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China's emerging wealth not buying comprehensive Medical Insurance

Posted on Nov 21, 2012 by Sergio Ulloa ()

Pacific Prime has received mixed signals coming out of the china medical insurance market recently and believes it is unlikely that the emerging high net worth's will buy significant volumes of comprehensive medical insurance in the near future. Most key international insurers that have targeted China by developing onshore medical insurance solutions such as Bupa, Cigna, Aetna and AXA etc are still seeing mixed results. Consequently, some insurers are retrenching while others continue to push ahead with new solutions to try to tap further into the market.

In a move this month, ICBC AXA has pulled its 'China Executive Plan' which was launched last December to specifically target Chinese nationals but received little fanfare. Benefits were pitched at a lower level than a traditional expat medical insurance policy but much higher than medical plans typically offered by domestic Chinese insurers. Interestingly, the plan offered potential cover for pre-existing conditions which, considering this requires fairly sophisticated underwriting, was an interesting choice to make for a plan pitched at this price point.

The 'China Executive Plan' limited treatment outside of China and in order to control cost, access to High Cost Providers (HCP) was restricted. The decision naturally made a great deal of sense if the aim was to control costs, as clinics and hospitals in China that market themselves to the traditional expatriate market (the so called HCP) have been the primary source of medical inflation in China for international Private Medical Insurance policyholders over the past 10 years.

Treatment costs in these HCP's rival those found almost anywhere in the world. The logic behind restricting access to these facilities then, based on the fact that local nationals do not have any language barriers to access any facilities in China, makes perfect sense. In fact, there are plenty of lower cost options still with high standards of care which are readily available to the individual that speaks Chinese. Based on this, the China Executive Plan seemed to be well designed to target the emerging wealth of the country but it would appear to Pacific Prime that the take up rate was not successful (or the plans financial performance was not good enough).

Other recent moves which question the appetite from local nationals to buy high end medical insurance solutions have been made by Bupa International in the form of new restrictions. Previously, Bupa International allowed children to be insured independently from their parents. Now, this will no longer be possible without very selective underwriting. The plan is still available, but the premium, benefits and underwriting have been adjusted to be far more restrictive. It would appear that the take up rate of Child alone policies was very high but the financial performance was poor (Interglobal discovered the same fact 12 months before). In light of this, Pacific Prime has concluded that local nationals are aware of the policies but they do not seem to fully understand the concepts of insurance and are merely looking at the purchase of a policy and a financial transaction. In other words, if an individual thinks they are going to claim more than they will pay in a single year, then why wouldn't they buy? Or conversely, if they cannot claim more than they pay then why would they buy? This mentality ignores the risk or financial implications of serious/long term illnesses or accidents, and these do not seem to be in the assessment when choosing if a policy should be bought. This mentality is not unheard of in an emerging market and it takes time for the level of sophistication to develop in such a way that a risk transfer mechanism like insurance is understood. In light of this, it appears that China is currently in this phase.

Of course, the problem could be related to the apparent lack of sophisticated distribution to educate potential clients on the reasons and benefits of a high quality health insurance solution. This is undoubtedly a weakness that does exist and one that will not be quick to correct. Distributors are driven by profit and return (as any other business) and of course, with any medical portfolio this takes years to build. Adding to this is the existing challenge of educating oneself as a distributor as well as educating new clients so small hills in China can easily become mountains.

However, as with most business opportunities, timing is perhaps the most important factor. Without doubt there will be considerable domestic consumption of high end medical insurance solutions in China in the coming decades, but when will this really start to take off? Cigna clearly is an international health insurance company with considerable global ambition and through its partnership in China with CMC, they are putting a lot of resources into trying to be the leading player.

It is now understood that they will be launching a new plan to target the domestic market in December of 2012. Little is currently know about the plan or exactly how it will be marketed, but what is sure is that if it does succeed, Cigna could become the market leader.

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