China Pacific Insurance : Summary of Q & A of CPIC 2023 Investor Day

Summary of Q & A of CPIC 2023 Investor Day

(Hangzhou, July 2023)

1. Q: Phase I of Changhang Transformation has recently been concluded. In light of your original objectives, what have you accomplished according to plan and what have you done better than expected?

A: The blueprint of the transformation highlights 3 objectives, i.e., industry leadership, new model of life insurance and long-term commitments. As for industry leadership, our NBV growth turned positive in the second half of last year, the first among our peers. And the momentum continued to build up, with notable improvement in business quality metrics such as policy persistency and claims ratio. In terms of the new model of life insurance, there was substantial progress on multiple fronts, from career-based agency force to value-oriented bancassurance, from the supportive "product + service" system to risk management, from compliance to investment, and from culture, leadership to talent development. When it comes to long-term commitments, the work Phase I of Changhang Transformation started will continue, such as the restructuring of agency force centering on "3 Directions and 5 Mosts", and value-oriented bancassurance, all aiming to enhance our productivity; Phase II would focus on organisational

transformation, which, in turn, will help with productivity improvement and cultivation of new growth drivers. The two projects are supportive of each other.

2. Q: Phase II of Changhang Transformation intends to shift from centralised management to more independent business operation on the part of branch offices. But how can you maintain the cost advantage of the centralised model? What is the boundary of responsibilities between head-office and branch offices? How do you draw the line? How can you minimise the short-term volatility of business results when implementing Phase II?

A: When business was fast growing, we put emphasis on "one voice" across the entire organisation, i.e., the head-office gives orders, and branch offices execute. Excellent execution became an advantage of us.

But in the new stage of development, as customers become more sophisticated and their needs more diverse, the old approach is no longer compatible with the new customer-centric model. Therefore, we put forward the concept of "headquarters for empowerment and branch offices for business operation". We hope the head-office could focus on value management, top-level design and strategic planning, while the 38 provincial-level branches, which are in different stages of development, with varying local market conditions, customer profiles and needs, and

different organisational endowments, will ensure an alignment of top-level design and development strategies from above with their own, specific realities, and operate on a more discretionary, self-motivated basis. To be specific, they are supposed to be responsible for market strategies, talent development & succession, allocation of financial resources, KPI systems and be more accountable for value creation and profits. The old model is like a slow train, and we want to build a high-speed train. They both move on the same track, towards the same direction. But the high-speed train has multiple drivers, with each compartment, namely, each branch office, having its own engine. In such a way can we ensure a sustainable future of Changhang Transformation.

CPIC Life has 3 gold mines: the sales force, employees and customers. Last year, we mainly focused on fixing the sales force so as to unlock its potential and boost productivity. Next, we'll work on employees, like how to better motivate them, tap their poitential in productivity and creativity, which lies at the heart of organisational vitality. A typical problem with many large firms is that only the head-office is responsible for business performance, such as profits, value growth and business quality, as well as compliance and risk management, while branches only look after sales. Hence problems with business quality, and short-termism practices such as massive recruiting and extra incentives on top of the Basic Law for business promotion.

Next, we'll start with level-II branches, and go down to level-III branches, so that management of branch offices can be serious about business management and shoulder more responsibilities in value creation, cost control, profit contribution, talent and leadership development, risk management and business quality.

As for how to avoid short-term pressures in transformation, pains with the agency channel are already in the past, because we made a paradigm shift which boosted productivity and helped agents with customer service. Ultimately, it's all about enhancing business management capabilities. We seek to improve the professionalism of staff at all levels, from headquarters to branch offices. Their focus will shift away from keeping tabs on how well commands from head-office are executed to a new work mode of empowerment and professional support, such as PDS training of the sales force and NBS coaching. The reform is essentially about removing impediments of further productivity gains, and this would also help us address the short-term pains.

3. Q: In Phase I, we've seen some improvement on certain metrics, such as productivity and NBV growth. In Phase II, what metrics can outsiders use to evaluate the progress of reform?

A: In Changhang Transformation, we focused on capacity-building of the sales force, particularly training of sales capabilities and business

management, and this would help us attract competent agent candidates. The KPIs remain the same, such as productivity, headcount of core manpower, recruitment and retention of new agents, business quality and policy persistency. Of course, we would pay more attention to NBV margin, which is a measure of sales capabilities in the second half of the year. Sales of high-margin protection and long-term savings products require stronger capabilities, and this will be our priority going forward. Another priority is high-quality recruitment and retention, which would lead to steady growth of core manpower. In brief, so far we've stabilised the core manpower, and next we will strive for its recovery.

Going forward, the growth of the agency force will be driven by two engines, steady productivity gains and core manpower growth on the back of high-quality recruitment and retention. This would enable sustainable business development.

4. Q: These years the life insurance market talked about reform. It seems CPIC is the most successful. What have you done right?

A: A research report of McKinsey lists the top 3 factors of failure of any reform. First, reluctance to endure short-term pains. Without pains there will be no serious reform, nor can you fix structural problems. The second factor is hesitation, i.e., shying away from short-term pains and