Mutual Risk Sharing and Fintech: The Case of Xiang Hu Bao
49 Pages Posted: 18 Feb 2021 Last revised: 15 Mar 2021
Date Written: December 8, 2020
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: Suggested Citation