BEIJING (CAIXIN GLOBAL) - The shutdown of Ant Group's Xiang Hu Bao, the largest crowdfunded healthcare platform in China, completed the collapse of a booming insurance-like industry just three years after its emergence. The platforms served more than 150 million people at the peak.

Under the online mutual aid programs, participants shared the risk of becoming critically ill and collectively bore related medical expenses. Dominant player Xiang Hu Bao, whose name means "mutual protection," provided a basic health plan covering 100 types of critical illnesses, including cancer, critical brain injury and heart attack.

In 2019, each member of Xiang Hu Bao paid as little as 29 yuan (S$6.16)-about the cost of a cup of Starbucks coffee - and could receive a one-time payout of as much as 300,000 yuan for an eligible claim.

In the first 10 days after its launch, Xiang Hu Bao attracted more than 12 million users, equivalent to the size of a medium-sized health insurance company. At its peak, it boasted more than 100 million participants.

About a dozen second- and third-tier players jumped on the bandwagon, filling a hole in China's national healthcare coverage.

But regulators found that "improper innovation" and "disorderly competition" by some businesses in the 5.4 billion yuan industry hurt consumer rights and led to soaring complaints. Meanwhile, the rising number of patients pushed up members' shared costs, which in turn prompted the exit of healthy members.

Unsustainable business model

Mutual aid is like a private version of social security, which works only if both the young and the old, the healthy and the less healthy participate, an executive at an insurance company said. Online mutual aid platforms required no threshold for participants, which might work well in attracting members at first, but inevitably the programs eventually become more attractive to high-risk groups, the executive said.

It was a consensus in the insurance industry that the mutual aid model was unsustainable, an executive at an already-folded online mutual aid platform told Caixin.

In March 2020, more than 100 million members participated in Xiang Hu Bao's critical illness program. Two month later, the number of participants started to decline. In its last payout in December, 72 million members remained. Among them, young people were quickly exiting. More than 71 per cent of participants were ages 39 and younger in June 2020. The ratio declined to 67.70 per cent by December. Meanwhile, members between ages 40 and 59 climbed to 32.3 per cent from 28.81 per cent.

As young and healthy members left, each remaining member's shared costs went up, making the mutual aid products lose their cost advantage against insurance products, which in turn further prompted the exodus of healthy members. In 2020, Xiao Hu Bao capped member payments at 188 yuan - about the cost of two KFC bucket meals, significantly higher than the earlier costs.

There are health insurance policies available with annual premiums of 100-200 yuan that provide 100 million yuan of coverage and are superior to the mutual aid products, a person at a life insurance company said.

More than 200 Chinese cities have launched a government-backed customised inclusive commercial insurance product, Hui Min Bao, to local citizens. As of Dec 1, more than 96 million people bought the products. For example, the Shanghai version, called Hu Hui Bao, charges 115 yuan a year and provides up to 2.3 million yuan for a number of serious illnesses such as cancer and rare diseases. More than 7.39 million Shanghai residents participated in the program.

Unregulated sector

Unlike insurers, mutual aid platforms are not licensed by the China Banking and Insurance Regulatory Commission (CBIRC), and they do not need to comply with the tough capital requirements or other risk management rules that apply to traditional insurers. But regulators found that healthcare mutual aid platforms were essentially commercial insurance providers doing business outside of supervision.

Since May 2020, Chinese regulators started to tighten regulations on the internet finance sector. The CBIRC in September 2020 published an analysis of illegal commercial insurance activities, finding that online mutual aid platforms such as Xiang Hu Bao and Waterdrop were operating without licenses. The article suggested inclusion of the platforms in the regulatory network as soon as possible.

In April 2021, China's central bank, the CBIRC and other financial regulatory authorities summoned 13 tech companies and imposed a raft of requirements on their financial businesses, including reining in risks of online mutual aid operations.

In March, Waterdrop shut down its online healthcare mutual aid platform, following the closures of Meituan's platform in January 2021 and smaller rival Qingsongchou. Xiang Hu Bao followed, announcing in December that it would cease operations Jan. 28, marking an end to the industry.

What's next for Ant?

Ant Group tried to obtain a license to keep Xiang Hu Bao going as a regulated business, according to several people close to the company. The CBIRC was clear about the problems with the business model and let several other operators shut down, so it was unlikely to give a green light to Ant alone, several participants in other platforms told Caixin.

Meituan, whose mutual aid platform had about 34 million members at the peak, promised to refund members all previously shared costs in full. Waterdrop also promised to refund members whatever funds remained in its program.

But for Xiang Hu Bao, the shutdown cost is much higher than for its smaller rivals. After Jan 28, eligible participants will have 180 days to submit claims for aid with medical expenses for illnesses diagnosed before the closing date, and the approved claims will be paid out by the program instead of other members, the company said. It's expected to pay out about 1 billion yuan on remaining claims.

Xiang Hu Bao said members can choose to switch to other commercial insurance products at no cost in the first three months. Total costs related to the shutdown could reach 3 billion yuan, analysts estimated.

Before the company announced the closure of the platform, more than 30 million Xiang Hu Bao members switched to Ant's Hao Yi Bao product, a cancer health insurance policy launched in collaboration with PICC Group and China Life Reinsurance, people close to Ant told Caixin.

Ant has also been trying to attract insurance companies to work with its flagship payment platform Alipay. In October, Ant held a closed-door meeting with more than 20 insurance companies, pitching an idea that they open shops within Alipay app. Users could shop for insurance products in Alipay and pay premium via Alipay. Insurers could also take advantage of Ant's big data on users to sell their products.

This story was originally published by Caixin Global.