If technology is the sexiest sector these days, then insurance could probably be the exact opposite of that.
To many people, when it comes to the insurance industry, it’s like travelling back in time where innovation and the technology of the 21st century don’t matter as much.
But it also represents a massive opportunity where the insurance industry in China alone is a US$650 billion market.
As such, tech companies, like Tencent Holdings Ltd (SEHK: 700), have been investing strategically to tap into this market.
In this article, I’ll take a look at what Tencent has been doing in insurance and whether tech companies like Tencent can challenge the position of the existing insurers.
Tencent’s strategic investments in insurance
Tencent’s early initiatives included the backing of one of the first pure-play online insurance company in China, ZhongAn Online P&C Insurance Co Ltd (SEHK: 6060). This happened as early as 2013 when insurance technology (insurtech) was unheard of.
ZhongAn also marked the first very attempt the tech giants in China were trying to crack the code of insurtech as two of its founding shareholders were none other Tencent and Alibaba Group Holding Ltd (NYSE: BABA) (SEHK: 9988).
After having backed, albeit more passively, ZhongAn, Tencent then launched its own insurance initiative – WeSure. WeSure is an insurance platform that focuses primarily on the distribution of insurance products.
The difference between ZhongAn and WeSure is that ZhongAn is a full-stack online insurance company that takes underwriting risk onto its balance sheet.
On the other hand, WeSure is just a platform that partners with other insurers (such as ZhongAn) and helps distribute their products via Tencent’s popular social network ecosystems, like WeChat and QQ.
WeSure doesn’t take on any underwriting risk. It simply earns a fee for the products it sells.In 2019, Tencent then invested in insurtech company Waterdrop (also known as Shuidihuzhu).
Waterdrop is a platform company that provides a crowdfunding channel for uninsured patients in China who can’t afford the large sum of medical expenses. Through its platform, it distributes insurance products as well.
Can tech giants really challenge insurers?
ZhongAn represents the very first full-stack insurtech that tech giants like Tencent and Alibaba backed.
But one of the early backers of ZhongAn is also the insurance leader, Ping An Insurance Group Co of China (SEHK: 2318).
After ZhongAn, the general trend for tech giants in the arena of insurtech is mainly focusing on utilising its platform to facilitate the distribution or sales.
This is the case whether investors look at the business model of Ant Group or Tencent. After all, tech companies are not wired to do underwriting and claims like insurance companies.
Their strength is on acquiring users and building ecosystems. Given this, it will be much more sensible for them to play to their strengths to facilitate insurance sales.
In my opinion, tech companies will never replace insurance companies like Ping An since the two sectors are the exact opposite; tech companies operate with the asset-light business model while insurance companies need to have strong balance sheets to withstand tail-risk events.
However, Tencent can challenge how insurance products are distributed. This is exactly the case when it comes to the simpler property & casualty (P&C) products, such as travel insurance, which users are more comfortable purchasing online.
For life insurance, companies like Ping An still have a stronghold since the ticket size of the policy is quite substantial and the contract is long term. Therefore policyholders still prefer to buy it from knowledgeable insurance agents.
In addition, underwriting and claims are much more complicated in the case of life insurance.
It requires an even larger balance sheet (hence capital buffer) to operate life insurance companies.
Insurance, being one of the oldest industries in the world, will never be replaced, no matter how fascinating the technologies can be.
While changes and disruptions are slowly happening in the P&C sector, life insurance is still quite insulated.
As a long-term investor who wants to gain exposure to insurance, life insurance is a much better bet than P&C.