part of the article series, we will discuss the three key elements of transitioning the life insurance business back to profitability: shareholders, strategy and efficiency.
Return to Capital Efficiency
In the past, the life insurance industry promoted the law of profitability in eight years. This actually reflects the misunderstanding of the industry’s business model because interest gained in either eight years or eight minutes can produce extreme situations.
The first scenario is when inexperienced shareholders meet management that is good at storytelling. Although the company has losses for the first few years, management convinces shareholders that “the eight-year period has not been reached, so the real profit period has not yet arrived.” This leads to losses year after year until the eight years are up; by this time, the company has only empty chairs at empty tables and capital deficiency.
Another situation involves impatient shareholders who can’t or won’t wait eight years to achieve huge assets or profitability goals. They force management to adopt another radical model, resulting in industry chaos. Insurance policies should not be purely financial tools, so life insurance needs shareholders who are patient, responsible and willing to engage in the industry over the long term to return potential investment players to capital efficiency.
Maintain a Reasonable Leverage Ratio
Under the regulatory rules of C-ROSS II, actual capital is identified more and more prudently, the solvency pressure faced by insurance companies is relatively greater, and the core solvency adequacy ratio of some companies has declined. Therefore, compared to the regulation of C-ROSS I, the capital constraint on the operating leverage of insurance companies is greater. In fact, most companies, including those with excellent capital structures under C-ROSS I, face the new issue of how to operate efficiently under the C-ROSS II rules. To maintain a stable solvency ratio, insurance companies should maintain a reasonable leverage ratio.
Rationally Judge Market Opportunities
The chaos and difficulties in the transformation of the insurance industry also contain unlimited opportunities. If we can deal with the difficulties and adjust the cognitive bias correctly, it is also a period of opportunity for potential shareholders. Because the insurance market has just entered a cooling off period, the same can be said of insurance license applications, with prices gradually returning to reasonable levels and market expectations for insurance profitability becoming clearer and more rational. Therefore, whether you are looking for a person, a license or a model, now is the best time to build a 100-year life insurance career.
The key to finding your strength in strategy lies in the degree of self-assessment you have done. Part 2 of this article provided a detailed review of the three major misunderstandings faced by companies trying to transform and upgrade, and there are two aspects to seizing strategic opportunities.
Analyze the Underlying Resource Endowment
Overall, many local small and medium-sized banks are better developed than local small and medium-sized insurers, and this is because local banks work hard to develop local markets and focus on serving local development. Most small and medium-sized insurers set very ambitious goals when they are founded, hoping to cover all of China or even reach overseas markets, and few of them are rooted only in local cities. However, overseas markets, such as the United States and the United Kingdom, are able to accommodate a huge number of local small and medium-sized insurers. Moreover, many insurance companies greatly ignore the advantages of “locality.” After all, local governments and local financial enterprises are very willing to support the development of local insurers, so in theory, customer resources and business channels are sufficient to support the growth of these insurers. Therefore, if local insurers are willing to plow deeply into the local market, there are many dividends to be had. The methodology of success is simple, but success is never achieved overnight, and the road to success varies from company to company. The key lies in patiently adjusting measures to local conditions. Focusing on the present, learning from local small and medium-sized banks, making good use of local resources, serving regional enterprises and customers, clearing target and segmenting markets according to available resources, and actively building industry barriers are the key factors for success.
Put the Customer First
Adhering to a long-term vision, we must abandon the traditional model of single-channel strategy development and build a customer-centric, multichannel business model. Take worksite marketing as an example. Although many insurance companies started to discuss worksite marketing as early as 2005, until now no one has been able to master the concept. The reason is that no one has thoroughly understood the concept of this model. Three models bring three different results:
- First is the traditional referral model, where the group insurance business manager brings in well-trained individual insurance agents. Customers are brought to the company through group insurance relationship resources and introduced to the individual agents. At this time, there is a great sense of unfamiliarity between the customer and the agent, and they have little interaction. The result is predictable—only a few business cases are finally negotiated.
- Second is a typical group buying model of product introduction and sales presentation. Internal staff with B-side customers are trained to exploit resources, build a platform and develop individual insurance business. The group account manager is trained to supervise people who issue individual policies. At the same time, the company can achieve short-term growth through low-cost critical illness insurance or other resources (fast flow). Those who have participated in individual insurance know this fast-flow model is not a long-term solution, and when the flow dries up, the company will enter a stagnant period and eventually fall into trouble. Real elite marketers do not rely on training alone; a large part of their success comes down to talent. Providing customer resources and training can’t turn ordinary people into sales masters.
- Third is the customer-centric model, which allows trained, elite individual insurance marketers to operate group insurance directly, with the main focus on operating group insurance and bringing in individual insurance business through word of mouth. The two are integrated, with group insurance at the beginning and individual insurance at the end, forming a positive cycle.
Thus, we should continue to adhere to our original intention to provide customers with better products and services. We need to open various channels to achieve integrated operations and make meeting customer needs and protecting customer interests our first priority.
After the era of “getting bigger before getting stronger,” insurance companies should return to the eternal theme of operation for any type of industry: maximizing cost effectiveness. Specifically, this theme is divided into three aspects: customer cost, channel cost and operation cost to improve overall efficiency and return to effective operations.
- Customer cost. In the industry’s long-term and low-growth “stock era,” declines in customer loyalty, high customer-acquisition costs, lack of risk control capabilities and other challenges are increasingly prominent, but controlling customer costs is the most difficult. However, under China’s high-intensity regulatory policy, customer costs and interest spread risk can still be controlled to a certain extent.
- Channel costs. Channel costs are relatively easy to control, and we should prevent the expansion of channels and avoid large-scale arbitrage in the name of increasing staff. This is especially true for new companies; otherwise it will lead to a serious surplus in supply. For example, Singapore’s high-income population of 5 million can support only 16 life insurance companies. Meanwhile, the urban population of Chengdu, which has a relatively low income, is about 8 million to 9 million, but there are at least 50 life insurance companies, 30 of which are operating in the agent channel. This is a serious oversupply and leads to high channel costs.
- Operating costs. As mentioned earlier, a current reason for inefficiency is the high input of internal and external staff costs, and the 1 million internal staff, 4.5 million agents and 45,000 agencies supported by the industry actually have very limited output. Therefore, we should start from the scale of the whole industry to reduce the hierarchy of agencies, the cost of redundancy and the cost of backup and other support departments to achieve efficient operation of automation, technology, outsourcing and post-optimization.
With the empowerment of clear top-level design and strategic planning, breakthroughs in big-picture thinking and a solid infrastructure foundation, the Chinese life insurance industry will come through the throes of transition and resonate with economic and social development in ensuring people’s livelihood and joining national strategies in the future, doing fine customer service work and creating the industry’s next golden age.
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.