Digital underwriting of Life and Health insurance in China

China's Life and Health (L&H) insurance market is growing and introducing a variety of more diversified insurance products. These offer covers such as critical illness and medical expenses targeted to specific consumer segments. L&H policy terms are continuously improving with clear and detailed coverage specification, a response to competitive market dynamics and regulatory requirements. Annual L&H insurance premiums stood at CNY 3.4 trillion (USD 530 billion) in 2022, up from CNY 1 trillion (USD 161 billion) in 2012. This compound annual growth rate (CAGR) of 13% is about 5 percentage points higher than China's nominal GDP growth over the same decade.

The digital economy is also developing rapidly, and consumers have quickly adapted to digital living. The value of the digital economy reached CNY 45.5 trillion (USD 7.1 trillion) in 2021, accounting for nearly 40% of China's GDP, and online activity has accelerated in response to the social distancing induced by the COVID-19 pandemic. L&H insurance has undergone significant digitalisation across the value chain from distribution and underwriting to claims. Over 80% of new L&H policies are underwritten by online digital applications from all distribution channels. This rises to over 95% when telephone sale channels are included.

These developments create a strong rationale for China's L&H insurers to deepen and enhance the capability of digital underwriting, which aims to leverage the fast-increasing accessibility and availability of data to generate insightful applications through computing power and algorithms. In 2020, the State Council defined data as a “factor of production” at the first time outlining the plan of constructing a market-oriented factor allocation mechanism in China. The key technologies include artificial intelligence (AI), machine learning (ML), federated learning, graph computing, graph databases, among others, which are expected to have impactful influence on digital underwriting in the next course.

This report (in Chinese only) is a deep dive study of digital underwriting in China that highlights the key features and development outlook for digital underwriting. We evaluate the current status and development outlook of its core fundamental aspects: data resources and big-data-analysis technology.

Against the backdrop of rapid digitalisation in China, the concept of digital underwriting has expanded over time, and there is no one universal definition for it. We follow a broad definition of digital underwriting that extends from its core function of risk control to include all digital and intelligent related underwriting solutions, such as smart underwriting questionnaires, as well as insights about customers' risk characteristics obtained from various digital channels (see Figure 1).

Essentially, digital underwriting aims to improve the accuracy and efficiency of underwriting risk control for L&H insurers, and so support underwriters to make effective decisions. It can also facilitate sales via different channels, as digital underwriting tools can provide faster responses to distributors as to which products to offer for best fit with an insured's risk profile. More advanced digital underwriting is expected to enable insurers to characterise risk profiles of individuals more precisely, supporting the innovation of more customised products to specific consumer segments such as the elderly, those in poor health or individuals with chronic disease.

We summarise the development of digital underwriting into four stages: fostering, growing, developing and maturity. For each of these stages we outline the key characteristics of the data need and technology used. At present, digital underwriting in China is at the developing stage: insurance companies are building strengths in data mining and governance, extending the application of intelligent algorithms and modelling along the business value chain. In general, insurers still face significant challenges in data and technology use and management, and further advances are needed to reach maturity in this area.

The most common and mature digital underwriting applications in China's L&H insurance industry today are the "smart underwriting questionnaire", "digital health underwriting (DHU)", the "business-data-based predictive underwriting model" and the "big-data-based risk management model". The first two are used for underwriting process, applying advanced technologies to the expert assessment rules to generate more accurate decisions. The latter two are used for risk controls, as advanced technologies such as AI and machine learning are increasingly adapted to risk control processes to improve the effectiveness. In contrast, other applications, such as "digital health underwriting systems", are relatively underdeveloped. We summarized each application's key features and give each a rating based on their current development, development potential, data resources required and complexity of the technology.

We expect the next developments in digital underwriting to be driven by data augmentation and technology advances. The input data for underwriting is expected to become increasingly multi-sourced, structured and standardised (see Figure 2, left hand side). Advances in algorithms and big-data modelling are anticipated to create digital underwriting tools that are more intelligent, interpretative and intended to improve risk selection over the long term.

In our view these developments also have the potential to strengthen insurers' business evaluation systems and risk management mechanisms, and generate more different use-scenarios to help them better assess and price risks (see Figure 2, right hand side). We envisage these two innovations interacting with each other in a positive feedback loop that could improve insurance business efficiency over the long term.

We believe the use of digital underwriting applications could unlock significant business potential for L&H insurers by improving the efficiency of underwriting as well as enhancing innovation.

In recent years, laws and regulations around cyber security, information security, and personal information protection have been accelerated and improved aiming to protect the core interests of various related parties at digital age. The digital underwriting can effectively overcome some shortfall of traditional underwriting methods, such as reducing the subjective bias related to manual underwriting, and the lack of fairness caused by excessive granularity of rules and assessments, etc. In addition, the continuous strengthening of data governance, system transformation and personnel training in the development of digital underwriting by insurance companies can ensure data security, personal information security and legitimate rights and interests of consumers at the operational and management levels.

In conclusion, we see digitalisation as a critical part of enhancing core value of underwriting thus a key driver of high-quality development in the L&H insurance sector. Insurance companies should accelerate the construction of digital underwriting systems, and continue to invest in data, cutting-edge technology, talent pool and operational systems to enhance risk control capabilities, improve underwriting efficiency, and deepen customer risk insight, thereby promoting precision marketing, effectively promoting business and product innovation, giving full play to the important potential of data as a production factor in the new era, and consolidating the core competitiveness of life insurance business operations.