In recent years, especially since 2019, there has been a noticeable shift in Asian consumers buying behaviour towards online channels. This holds true for the insurance industry as well, with customers searching for virtual policies in larger numbers.
In Hong Kong, where over half the population is aware of digital insurance and premiums have been growing steadily the last five years, consumers are more conscious of their protection options than before, and that includes purchasing their insurance policies directly from online channels.
This ‘direct to consumer’ model is bypassing insurance agents and, empowered by technological independence, are providing credible alternatives to the intermediary-led insurance scene in Hong Kong. But what are the factors that instigated this sea change, and what advantages can they offer the customer as opposed to going through an insurance agency?
The Hong Kong insurance market in recent years
The Hong Kong life insurance market shrank for two consecutive years, by 0.3% and 4.6% in 2021 and 2022, respectively, with 99% of pre pandemic policies being sold through intermediaries such as banks, agents and brokers.
One in every 36 people employed in Hong Kong is an insurance agent, meaning the market is saturated with agents, and heavy reliance on them results in Hong Kong insurance companies having a minimal relationship with their end customer. Consequently, they lack the customer data that can aid with coming up with more targeted products and in assessing risk.
This can cause reputation problems for the insurer, even more so if the agent engages in misconduct. Moreover, a collective HK$ 61 billion (US$ 7.8 billion) in commissions were paid out to intermediaries in 2021, a vast figure that does not include the billions in upfront payments made out to banks for established bancassurer agreements to sell insurance products to banking clientele.
There is also an assortment of supplemental sales costs attached to supporting agents, including agent events to recognise high performers, sales data reporting costs, HR and marketing support. Agent training will also factor in heavily, with on-the-job training still required upon completion of IIQE2 insurance exams, and even then only 15 hours are required annually to maintain their licences.
This means agents are minimally trained and ill-equipped, potentially causing more reputational harm and financial drawbacks by recommending products which earn them the higher commission as opposed to what is in the customer’s best interests.
Throughout this dominant insurance distribution model, the insurer is not actively engaged with their end customer. A direct relationship with the coverage provider, competitive prices versus incumbents, and the ability to compare policies online via on local insurance research platforms, are some of the reasons why coverage provided by insurtech direct to the consumer is rapidly catching on globally.
Hong Kong consumers willing to buy insurance online
In fact a Quinlan and Associates study highlighted that amidst a global shift towards customers carrying out their own research and buying insurance policies through digital channels, 60% of Hong Kong consumers are now willing to purchase their insurance coverage online.
This reflects the prevalent trend now amongst consumers, who have become increasingly accustomed to shopping, comparing, and consuming online since COVID-19 was in full swing. This does not bode well for incumbent insurers, known for lagging behind when it comes to digital transformation drives.
Even if they are, digitalisation efforts are focused on optimising their operational and backend processes and not on enhancing their digital distribution footprint. After all, incumbents have invested heavily and are entrenched in the intermediary-led distribution strategy.
But it is in incumbents’ best interests to seize upon insurtech-led digital distribution sooner rather than later, as evidenced in the strong growth of the fledgling industry. Share of online insurance premiums are rising sharply in prominent markets like the UK, US and Germany, and digital insurance is not being left behind in Hong Kong.
For instance, even as the Hong Kong life insurance market (overwhelmingly driven by intermediaries) contracted in the last two years, total insurance premiums have been growing steadily since 2017, topping out at HK$ 581 billion in 2021.
“In fact, Hong Kong’s virtual insurers, which only launched in recent years, saw their premiums grow by a factor of 8x between 2020-21,” the Quinlan report noted. Digital insurtech like Blue, Bowtie and ZA Insure are able to offer relevant insurance products and respond agilely to customer demands by interacting directly with the end user and by analysing the market data collected.
“We see considerable scope for Hong Kong’s insurers to further digitalise their consumer-facing proposition, particularly with respect to D2C [direct to consumer] online distribution,” the Quinlan report stated.
Incumbents are still concentrating their digital investments into enabling their agents, primarily via integrated online portals such as Prudential’s Virtual Sales Platform, AIA’s Online Portal for Agents, and FWD Insurance’s Agent Assist Platfrom. But “this does not tackle key pain points and comes with added costs,” Quinlan explained.
D2C transformation barriers for incumbents
There will be stumbling blocks for legacy insurers to adopt the direct to consumer digital distribution model. They will definitely encounter resistance from traditional agents and brokers, for instance, many of whom would be long standing partnerships.
Different regulatory requirements must also be dealt with, such as policy and marketing transparency for what’s covered by personal insurance products. In addition, incumbents must ensure they have sufficient technological resources to mount a seamless digital experience for consumers on the front (via apps or websites) as well as internally, where both a smooth data management and change management pathway will be critical.
An active communication strategy, governance and training frameworks would be important to digitally transform the internal value chain, onboarding everyone from employees to intermediaries to customer service personnel, to the new distribution strategy.
While building the initial D2C value proposition would require sizable upfront investments from incumbents, it is clear the change in customer expectations is already underway in Hong Kong and globally.
Aligning their operations with the direct distribution model sooner would put them in a better position to compete with the insurtech startups for market share, and economies of scale will see future marginal costs be greatly slashed with every subsequent year after the initial upfront investment.
To this end, it would behove traditional insurance companies in Hong Kong to embrace the direct to consumer journey sooner, rather than later.
