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For China’s insurers, distribution channels are where the money can be found

Distribution channels are the goldmines along the insurance industry’s value chain, said China International Capital Corp, as it takes a bullish view on professional insurance intermediaries.

“Among these intermediaries, we favour platforms that conduct their business on the internet, which can leverage their online and offline resources to generate strong sales,” said CICC analysts including Huang Jie and Lu Ting in their latest research report, in which CNinsure and Focus Technology are recommended.

The professional insurance intermediaries now only hold a 10 per cent share of the market, much lower than in mature markets. But these platforms will likely see decent growth in their market shares mainly thanks to three factors.

First, the high growth of tier-2 and tier-3 life insurers would benefit insurance intermediaries because these small companies are willing to sell standardised wealth management products through the internet-based distribution channels of professional intermediaries for lower fees than bancassurance distribution channels.

In the past two years, tier-2 and tier-3 life insurers have been growing rapidly. The premiums of the top five to nine life insurers surged an average of 45 per cent compared with the 24 per cent growth of the four tier-1 large life insurers in the same period, while the overall premiums of smaller insurers that focus on universal life insurance soared 150 per cent over the same period.

Second, the reform of vehicle insurance pricing led to traditional distribution channels of insurance intermediaries regaining market share. After the reforms, consumers can now enjoy a 15 per cent

discount through all distribution channels including insurance intermediaries.

Third, internet-oriented thinking has created new markets for insurance intermediaries.

“The combination of insurance intermediaries and the internet can allow internet-based

life insurers to make breakthroughs beyond selling standardised products,” Huang said.

With the potential for growth, CICC said the goldmine is in the channels.

“Compared with investing directly in insurers, investors in intermediaries could enjoy rapid revenue growth while avoiding the insurance sector’s risks from the mortality and morbidity gap, expense spread and interest spread by directly investing in the distribution channels of insurance products,” said Huang.

With low interest rates, the interest spreads of insurers’ investments would narrow, while aggressive life insurers are left to bear the high costs of liabilities to maintain their high growth, which may lead to negative spreads.

As for insurance policies like health insurance and critical illness insurance, insurers have to bear the risks of pricing. Aggressive pricing at insurers may bring on a narrowing mortality gap or losses due to deteriorating mortality.

“We believe investing in insurance distribution channels could avoid the above risks in the insurance sector,” said Lu. “The bad news for insurers could even be viewed as good news for insurance distribution channels.”

CICC has buy recommendations on US-listed CNinsure and Shenzhen-listed Focus Technology.

“We believe the two companies are the best investment targets in the professional insurance intermediary market and have their own ‘Alpha’ amid the sector’s rapid growth,” Lu said.

Net-based professional insurance distribution platforms such as CNinsure, Huize.com and Xinyizhan.cn, and sideline insurance distribution platforms as well as third-party

platforms will co-exist in the future, Lu said.

“[These] platforms all benefit from the high growth of insurance premiums and the rising penetration rate of online operations, “ he said. “They are good at selling different insurance products based on their respective advantages in attracting traffic.”

In terms of upside potential in earnings, professional insurance distribution platforms would benefit more, Lu added.