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ZhongAn - First Insure-Tech To Go Public in Asia

In 2013, ZhongAn was founded through the collaboration of Chinese internet giants: Alibaba, Tencent and Ping An. It became China's first truly digital insurer that sells all its insurance products online as well as handling claims.

Fast forward to 2017, Zhong is the fist technology-driven insurer to go public. It had fortunate start on the first day of trading, with the share price fetching HKD 70.50 before settling for HKD 65.20 by the end of the day.
ZhongAn received an overwhelming interest from retail investors, and had a good support from institutional investors too, with Softbank reportedly buying close to 5% of the company.

ZhongAn is the only company holding a chinese internet insurance license. It has been priced as a technology company and was loss-making in 2017. However, from the heated interest in the IPO share subscription, one could tell that the degree of confidence in ZhongAn was present.

This article offers a short overview. Let's take a look at ZhongAn's

  1. Business Model
  2. Risks
  3. Possible Strategy

Business Model

ZhongAn relies on established ecosystem partners' platforms to embed their insurance products and solutions. The interesting part is that the product is blended within another consumption product. An example of an ecosystem partner:

As any insurance company, ZhongAn requires customer data. The latter is originated from the ecosystem partners, which helped ZhongAn to develop tailor-made product for the consumers of a particular service on a given ecosystem partner's platform.
One product is illustrated below:
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By first working with a leading ecosystem partner, ZhongAn leverages on the experience to extend its services and products to more ecosystem partners. They also sell certain insurance products through insurance agents and their proprietary platform.

ZhongAn makes its money from Gross Written Premium (GWP) which is atypical of an insurance company. From 2014 to 2016, the net premium earned grew from RMB 0.7 billion to RMB 3.2 billion (or by ~353%)

Their first product has been linked to Alibaba and its subsidaries being a shipping return policy focused on reimbursing merchants for the shipping costs on returned products. Consumers (or end-buyers are also offered a shipping return policy).

This was said to be particularly helpful to enable faster transaction while alleviating end-buyers concerned from buying online.

There are more than 240 products offered spread across primarily lifestyle consumption, health, accident, liability, credit, auto among others.

Inflection points by Alex Rampell of Andreessen Horowitz is an interesting read which applies to ZhongAn and similar fintech company. Each of ZhongAn's product is embedded within a consumer's natural touchpoint within, say, e-commerce. The said product becomes inevitable, almost similar to a complementary good, to the customer who can also adjust his/her preference to risk when completing a core action one a given ecosystem partner's platform. Most importantly, the touchpoint must be from a trgger event, such as a holiday trip (e.g. flight insurance) or an important purchase (e.g. house insurance)

Risks

Although there are currently over 180 ecosystem partners, ZhongAn has an over-reliance on its top 5 ecosystem partners, which collectively contributed close to 68% of its 2016 GWP.

The key risk is what if Alibaba's Ant Financial and Tencent are granted an internet insurance license. ZhongAn would found itself competing against its initial backers, and subject to market cannibalization.

The company is also incurring annual lossess and anticipate more losses as it grows, and expands its products and services. Moreover, tackling growth will require substantial investment to continuously capture more market share, leading to more losses in the short-term. Are investors willing to wait?

ZhongAn will face tougher competition as more licenses are approved in China. Beyond market and competitor risks, the company will need to innovate and retain employees for the long-term. Similarly, products and services will have to demonstrate an edge over those from competitors.

Lastly, successful growth in recent years to date are not subject to similar successes in the future. As the pioneer of internet insurance in China, will ZhongAn be able to accelerate its growth and path to profitability?

Possible Strategy

It is said that ZhongAn's proprietary technology can process 13,000 policies per second, and with still only 1% of the Chinese insurance market covered, there is ample room for growth.

While we also have to consider multiple risk factors (such as some mentioned previously), ZhongAn could adopt a new strategy to grow better in the next few years leveraging on its access to public market capital, and its pioneer branding in the industry.

We believe, in a hypothetical setting, that ZhongAn should aim for new market entry outside of China as soon as possible before its backers decide to do so. (Key Assumption: Ant Financial and the likes are not yet doing so). It should not wait for its business in China to reach maturity before looking outside. This in fact would be a contrarian strategy to what BAT have achieved.

Conclusion

A lot being said about financial technologies and China being a leader in this industry is seemingly believe to be true. If ZhongAn were to expand further outside of China, it would face new set of challenges, but this could simultaneously be an opportunity to leverage on its technology to quicken market entry.

There are many niches yet to be explored, and with the heavy data collection by ZhongAn, the opportunities to develop customized products are just limitless.


Read the Oliver Wyman Report commissioned by ZhongAn for more insights on Chinese insure-tech industry.