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Ant and Others Embraced Crowdfunded Medical Coverage, but Now It's Under Beijing's Microscope

04/15/2021 | 03:44am EDT

By Xie Yu

In China, a financial-technology innovation that has sent billions of dollars to critically ill people is losing its shine and drawing regulatory scrutiny, creating more uncertainty for Jack Ma's Ant Group Co., the industry's biggest player.

The business, known as "mutual aid," has seen tens of millions of strangers chipping in small amounts of money--typically the equivalent of less than $2 each month--to fund lump-sum payouts of as much as around $45,000 to people who suffered serious injuries or were diagnosed with certain illnesses such as cancer, severe strokes and Ebola.

The concept of crowdfunded critical-illness coverage has caught on among internet-technology startups and giants over the past few years. Many saw it as a way to provide benefits to their users and keep people connected to their apps. The companies said their services differed from commercial health insurance because users weren't required to pay anything up front, and were instead committing to share the cost of future payouts to others.

Financial regulators don't see it that way. As mutual-aid services have surged in popularity, the country's banking and insurance regulator has warned that the industry has the characteristics of commercial insurance without being supervised as such and could pose risks to individuals and the companies.

Earlier this week, Chinese financial regulators laid out a five-pronged business rectification plan for Ant, which will restructure itself and apply to become a financial holding company that would be overseen by the People's Bank of China. While regulators didn't directly address Ant's mutual-aid service, the company said it would ensure that its financial-related businesses were fully regulated.

Ant, the owner of popular payments and lifestyle app Alipay, entered the mutual-aid business in 2018 and supercharged its growth. Ant's service, called Xianghubao, which means "mutual treasure," had more than 105 million subscribers at the end of 2020 but wasn't profitable, according to its yearly update to users.

Its user numbers have declined by about 9.3% this year, after people were made to cough up rising amounts to cover payouts to others. Close to 113,000 members of Ant's mutual-aid service have received the equivalent of $2.5 billion in total over the past two-plus years.

About a year ago, Ant estimated that more than 150 million Chinese citizens had signed up for mutual-aid services provided by more than 10 companies. It predicted that the number of users across the industry would triple by 2025 to 450 million, close to a third of China's population. Many people who subscribed to the services come from low- to middle-income backgrounds and live in rural villages or cities in less developed and poorer parts of the country.

In recent months, however, several companies have quietly exited the mutual-aid business, and the country's insurance regulator has frowned upon the unregulated nature of the industry.

Meituan, which is one of China's most valuable internet companies and operates a consumer app, shut down its mutual-aid program at the end of January, saying it wanted to focus on its main business of providing food delivery and other online services. The Hong Kong-listed company once said that more than 10 million people were using its mutual-aid service, which was started in 2019. The firm didn't disclose how much in payouts were made from it in total.

Xiao Yuanqi, chief risk officer for the China Banking and Insurance Regulatory Commission, said shortly afterward that Meituan's mutual-aid services had deviated from the company's major business, while risks due to adverse selection had increased. He also said the regulator would further study online mutual-aid services and act accordingly. Meituan declined to comment.

Tech company Baidu Inc., and two startups backed by Tencent Holdings Ltd., have also pulled out of the mutual-aid business. One of them, called Waterdrop, had been providing the service for five years and facilitated payouts to 21,235 families, it said, without disclosing how much it paid out in total.

A spokesperson for Waterdrop said its mutual-aid service was operating in a healthy and stable manner before it wound down and that it has made arrangements for its users to have one year of free critical-illness coverage from a commercial insurer.

"Competition is fading, but some more fundamental challenges are emerging as the latest developments are starting to question the sustainability of such a business," said Leonard Li, a Hong Kong-based partner at consulting firm Oliver Wyman.

The industry, he added, is falling out of favor because of growing regulatory pressure and rising costs, as well as risks to the companies and their users.

Adverse selection could occur if more people with poor health conditions or weaker finances join mutual-aid networks and there aren't enough healthy and wealthy people to help foot the bills. In those scenarios, the online platforms might run into difficulties if payouts rise sharply, according to a recent study by the Institute of Digital Finance at China's Peking University.

Some consumers have been discouraged by the rising costs to them. Fan Xiao, a 21-year-old college student who joined Ant's mutual-aid service in early 2020, said her bimonthly contribution more than doubled to the equivalent of around 97 cents in late March.

Ms. Fan said she originally signed on to Ant's service thinking she was doing a good deed for others in need, in the hope the favor would be returned to her if she were to be afflicted by similar misfortune. The higher payouts could make her reconsider. "I will have second thoughts if it charges a few hundred yuan a year," she said.

The banking and insurance regulator released a research paper last fall flagging risks to stakeholders in online mutual-aid platforms, including those operated by Ant and Waterdrop, that have large numbers of users but aren't bound by any regulatory authority or standards.

An Ant spokesman declined to comment, and pointed to disclosures the company made last summer about the business when it filed for an initial public offering that has since been suspended.

In its listing prospectus, Ant said the mutual-aid service could become subject to regulatory oversight and be regarded as an insurance product. It also said that if claim payouts increase, some participants might drop out of the service or decline to supply the funds, which could force it to make up the shortfall. Ant said it might divest the mutual-aid business if the service doesn't comply with regulatory requirements and the company can't keep it going.

Write to Xie Yu at Yu.Xie@wsj.com

(END) Dow Jones Newswires

04-15-21 0544ET

Stocks mentioned in the article
ChangeLast1st jan.
BAIDU, INC. -1.69% 192.33 Delayed Quote.-11.06%
BANK OF CHINA LIMITED -0.32% 3.11 End-of-day quote.17.36%
MEITUAN -0.42% 285.8 End-of-day quote.-2.99%
TENCENT HOLDINGS LIMITED 0.00% 610.5 End-of-day quote.8.24%
UNITED STATES DOLLAR (B) / CHINESE YUAN IN HONG KONG (USD/CNH) -0.08% 6.45789 Delayed Quote.-0.49%
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