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In just one year, "online mutual aid," or China's answer to private medical insurance, has gone from industry darling to doghouse.
It was May 2020 when the Alibaba-affiliated fintech firm Ant Group released its Online Mutual Aid White Paper. It predicted that mutual aid, a new digital form of informal medical insurance, would cover over 30% of China's population by 2025 and take in nearly $7 billion in premiums that same year.
At the time, many Chinese tech giants — including Alibaba, Baidu, JD, Meituan, DiDi and Xiaomi — had introduced mutual aid products. The top player, Alibaba's Xiang Hu Bao (meaning "mutual protection" in Chinese), had over 100 million users paying less than $1 per month with the ability to claim up to roughly $43,000 if they got seriously ill. Mutual aid looked like a promising new direction for fintech, turning low-income users into insurance consumers.
But less than a year later, Xiang Hu Bao is the only major mutual aid platform still standing. Five others, including some with over 10 million regular users, have closed.
Online mutual aid started during the golden years of Chinese fintech, when regulations were loose and venture capitalists were placing big bets on digital transformation. But those days are over. China's financial regulators have largely caught up with technological change, and less profitable products like mutual aids are being discarded as the market retrenches to focus on higher-profit opportunities.
A low-cost substitute
About 95% of China's population is covered by basic public health insurance, but patients still face large out-of-pocket costs. Private commercial insurance is still in its early stages and only serves a small percentage of the market. Mutual aid promised a low-cost substitute.
Tencent-backed unicorn Waterdrop, which reportedly plans to go public this year, is now known for its GoFundMe-style fundraising platform. But it started in 2016 as a mutual aid group. Within just 100 days of launch, Waterdrop attracted a million users. Wang, a 40-year-old worker at a shopping mall in the northeastern city of Tianjin, was one of them.
She joined in summer 2016 because commercial health insurance was too costly. Waterdrop boasted an ideal cost-benefit ratio for poorer users: In April 2020, as an example, 14 million people pitched in about $1 so that 566 beneficiaries among them could be given $24,000 on average to pay their medical bills. Like its peers, the company heavily promoted stories where poor families received vital help all because they'd paid in tiny premiums.
"I primarily did it for myself. It's important for an ordinary person like me to get a sum of money when I fall ill," Wang, who only wanted to use her surname in this story, told Protocol. "If I don't get sick, I can help a lot of people. It can give me a sense of accomplishment."
The majority of mutual aid participants, like Wang, can't afford commercial health insurance, which costs about $100 a year and provides about the same coverage as mutual aid. According to the Ant Group whitepaper, nearly 80% of all online mutual aid members have an annual salary lower than $15,000, and 72% are from rural areas, small towns or "third tier" cities. For them, mutual aid is the only affordable and accessible insurance alternative. And it can be life-changing for the group of beneficiaries who need, and receive, payouts.
Wang later joined two more similar platforms, Alibaba's Xiang Hu Bao and DiDi's Diandi Shouhu, because she feared the maximum payout on one mutual aid platform would not be enough to pay serious medical bills.
On March 26, Waterdrop announced it would soon close its 5-year-old mutual aid platform, once the core of its business. Like all participants, Wang was offered free one-year commercial medical insurance as compensation, which she doesn't intend to renew.
A failing business
Tech giants are less and less interested in mutual aid because the profit margins turn out to be narrow or even nonexistent.
In theory, big internet platforms are eminently capable of pulling off mutual aid, a business that requires large scale to work. The success of the fintech revolution in China in recent years means companies like Alibaba and Meituan can easily reach the wallet of hundreds of millions of people. The large amount of data they collect also helps them reduce risk: In the absence of a national credit system, Alibaba is using its own personal credit database, Zhima Credit, to determine the eligibility of every Xiang Hu Bao applicant.
There's just one problem: Compared to other more lucrative businesses like micro-lending, mutual aid offers tiny profits.
After its service closed, an unnamed Waterdrop employee told China Business Journal that the company's mutual aid product didn't make any money at all. "It would be good enough if it didn't lose money," the employee said. In Xiang Hu Bao's 2020 annual report, the industry leader also said it had never turned an annual net profit.
"They wanted to explore first, and find the profitability model later on, but that has failed," He Xiaowei, a Beijing-based associate professor at the University of International Business and Economics, told Protocol.
The future looks even darker: Members are quitting services like Xiang Hu Bao in droves as monthly premiums rise to levels they aren't comfortable paying. Without enough members paying in, costs could rise further, pushing mutual aid into a death spiral.
When Waterdrop closed its mutual aid service in March, CEO Shen Peng published an open letter. "Ultimately, online mutual aid is not insurance," he wrote. "Its future remains uncertain."
Shen's letter hinted at the murky regulatory status of mutual aid. Even today, online mutual aid platforms are not being explicitly regulated in China as an insurance product or any other sort of financial activity.
This used to be the norm for Chinese fintech innovations. For years, tech companies stayed ahead of regulators, combining technology and finance in ways that don't fit into any traditional category. Regulators have also been cautious to act, reluctant to stand in the way of innovation.
That has all changed, with Chinese financial regulators taking a much more active role. Mutual aid is one of the products under scrutiny, even though its systemic risks are low.
In September 2020, the China Banking and Insurance Regulatory Commission published an article on illegal commercial insurance activities widely seen as signalling more forthcoming regulation. "The online mutual aid platforms that have been growing unchecked recently have the characteristics of commercial insurance," the article says, "but currently there are no dedicated oversight entities or regulatory standards, so it's in an awkward situation with no supervision."
He Xiaowei, the insurance studies professor, expects the mutual aid market to worsen further. "There's no evidence indicating the market will grow," he said.