TELEMATICS OPPORTUNITIES IN CHINA’S INSURANCE MARKET

1. TELEMATICS OPPORTUNITIES IN CHINA’S INSURANCE MARKET October 22 2013 Wenli Yuan Senior Analyst, Asian Financial Services group wyuan@celent.com A recording of today's webinar and copy of the presentation will be available to Celent clients on our website after the event at http://reports.celent.com/login.asp

3. Content • Telematics Operation • The Telematics Development Opportunitiesin China • China’s Motor Insurance Market • China’s Development of Internet of Vehicle • Conclusion/ Suggestion

4. Telematics Operation Section 1

5. Usage Based Motor Insurance Traditional policies • Premiums reflect credit score, vehicle type and gender 1 • Pay as you use polices, with 2-3 pricing brackets • Mileage verified by odometer Usage based policies 2 3 • Basic Pay how you drive • Premium adjusted to reflect manner of driving (accelerometer data) as well as time and location • Enhanced Pay how you drive • Premium incorporates manner, location and time of driving • Driver feedback mechanism in place Telematics enabled

6. Telematics Operation –The Insurance Value Chain Device Installation Network Data services 1 2 3 4 Telematics value chain • Sourcing of black box device • Installation network (garages or mobile) • Managing pre and post sales installation of device • Training • Communications network to support transmission of data from car • Collection of all data from device such as acceleration, braking, time driven, distance • Collection, management, reporting and transmission of data Product design Customer acquisition Administration Claims 5 6 7 8 Insurance value chain • Customer segmentation • Cost/benefit analysis • Underwriting terms and conditions • Regulatory approval • Customer lifetime value analysis • Marketing collateral • Training, tools and incentives for agency/ broker channel • Online communications • Customer portal • Monthly billing • Data flow to/from telematics provider • Telematics-enabled claims management

7. Additional services Rich customer interaction • Feedback to driver on driving behaviour • Roadside services • Stolen vehicle recovery • Teen driver monitoring • Immediate notice of loss • Detailed accident data • Sign post to appropriate supplier Vehicle information • Fuel consumption monitoring • CO2 emissions Telematics Operation –The Insurance Value Chain Example: Product Design

8. Telematics Operation –The Telematics Value Chain Device Installation Network Data services 1 2 3 4 Telematics value chain • Sourcing of black box device • Installation network (garages or mobile) • Managing pre and post sales installation of device • Training • Communications network to support transmission of data from car • Collection of all data from device such as acceleration, braking, time driven, distance • Collection, management, reporting and transmission of data Product design Customer acquisition Administration Claims 5 6 7 8 Insurance value chain • Customer segmentation • Cost/benefit analysis • Underwriting terms and conditions • Regulatory approval • Customer lifetime value analysis • Marketing collateral • Training, tools and incentives for agency/ broker channel • Online communications • Customer portal • Monthly billing • Data flow to/from telematics provider • Telematics-enabled claims management

9. Options in the Operating Model • The decision for the appropriate model depends on the current market and decisions around points of key differentiation. • Option 1: Own full value chain. • Option 2: Panel/MGA option. • Option 3: Full outsource option. • The investment plan in people, technology, and processes will fall out from the choices made in the approach to the operating model.

10. The Development Opportunities in China Section 2

11. The Future Development of telematics Insurance Products in China • At present, telematics insurance products do not exist in China. • However, insurance companies and telecommunications enterprises have initiated some collaboration with telematics service providers, such as: • China Mobile’s Travel Worry-Free terminal – PICC • Shenzhen Chainway Intelligent Transport System Co., Ltd.’s CW-GPS - China Life Property and Casualty Insurance

12. The Future Development of telematics Insurance Products in China • There are certain preconditions that are necessary for the development of insurance telematics in China. • Compliance with regulatory requirements • Needs of insurers • Telematics development

13. Current Status of China’s Motor Insurance Market Section 3

14. Growth in Motor Insurance Premium Income • There has been sustained growth in the number of civilian vehicles in China, with the number reaching 120 million by the end of 2012. • Motor insurance occupies an important position in China’s property insurance market, with its premium income accounting for more than 70% of the total property insurance premium income in China. Source: Annual Statistical Bulletin published by China National Bureau of Statistics, Celent Source: China Annual Statistics, market information, Celent

15. Issues related to Motor Insurance: Losses in the Motor Insurance Industry • Motor insurance businesses experienced a period of industry-wide losses. Reasons: • Continual rise in intermediary processing fees of motor vehicle dealers and repair vendors (who are the main sales channels of motor insurance) • High payout rates for insurance claims • High traffic accident rate • Cheating • The quick increase in the number of drivers and some of them don’t have good driving skills. • The underwriting quality of insurers is low • Increase in the compensation payouts for personnel injury and death cases • In order to reverse the loss-making situation, a number of measures were introduced by the insurance industry. • The motor insurance business started becoming profitable in the first half of 2010, but the situation was not stable. • The SALI business has also been making losses.

