When Covid-19 hit China hard in February, Xiang Hu Bao, an online mutual aid platform operated by Alibaba’s financial arm Ant Financial, launched a special program offering a payout of up to RMB 100,000 per person if any of its users died as a result of catching the virus. Unlike the typical online mutual aid programs in China, the payouts in this case would not have to be borne by Xiang Hu Bao participants, but by Ant Financial.
The move impressed many, even those who were not familiar with online mutual aid platforms. Participants in mutual aid platforms crowdfund to pay the medical expenses of a fellow participant, with each member typically paying only dozens of RMB a year, but can get up to RMB 500,000 to pay for treatment of critical diseases.
Xiang Hu Bao, the market leader, was launched in October 2018 and provides its participants with a mutual aid plan covering many types of critical illness, including thyroid cancer, breast cancer, lung cancer, critical brain injury and acute myocardial infarction. Users do not pay an upfront fee.
Hundreds of millions Chinese have been attracted to platforms like Xiang Hu Bao for the safety net it provides for a very small amount of, or even no, up-front payment to guard against illness-induced poverty. For many Chinese, especially those on low income, online mutual aid programs supplement or even replace commercial health insurance.
Although 97% of the Chinese population have basic universal healthcare, many medications and treatments for certain illnesses aren’t covered. Commercial insurance is meant to fill the gap but the healthcare insurance sector grew at a CAGR of just 30% during the past five years and its penetration rate is estimated to be only 26% in 2020.
Early startup bubble
Barriers to the take-up of commercial health insurance products include high premiums, complex contracts and confusing terms. Many of those who cannot afford to or do not take the trouble to buy health insurance turn to online mutual aid plans for cost-effective solutions.
A commercial insurance plan for critical diseases usually costs at least a few thousand RMB but users of the Xiang Hu Bao program covering the same illnesses paid only RMB 29 in 2019. The platform has also promised that its members will never pay more than RMB 188 a year in the future.
Similarly, a user of insurtech startup Waterdrop’s mutual aid platform Shuidi Huzhu has to pay only RMB 0.01 to join a program that covers 106 types of critical diseases. The program has offered over RMB 1.5bn in financial assistance to 11,597 users at a cost of less than RMB 100 a year to each participant.
The origins of China’s online mutual aid schemes can be traced back to 2011 when Zhang Mading, who had to borrow money for his mother’s cancer treatment, started a chat group on QQ (China’s equivalent of WhatsApp before WeChat became popular). Chat group members shared their plight and donated to each other through Alipay, Alibaba’s payment tool.
The group evolved to a platform called Kang’ai Gongshe. Users joined for free and claimed a payment for treatment of critical illnesses. All members would share the cost of payouts, which was generally less than RMB 10 each. As a pioneer, Kang’ai Gongshe was, for a while, the only player in the market, but the landscape changed dramatically from 2014–2015, when the Chinese government introduced policies to encourage “mutual assistance and cooperative insurance.”
It was seen as a positive signal and mutual aid companies emerged in a frenzy adopting the Kang’ai Gongshe model with minor tweaks. Several hundred mutual aid startups were founded and money poured in. Fourteen mutual aid platforms raised about RMB 200bn from investors within 10 months in 2016.
However, toward the end of 2016, the government clarified that its policy did not include mutual aid programs and warned some platforms against issuing insurance products without a license and illegal fundraising. Many startups soon quit the game, leaving only a dozen in business in 2017.
Enter the tech giants
The startups that survived did not quite take over the market. Instead in 2018, Ant Financial launched its own mutual aid platform, Xiang Hu Bao. Other tech giants followed suit joining the battleground once occupied only by startups.
Unlike startups, tech giants have large user bases and more resources to promote their products. It is also easier for established companies to earn users’ trust compared to young startups. For example, Xiang Hu Bao acquired 20m users in a month after it went online on Alibaba’s billion-user app, Alipay.
But the market is still growing. A white paper published in May by the Research Institute of Ant Financial shows that China's online mutual aid industry is expected to reach 450m users by 2025, three times the current number, covering about 32% of China's 1.4bn population. Tech giants are likely to take the lion’s share.
With 100m users, Xiang Hu Bao is the market leader, followed closely by crowdfunding platform Qingsong Chou’s Qingsong Huzhu and crowdfunding and insurtech startup Waterdrop’s Shuidi Huzhu, each with about 80m users. With investments from deep-pocket VCs and tech giants, including IDG Capital and Tencent, both Qingsong Chou and Waterdrop have built up offline teams and used medical crowdfunding to acquire users who may later participate in their mutual aid platforms.
