Mutual Risk Sharing and Fintech: The Case of Xiang Hu Bao

49 Pages Posted: 18 Feb 2021 Last revised: 15 Mar 2021

See all articles by Hanming Fang

Hanming Fang

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Xiao Qin

Shanghai Jiao Tong University (SJTU)

Wenfeng Wu

Shanghai Jiao Tong University - Antai College of Economics & Management

Tong Yu

University of Cincinnati - Department of Finance - Real Estate

Date Written: December 8, 2020

Abstract

Literally meaning "mutual protection", Xiang Hu Bao (XHB) is a novel online platform operated by Alibaba's Ant Financial to facilitate mutual risk sharing of critical illness exposures. There are three major distinctions between XHB and traditional insurance products. First, XHB leverages the tech giant's platform and digital technology to lower enrollment and claim processing costs. Second, different from insurance products applying sophisticated actuarial pricing models, XHB collects no premiums ex ante from members instead equally allocating indemnities and administrative costs among participants after each claims period. Third, XHB limits coverage amount, often below critical illness insurance products, particularly for older participants. We show this restriction potentially leads to separating equilibrium, a la Rothschild-Stiglitz, where low-risk individuals enroll in XHB while high-risk individuals purchase insurance. Proprietary data from XHB shows that the incidence rate of the covered illness among XHB members is well below that of comparable critical illness insurance. Our findings further suggest the role of advantageous selection in explaining the cost advantages of the Fintech-based mutual protection programs.

Keywords: Risk sharing; FinTech; Separating equilibrium; Mutual protection; Critical illness risk

JEL Classification: G22; G23; I14; I15

Suggested Citation

Fang, Hanming and Qin, Xiao and Wu, Wenfeng and Yu, Tong, Mutual Risk Sharing and Fintech: The Case of Xiang Hu Bao (December 8, 2020). Available at SSRN: https://ssrn.com/abstract=3781998 or http://dx.doi.org/10.2139/ssrn.3781998

Hanming Fang

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Xiao Qin

Shanghai Jiao Tong University (SJTU) ( email )

KoGuan Law School
Shanghai 200052
China

Wenfeng Wu

Shanghai Jiao Tong University - Antai College of Economics & Management ( email )

No. 535 Fahuazhen Road
Shanghai, Shanghai 200052
China

Tong Yu (Contact Author)

University of Cincinnati - Department of Finance - Real Estate ( email )

College of Business Administration
Cincinnati, OH 45221
United States
4019548606 (Phone)
4019548606 (Fax)

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