EVERYONE hails the idea of innovation in the financial sector, but at what point does ingenuity become folly?

China’s insurance regulator may be trying to define that line. Last month, it banned sales of widely watched smog insurance products a week after they were introduced. The regulator said it wanted to prevent financial innovation from becoming too far-fetched.

The ban targeted Ping An Insurance Co and China Life Insurance Co, which both introduced policies to compensate holders for smog-induced illness or smog-ruined holidays.

Some of the policies offered compensation for respiratory illness and lung cancer. Others promised payments if air pollution levels rose a certain amount above designated standards in specified cities.

For example, for a premium fee of 10 yuan (US$1.61) on Ping An’s outlet on WeChat, a popular mobile instant messaging service, people in Shanghai could get a minimum 150 yuan payout if the official Air Quality Index rose above 100 for at least three days in the week ended April 7.

The China Insurance Regulatory Commission said it took action to shutter the products after finding that they differed in substance from the lodgings on prices and polices filed with the regulator. It also pointed out that the policies resembled gambling more than true offers of protection.

“The products go against the principles of insurance, which is to protect people from potential risks,” an unidentified commission official was quoted as saying by the official Xinhua news agency. “Companies are encouraged to innovate, but they cannot stage public stunts to win market,”

It was the second time in a month that the watchdog has interceded against insurance products with a fanciful look.

In February, it suspended Chang An Property & Liability Insurance from selling a policy on the Internet in Beijing that promised a payout to policyholders who successfully obtained a plate in the capital’s car-license lottery system. Normally only one in every 100 applicants wins a plate from the system.

New products

The smog and car lottery policies are but two examples of the lengths that insurers are willing to go in trying to buttress their ailing industry and attract more customers. Policies have also been offered to compensate people who couldn’t see the Mid-Autumn Festival moon because of cloudiness, for people hit by an unexpected divorce and for women who accidentally became pregnant on Valentine’s Day. All three policies were allowed to proceed without regulatory interference.

The recent change of mood by the insurance regulator may be sending a signal that insurers need to return to more conventional definitions of innovation, analysts said.

“We have to applaud the innovation awareness of insurance companies as they take note of a changing society and environment,” said Tuo Guozhu, an insurance professor with Capital University of Economics and Business. “But some products have been introduced in haste and appear immature.”

He said that air pollution is an emotive public issue, but it is too early for smog insurance because the causal relationship between foul air and various diseases remains unclear.

An official of a joint venture insurance company, who declined to be identified, said executives have always been hesitant about putting forth more “fanciful products” because they distract from the company’s core businesses.

He admitted, however, that fanciful products do attract public attention and raise awareness of the industry.

Public stunts may be just a means to an end as insurers experiment with the Internet.

For example, by selling the smog insurance on its WeChat platform and through cooperation with Ctrip.com, an online tour operator, Ping An said it was aiming to promote its multi-channel sales strategy that would cover web users not only on computers but also on mobile phones.

Chen Hui, an actuary Chang An Property & Liability, told a forum in late March that innovation should be used to promote insurance awareness among the general public, and the Internet provides a shortcut to sell products, serve customers and acquire user data.

Tapping Internet

The Internet is viewed as the best place to engage and interact with the younger generation, opening a previously untapped revenue source.

“The insurance sector in China is going through a difficult transition from the pursuit of volume business to the pursuit of value,” said Sun Ting, an analyst with Shenyin & Wanguo Securities Co. “Life insurers could benefit from expanded sales channels, while property insurers may benefit more from the Internet because car insurance and other property policies are simpler in nature.”

In the life insurance sector, the impact of online sales will be slow and limited, Sun said.

For the time being, digital channels have yet to produce much at the bottom line.

For China Pacific Insurance (Group) Co, online sales have not yet proven a profitable channel but remain an irresistible trend. Last week it reported an 82 percent surge in net profit and a stable increase in the value of life insurance, but showed an alarmingly thin margin on property insurance.

The company attributed the high cost in the property sector to large compensation costs for car insurance claims, huge payouts for natural disasters, and, last but not least, investment in Internet sales exceeding returns.

New technology

Still, employing new technology to facilitate faster claims processing and to improve online-to-offline business interactions were written into the insurer’s reform agenda.

As insurers seek new channels to sell products, they are being invariably drawn to the Internet in a country with the world’s largest online population.

China Pacific Insurance in mid-March launched a WeChat service platform for both sales and customer service functions, and was the first insurer to allow payments through WeChat’s payment service.

Ping An Insurance Chairman Peter Ma said last month that his company is building a “social finance” network, with online and mobile portals providing services from healthcare, shopping information and online payments, to bank and insurance account management.

By trying to penetrate every aspect of daily life and communications, the company is aiming to provide a whole gamut of financial services.

US-Sino Metlife Insurance Co announced in March that it has chosen “digital” as the theme of its next five-year strategy as it seeks to expand its customer base and streamline sales channels.

Formerly focused on the high end of the insurance market with its sales agent team, the company hopes to enrich its sales channels “to serve different populations with different measures,” according to CEO George Tan.

The company will use part of the money raised through its 800 million yuan subordinate bond sale to build a digital platform in the next three to five years. It will incorporate sales agents, websites and mobile applications to offer sales, customer service and risk management.

For AIA Group, the third-largest Asia-based life insurer, building high-end sales agent teams and providing assurance products to clients will be the backbone of its strategy in China in the next five years.

The company started online sales in 2000, in cooperation with Taobao.com, but online and offline businesses need to be integrated, said John Cai, CEO of AIA China.

The company launched AIA TAC digital platform last year to manage agents, policies and client information.

“Online insurance sales started in developed countries two decades ago, and most policies sold on the Internet are car insurance,” Cai said. “For our company, the focus is tailor-made sales and wealth-management services, which cannot be moved to the Internet.”

He said personal contact will always remain crucial in promoting insurance awareness among the public.