Meanwhile, other surviving startups, including Kang’ai Gongshe, eHuzhu, Bihu Huzhu, Kuake Lianmeng, together with new-comer tech giants Meituan, Didi Chuxing, Qihoo 360 and Suning are fighting for a piece of the cake. Some have taken a different approach. Besides providing its own mutual aid programs, Bihu Huzhu is also providing IT and management systems to late-comers that need a leg-up.
Leveraging mutual aid
Since 2016, the China Insurance Regulatory Commission (CIRC) has repeatedly stressed that mutual aid plans are not insurance products and their cash pools must be supervised by third parties – either banks or foundations. This means that mutual aid companies have neither access to the cash pool nor the right to use the money for investment or other purposes and need to figure out a way to generate revenue to sustain operations.
Xiang Hu Bao charges a 8% management fee on each user payment, but the company says the fee does not cover its cost of operations. “We have not intended to use Xiang Hu Bao to make any profits,” said Yin Ming, president of Ant Financial's Insurance Business Unit. Waterdrop CEO and founder, Shen Peng issued a similar statement that he has no plan to achieve profitability in the first five years.
For mutual aid platforms, especially the bigger companies, profit is not the only way to measure business performance. “Online mutual aid programs can help acquire users at a low cost while giving tech giants user details like health information that could be used for other business,” said an anonymous head of an online mutual aid startup.
With 56% of its users coming from from tier three or even lower cities and another 32% coming from rural areas and counties, Xiang Hu Bao has a role in educating consumers about insurance products in areas where the penetration rates of commercial healthcare insurance are relatively low. The participation of people in these areas in mutual aid programs can help develop awareness of insurance products that are usually also available on such platforms.
According to a Financial Times Confidential Research survey, one in three Xiang Hu Bao’s participants said they intended to buy a critical illness insurance product in the next six months. Sales of health policies offered by partner insurance companies on the Ant Insurance Platform increased by over 60% by June 2019, just eight months after Xiang Hu Bao was launched.
This might explain why more tech giants are eyeing the market. Last year, large internet companies including Baidu, Meituan Dianping, Didi Chuxing, JD.com, Qihoo 360 and Suning.com introduced their own online mutual aid platforms. Ping An Insurance, one of China’s largest insurers, entered the fray and launched its own mutual aid program in January this year. Even Xiaomi Finance, the fintech arm of smartphone vendor Xiaomi, launched a mutual aid platform this month.
Risks and uncertainties
The CIRC does not consider mutual aid programs to be insurance. Technically, the platforms have no responsibility to pay users who get sick with money from their own coffers. When the cash pool is dry, a mutual aid group will be automatically dismantled.
Before the CIRC imposed cash pool regulation in 2016 that disallowed platforms from having access to the money in the pool, users were worried that the platforms would abscond with their money. “In the early days, the most used keyword for Kang’ai Gongshe-related search is something like, is it a fraud,”said Kang’ai Gongshe founder Zhang.
For users, especially those born after 1980, they may also be concerned that after paying for others for 10 or 20 years, when it is finally their turn to claim, there may not be enough money in the cash pool and the whole program may shut down. Some mutual aid programs are trying to avoid this situation by separating users into different age groups, but there is still no guarantee that a program will not shut down or members who get sick could claim a payout.
Even when there is enough money in a cash pool, some may discover that they are not eligible for a payout. One user, who joined a Xiang Hu Bao mutual aid program in 2018, was diagnosed the next year with Gaucher disease, a rare, inherited metabolic disorder. The medical treatment would have cost him at least RMB 100,000 each month. His claim was rejected as the disease was not among the 99 critical illnesses covered by the program.
Currently, about 50% of leading mutual aid platforms do not require real-name registration, leaving room for fraud. They pay private investigators to ensure that users were healthy before joining their programs, a process that can be lengthy.
One user, surnamed Chai, who had health insurance and also participated in Xiang Hu Bao, received her insurance claim for breast cancer within 10 days but had to wait three months for the RMB 300,000 payout from Xiang Hu Bao. “If it were an emergency or later-stage cancer, the money could be used only for my funeral,” said Chai.
Although online mutual aid platforms emerged to help those in need, operators are not as highly regulated as insurers. However, in March, the Zhejiang Association of Internet Finance issued standards for online mutual aid programs, the first of its kind in China. Jointly developed by Ant Financial, Internet Finance Research Institute at Zhejiang University and other institutions, the standards cover real-name registration, full-process risk control, independent auditing and openness and transparency. The standards are not compulsory but could potentially be a forerunner to future regulations on mutual aid programs.