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

Xiang Hu Bao (XHB), meaning 'mutual treasury' in Chinese, is a novel online mutual aid platform operated by Alibaba's Ant Financial to facilitate mutual risk sharing of critical illness exposures. XHB reached nearly 100 million members in less than one year since its launch and so far has offered its members critical illness protections at significantly lower cost than traditional critical illness insurance. 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 applying sophisticated actuarial pricing models, XHB collects no premiums ex ante from members, but instead equally allocates 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 critical illness insurance. Data 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 aid programs.