16. Issues related to Motor Insurance: Motor Insurance Business of Foreign Insurers • For a long period, only Chinese-invested insurers are allowed to operate in the Statutory Automobile Liability Insurance business. • The new “Regulations on Statutory Automobile Liability Insurance” was implemented from May 2012 and allows foreign insurers to operate in the SALI business in China. • The channels and outlets owned by foreign companies are still very limited, and they are unable to compete with Chinese companies. Their future opportunities include: • To find their market segments • To provide differentiated services • To use new sales channels

17. Issues related to Motor Insurance: Marketization of Motor Insurance Premium rates • The premium rates in China’s motor insurance market experienced a process of standardization to liberalization, liberalization to standardization and finally standardization to liberalization again. • Independent Pricing by Insurers in 2003 Triggered Price War • Standardization of Motor Insurance Premium Rates in 2006 • Floating Premium Rates in 2010 • Market-Based Pricing Mechanism Proposed in 2012 • Will take about three years to carry out the "three-step" schedule, with the final aim of having insurers meet the conditions for the development of commercial motor insurance premium rates based on their own data.

18. China’s Development of Internet of Vehicle Section 4

19. Factors that Promote Internet of Vehicle Policies Support and Industry Alliance • In July 2010, the Ministry of Transport convened a meeting for all heads of departments related to communication and information of the national traffic system. A consensus was reached on promoting the development of Internet of Vehicle and Internet of Vessel. • In 2011, the State Council promulgated the “12th Five-Year Plan on Road Transport Safety” • Towards the end of 2011, the Ministry of Industry and Information Technology promulgated the “12th Five-Year Plan for the Development of Internet of Things.” • In the national "12th Five-Year” plans, intelligent transportation is a key focus. • Various provinces have also shown support for "Internet of Vehicle" through the launch of relevant preferential policies. • Telematics Industry Application Alliance (abbreviated as Telematics Alliance or TIAA) was established in February 2010. • Shanghai Vehicle Connectivity and Telematics Alliance (SVCTA) was established in April 2011. • Strategic Alliance of China Telematics Industrial Technology and Innovation was established in December 2011.

20. Development of Vehicle TelematicsDevice Providers, Content Providers and Network Providers • Device providers: • Automobile manufacturers (pre-installation market). Such examples include General Motor's OnStar, Toyota’s G-Book, Nissan's CarWings navigation system, SAIC Roewe’sInKaNet, FAW Pentium’s D-Partner, Chang’an Auto’s InCall, and Geely’s G-NetLink. • Post-installation device providers. Post-installation devices are generally provided by the service provider. • The pre-installation market focuses on security, such as in the providing of remote diagnosis and other functions; the post-installation market focuses on personalized services, such as entertainment. • Content Providers: currently focus primarily on digital navigation maps • Network Providers • Telecommunication operators provide the channels for information transmission between vehicle terminals and content providers and service providers. • China Mobile Multimedia Broadcasting, CMM

21. Development of Vehicle TelematicsService Providers • Service categories: • Vehicle information services • Road traffic information services • Safety information services • Commercial information services • Management information service • Types of enterprises: • Telecommunication operators • Automobile manufacturers • Navigation platform operators provide services such as GPS navigation. • Service providers of third party telematics application platforms • Currently mainly provide services such as logistics management, dispatch management, security of special vehicles, traffic surveillance, and the telematics platform for operational vehicles jointly operated by the competent departments of various industries to commercial vehicle operators and government departments.

22. Conclusion and Suggestion Section 5

23. The Future Development of telematics Insurance Products in China • There are certain preconditions that are necessary for the development of insurance telematics in China. • Compliance with regulatory requirements. Gradual liberalization of motor insurance terms and rates by the China Insurance Regulatory Commission will likely bring about the development and progress of telematics insurance products in China over the next three to five years. • Needs of insurers. The intense competitive environment and business losses have resulted in the need for insurers to develop market segments, seek high quality customers, and control the risks from claims. • Telematics development. • Telematics insurance products can become an important application of telematics. • If the right business model and balance of interests could be found, telematics service providers and insurers could achieve mutual benefit.

24. Issues Need Consider • Before insurers decide to launch telematics insurance products, they should consider the following issues： • Pricing and underwriting • System • Privacy • Sales • Claims settlement • Regulation

25. Thank you! If you have any follow-up questions about the presentation, please contact Marie Aquino at maquino@celent.com A recording of today's webinar and copy of the presentation will be available to Celent clients on our website after the event at http://reports.celent.com/login.asp