This post, which describes recent news coming from Insurtech and Digital Insurance in China, was written by Zarc Gin from Insurview from within China.

Fanhua Inc. has held a press conference along with Cheche Tech, an InsurTech startup on auto insurance, on Jan. 10th, 2018 to announce the first big news in 2018 for the Chinese insurance industry – Cheche Tech has acquired Fanhua Auto, the subsidiary business line of Fanhua Inc.

Yes, you heard it right, it’s a three-year-old InsurTech startup being the acquirer while the nineteen-year-old public insurance broker being the seller.

They also reached an agreement to establish strategic partnership.

Who are they? How did this ‘David and Goliath’ story take place? And what’s the underlying meaning of this acquisition? Let’s look at the story step by step.

How big is Fanhua Inc.?

For readers who don’t know well about Fanhua, here is a few basic facts:

Fanhua Inc. distributes insurance products in China. It operates through three segments: Insurance Agency, Insurance Brokerage; and Claims Adjusting. As of March 31, 2017, it consisted of 31 insurance agencies, 2 insurance brokerages, and 3 claims adjusting firms, with 959 sales and service outlets, 280,196 registered independent sales agents, 1,165 brokers, and 1,241 in-house claims adjustors.

Fanhua Inc. was listed on NASDAQ in 2007 and became the first IPO of insurance intermediary in Asia. Its stock price has experienced drastic fluctuations in early years and kept in low position since 2012. However, with the financial performance getting better in 2017, Fanhua Inc. has gained investors’ favors again and stock price has been skyrocketing since the end of August, 2017, from 8 USD then to 28 USD now.

What does Cheche Tech do?

Cheche Tech was founded in September, 2014. As one of the early entrants in digital insurance, it is designed to be an open platform for digital auto insurance and by reinventing distribution channels, it wanted to build new connections between insurers and distributors. Its revenue comes from commissions of distribution and claims.

According to data released by Cheche Tech, premium income generated from their platform has achieved 3 billion RMB (464.43 million USD) and they have helped connect insurers with more than 100 Internet network portals such as Baidu Map, Tuhu Auto Maintenance and so on. In the meantime, they have provided services for more than 100 thousand shops and half a million individuals.

Zhang Lei, founder and CEO of Cheche Tech told media that they want to build a Chinese version of InsurTech structure by implementing four business models with a code name ‘ABCD’.

‘A’ means providing services for “agents” and their friends and relatives. They have already established connections with 100 thousand agents in New China Life.

‘B’ means cooperating with “blockbusters”, they are usually Internet platforms with high volumes of network traffic. Existing partners include Baidu Map and Autohome.

‘C’ means “consumers”, B2C services, helping consumers get the most appropriate auto insurance.

‘D’ means “development”, Cheche Tech is partnering with insurers to develop new policies for auto insurance.

What can we see in this acquisition?

Since the beginning of 2017, CIRC – China’s insurance regulator, has becoming increasingly strict on license approval. According to Zhang Lei, CEO of Cheche Tech, Fanhua Auto’s domestic auto insurance license is one of the main incentives for Cheche Tech in this acquisition.

Acquisition of Fanhua Auto means Cheche Tech has gained possession of its domestic auto insurance license, insurance network in over 100 cities in China as well as Fanhua’s auto insurance operation team. In other words, Cheche Tech has become one of the most integrated InsurTech startups in auto insurance in China. They will be able to integrate the old insurance infrastructures which are scattered, inefficient and non-standard into a more organized, efficient and standardized system. Thus providing better services for auto insurance consumers and policyholders.

However, what does it mean for Fanhua Inc. when they sold one of their major businesses?

In its 2016 financial statements, 70% of Fanhua’s revenue came from property insurance, while auto insurance contributed 80% of total property insurance revenue.

Ge Peng, CFO of Fanhua Inc. admitted that selling auto insurance business to Cheche Tech will impact their revenue in the following years. But he is also confident that their profits won’t drop as they are shifting their focus on life insurance business.

Life insurance business has been steadily growing for Fanhua Inc. According to their 2017Q3 report, revenue from life insurance business has increased from 260 million RMB (40.25 million USD) in 2016Q3 to 730 million RMB (113.01 million USD) in 2017Q3 which is a 177.5% growth. Proportion of life business revenue also increased from 41.8% to 67.8%.

New retail revolution in insurance

Apart from the meanings mentioned above. There is a deeper influence this acquisition can bring. That is to trigger a new retail revolution in insurance.

What is new retail? It’s a concept brought forward by Jack Ma, founder of the Chinese e-commerce giant Alibaba. As the Internet penetration grows higher, its growth rate is inevitably slowing down. E-commerce stores could make easy money as they were continuously explore new online markets in early years. However, it is much harder for e-commerce now as new markets are turning into old ones and e-store owners no longer have the luxury of easy network traffics. So, Jack Ma believes that e-commerce players are in desperate need of altering their business models and ignite a retail revolution for which he gives the name New Retail.

How to make new retail work? The key shall be an integration of online and offline. In short, converting offline traffics to actual customers and branding and marketing yourself online. UNIQLO from Japan, IKEA from Sweden and Starbucks from USA have made exemplary attempts and they are very well-received in China in recent years.

What can insurers learn from them? Insurance distribution is similar with retail. With the help of InsurTech, insurers and startups can improve the distribution system together.

First, policy design is the critical. Insurance products nowadays are in lack of diversification. What I see from insurer A can also be found in insurer B’s category and the only difference is pricing. This could lead to a price contest among insurers and ultimately lead to bad service. With the help of technologies like AI, big data and blockchain, insurers shall be trying to offer customized insurance.

Second, branding. Insurance has been existing for so long that most of the consumers, even if they never purchased any policies, have a fixed impression on it, which is probably complicated terms, low efficient processing and slow reimbursement. Insurers need to leverage online channels to brand themselves and re-shape common people’s impressions. Take a look at Starbucks in China, they have successfully branded themselves as icon for middle-classes, so people are no longer simply going to Starbucks for coffee, they are going to Starbucks for an identity recognition, and for an experience.

Zhang Lei, CEO of Cheche Tech, believes that with the help of the offline team from Fanhua Inc., they can expand from online to offline, fully integrate the resources from both channels and open the gateway to the new retail age in insurance to offer customers a completely different insurance experience in the future.

I think it will be very interesting to keep observing and see how it would play out.

Image Source 1, Image Source 2 & 3

Zarc Gin edits Insurview, the first vertical portal for Chinese Internet Insurance.

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