Duoguang Bei: What Incisive Insurance Can Offer?

From November 8th to 10th, The First Siming Forum for Insurance & the 2023 Academic Annual Conference of the Insurance Society of China were held. Prof. Duoguang Bei, President of CAFI, was invited to deliver a keynote speech titled "Developing Inclusive Insurance and Creating an Ecosystem thereof".

The speech as follows:

I am very excited to speak at this venue.

As a layman in the insurance industry, I have had occasional encounters with it over the past few decades and found it to be quite mysterious. Therefore, before sharing my views on insurance, I would like to share some of my personal experience. Nine years ago, I established CAFI at Renmin University. Prior to that, I had been an investment banker for almost 20 years. By chance I learned about consumer credit and microfinance. I was touched to know how these business models provide financial services to line workers and low-income people, and I think this is of great importance. Based on my early macro-financial studies, I realized early on that it was strategically crucial for finance, consumption, and investment services to reach the grassroots level, and for the consumption capacity of the grassroots to be elevated.

If financial services can be further popularized, it will have a significant economic and social impact on China. I later learned that this is inclusive finance. This realization motivated me to leave the high-end investment banking sector and return to my alma mater, Renmin University. With the support of the university, I established CAFI with the goal of promoting the development of inclusive finance in China.


Since its establishment, CAFI has primarily served as a platform for policy advocacy and communication. We organize the annual International Forum for China Financial Inclusion (IFCFI), and this year marks the 9th session of the forum. CAFI upholds the vision of "Good Finance, Good Society." However, some professors have challenged me, stating, "Prof. Bei, I believe you are mistaken. Finance is merely a tool and should not be classified as inherently good or bad." In response, I gave them with a few examples.

In the first example, I have encountered people expressing concerns about insurance, often saying, "We need to be cautious about fire, theft, and insurance." This sentiment arises from the fact that insurance salespersons, for a long time, have been exaggerating and falsely promoting products, leading to a sense of distrust within the lower socioeconomic strata. In this case, can we consider this type of finance as good?


The second example pertains to my previous experience as an investment banker, where mergers and acquisitions (M&A) played a significant role. To be honest, not all M&A cases are truly beneficial to the companies involved. However, in order to earn commissions, some colleagues would encourage such deals anyway, claiming them to be good projects that should be pursued. Just last week, I spoke with a leader from a central State-Owned Enterprise (SOE) who expressed frustration over a long-standing loss-making venture brokered by the bank I used to work for. They were unable to exit from this loss-making venture even after 10 years. Is this good finance?


The third example pertains to my realization after getting involved in the financial inclusion sector that not even all aspects of inclusive finance are inherently good. Practices such as violent debt collection, coercion, and relentless telephone harassment are all examples of bad finance.


So based on the observations and reflections on the "good finance and bad finance", we at CAFI have become more determined to advocate for "good finance" and make related research and policy recommendations. Fortunately, some of our recommendations have been recognized by regulators and policy makers. For example, I suggested merging several departments of consumer rights protection in an internal report, which was later commented and approved by the relevant leaders at the State Council. We have also offered recommendations to decision-makers based on our research on inclusive insurance.


Furthermore, we actively engage in international exchanges. We have established connections with nearly all international organizations involved in inclusive finance, such as the World Bank and the Gates Foundation. In 2019, we organized the China-Africa Digital Financial Inclusion Summit in Kenya. Many African countries are eager to learn about China's digital finance, particularly our platform economy. Hence, we shared China's experiences with them.


Earlier, I mentioned that I considered myself a layman in the insurance industry. However, two years ago, we embarked on a study called the "Financial Diary," which was initiated by the World Bank and later supported by the France-based insurance group AXA. In this research project, we followed 200 households in Hunan, Shaanxi and Shanghai. We meticulously recorded their daily income and expenses for 365 days, and subsequently analyzed all the collected data.


We have 3 major findings.


First, people at the grassroots often feel disconnected from the world of finance. They have an intrinsic fear of financial products and avoid them whenever possible. This fear may stem from past negative experiences, but more significantly, it is rooted in the longstanding lack of financial education that has led to widespread financial illiteracy. Improving financial literacy is an essential area that requires significant attention and effort.

Second, low-income groups are particularly vulnerable, not only due to their limited income but also because of a temporal and spatial mismatch between their income and expenditures. Often, their expenditures are fixed and essential, such as daily expenses, education, healthcare, and unexpected contingencies. However, their income is fluctuating. With the rise of flexible employment, an increasing number of individuals receive income that is not fixed or guaranteed. Even among those who receive a regular salary, statistics indicate that 50 percent of Chinese people frequently experience an imbalance between income and expenditures, with their expenditures exceeding their incomes.


