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Staking a New Claim on Internet Insurance

When three household brand names in China announced they would cooperate to form a company offering insurance services on the Internet, excitement naturally was the order of the day.

Last year, Alibaba Group, Tencent Holdings, and Ping An Insurance Group announced they would form Zhong An Online Property Insurance Co., which would sell insurance policies and settle claims online. In February, the regulator gave the green light for limited business to go ahead.

While there is a great deal of optimism regarding the future of Zhong An, there are some questions as to whether the new model will translate to other types of financial business or will be limited to insurance. Some wonder whether Alibaba or Tencent will share core resources and whether consumers will trust the new type of e-business for bigger financial transactions.

Alibaba runs the nation’s largest e-commerce platforms catering to both business owners and retail customers. Transactions worth more than US$3 billion were made through those platforms on a single day of shopping in November, way overshooting the annual sales of many Chinese and foreign e-commerce companies.

Tencent is best known for its instant messaging software QQ, which has almost 800 million active monthly users in the country. It also operates a slew of other social networking services, including a popular smartphone app called WeChat.

Last year, the two joined hands with the country’s second largest insurer, Ping An Insurance Group, announcing a plan to establish Zhong An to deal specifically with Internet-related insurance business. Six smaller firms, including travel website operator Ctrip.com International and private equity investor Shenzhen Jiadexin Investment Co., hold minority stakes in the venture.

The China Insurance Regulatory Commission limited Zhong An to providing insurance for goods sold on the Net, although the exact restrictions are fuzzy.

Even under this limitation, there is plenty of business scope. Zhong An has decided to target e-commerce operators that need to insure their products against damage and loss during shipping, a source from the company said. “This demand alone is huge enough,” the source said.

That confidence probably stemmed from Alibaba’s experience. The premiums on freight insurance tied to Alibaba-supported transactions have at times totaled 10 million yuan a day, said a manager from Huatai Insurance Group, one of the insurers that handled those policies.

The hope is that Zhong An will benefit from Ping An’s experience and technological know-how in managing insurance products and handling claims. Ctrip is considering cooperating with travel agencies to offer travel insurance, among other possibilities. And Jiadexin is ready to offer the new firm advice on investing insurance premiums.

Also, Tencent is looking to cash in on the readiness of its users to pay and have their virtual valuables on social networking sites guaranteed. Such virtual properties, said one source from Tencent, include the accounts of QQ users and all accessories, such as decorations on profile pages and tools that help users win online games. Heavy users do not want to lose these things, he said, hence the demand for virtual property insurance.

However, the idea has not gained much traction. One of the obstacles, said the Zhong An source, is regulatory ambiguity, not least because there is not yet a law that defines what constitutes virtual properties and how they should be protected.

Despite this, Guoxin Securities analyst Shao Zixin says the future is bright for companies like Zhong An. He said financial services were naturally suited to being sold online because a deal often involved nothing more than an exchange of information and did not require a logistics network to deliver tangible goods.

That meant it was easy for Internet companies to make inroads on the turf of traditional financial service providers, he said. Unfortunately for the latter, “the language of Internet is hard for financial institutions to learn.”

Learning to Share

However, some financial professionals say that beyond insurance, it is unlikely Internet firms will pose an immediate threat to traditional financial institutions. For one, there are doubts about the willingness and capacity of Alibaba and Tencent to share their key resources.

The core competitive strength of both companies, a commercial bank’s information technology executive says, lies in their vast pool of customers and their ability to mine huge amounts of user-generated data for targeted commercial use. Sharing those resources beyond the scope of insurance would jeopardize their businesses, he said. And Internet-related insurance alone was unlikely to disturb the current landscape of financial markets.

Besides, banks have a paramount advantage in providing financial services, he said. The large ones, in particular, enjoy creditworthiness that took decades to build.

In general, however, many brick-and-mortar financial institutions were worried enough to rush to develop online service arms. This includes Ping An. Its chairman, Ma Minzhe, has warned his staff that its biggest competitors are not rivals in the financial industry, but technology companies that thrive online. One executive of the insurer noted that Ma once admiringly referred to leaders of technology firms including Alibaba as “aliens,” because “their thinking is completely different from ours.”

Ping An has made several attempts at deepening its integration of Internet and financial services. In September 2011, it launched Shanghai Lujiazui International Financial Assets Exchange, an online financing platform for small and medium-sized companies.

Internet companies and conventional financial institutions are like two camps on each side of a thick wall, the Ping An executive said. They are both digging channels to the other side, and the first one to break the barrier would be the winner.

Alibaba has never hidden its desire to transform its dominance in e-commerce to something of comparable significance in the financial sector. Its independent small-loan business, which launched in 2010, has lent up to 28 billion yuan to small and family businesses operating on its websites, Guoxin Securities’ research shows.

Its two small-loan subsidiaries, with a combined registered capital of only 1.6 billion yuan, have raised funds to finance expansion through trust companies and asset securitization schemes. It is also mulling plans for a service that would allow users to buy things on credit. From the looks of it, the only barrier standing between Alibaba and its becoming a real bank is a license.

Tencent has also been vigorously pursuing a greater presence in the financial sector. It has sought to create a bank online. The application was filed with the banking regulator in 2011, but rejected, said a bank executive with knowledge of the matter. In public, the firm has been painting itself modestly as a partner with banks. In private, a manager sniffed, “banks are no match. If we only had the [banking] qualifications.”

Caixin staff reporter Ma Yuan contributed to this article.

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