Indeed, addressing the financial challenges faced by low-income individuals is a critical issue. One key aspect of financial inclusion is the ability of individuals to access contingency funds within a specified timeframe (say 7 days or 30 days) when faced with an emergency situation. The World Bank has conducted surveys [MOU1] on financial inclusion in China and discovered that, unlike in many other countries where people tend to rely on their savings, the primary approach for Chinese individuals to acquire emergency funds is by taking up additional jobs or increasing their working hours.


Third, during our research and interviews with families targeted for poverty alleviation, we discovered that what they truly needed were insurance products rather than poverty alleviation loans. This revelation impressed us very much. While the "530 poverty-alleviation loan" (providing 50,000 yuan for three years at zero interest) may appear to be a favorable deal, it is still a debt that needs to be repaid. Moreover, most families lack the knowledge and expertise to utilize the funds effectively. On the other hand, if the breadwinner of a family were to fall ill or accidents were to occur, the entire family might spiral back into poverty. However, if they had access to insurance products to mitigate such risks, they can make a lot of difference for their basic need.


Based on this important finding, we submitted a special report to the head of the relevant department. To our delight, the decision-maker responded swiftly and released the "Guidelines for Promoting the High-Quality Development of Inclusive Insurance (Consultation Draft)" at the end of last year.


From this point of view, inclusive finance is a broad concept, which includes inclusive insurance, and the development scope is very large.


By comparing China's total domestic and foreign currency credit to its GDP and population, and then examining similar data for insurance, we can observe the disparity between credit and insurance in China. As of the end of 2022, China's domestic and foreign currency loan balance amounted to 219 trillion RMB, while the GDP stood at 121 trillion RMB. This indicates that credit was 1.8 times the GDP. On average, each person's share of credit, considering the population of 1.4 billion, amounts to 150,000 RMB. In contrast, Mr. Cai from China Life recently mentioned that the ratio of insurance to GDP is much lower then it.

I would like to emphasize that historically, the insurance industry in our country has primarily catered to individuals with "middle and upper" incomes, resulting in good market coverage within that segment. However, there is significant untapped potential to expand the reach of insurance services to lower-income segments of the population.


Just now some executive mentioned some challenges in the insurance sector, but I think it is important to recognize the immense opportunity for growth that exists by venturing into underserved markets. If we can develop effective programs and initiatives to extend insurance services to lower-income individuals, it could indeed become a promising area of expansion. This is my perspective as a layman.


We have also paid attention to agricultural insurance in the past few years, and it plays a crucial role in inclusive insurance by providing coverage to the rural population. Similar to inclusive finance, the effectiveness of inclusive insurance is determined by the number of people it covers and the affordability of the insurance premiums. How about the payout rate? Is it also the lower the better? Is it possible? Of course not! I believe the insurance executives would also agree that setting an excessively low payout rate is impractical.


As you know, China's agricultural insurance program is already the world's largest. Additionally, inclusive finance in China exhibits unique characteristics, as does its inclusive credit. In my opinion, inclusive insurance first must be viable, but government and policy support play a crucial role, particularly in the early stages of development, so as to make the seemingly impossible possible.


We were lucky to learn about Ningbo Food Safety Liability Insurance the day before yesterday, which incorporates innovative elements such as satellite remote sensing technology for agricultural insurance, animal husbandry, microchip insurance technology and cross-border e-commerce cargo insurance. Innovation in product development is indeed crucial for advancing inclusive insurance.


Moreover, yesterday, the suggestion put forth by a foreign expert holds merit and is likely to resonate with Chinese insurance experts as well. While policy flexibility allows for the design of various insurance products, building a robust distribution, sales, and outreach system for inclusive insurance can be challenging. Inclusive insurance has already demonstrated the value of reaching the underserved segments of society, and whoever has this advantage may have a head start.


The following are my observations regarding inclusive insurance, and I stand to be corrected.


First, in China, governmental guidance remains essential.

Second, reaching the underserved population should be a priority in inclusive insurance efforts. We should go down as far as possible and establish platforms or networks to reach the low-income people. In some places, the government has issued directives that mandate the involvement of certain organizations in inclusive insurance initiatives. These practices can serve as valuable examples and be replicated in other areas.


Third, product innovation. Financial and insurance institutions cannot fully comprehend the needs of farmers simply by sitting in their offices at the Financial Street. Instead, they must actively engage with the target clients and gain firsthand knowledge of their circumstances.


Yesterday, a very small rural service company introduced one of their insurance products, which I found particularly interesting. With a single policy, the product covers the whole family of eight people at an affordable price, so the product is very popular. When I asked if it was profitable, the answer was that it was viable. I think these innovations are very significant for inclusive insurance. As researchers, we need to summarize what works.


Finally, I would like to take this opportunity to say that the financial inclusion we are talking about refers to the whole ecosystem rather than just individual products or offerings. We need to make the whole system more inclusive to serve the vulnerable groups and MSMEs. In this eco-system, credit, capital market, wealth management and so on can all play a role and I believe inclusive insurance must be a new growth area.


I hope to have the opportunity to do something good together with you, thank you!