In the face of profound changes in the global macroeconomic environment and a new wave of technological revolution, the importance of providing comprehensive financial services to tech-based enterprises throughout their lifecycle has reached new heights.
Recently, the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council issued the “Implementation Plan for Comprehensive Reform Pilot in Pudong New Area (2023-2027)” (hereinafter referred to as the “Plan”), which has garnered significant attention in financial markets for its innovative measures in tech insurance services. The Plan emphasizes promoting financial support for technological innovation, enhancing the quality and efficiency of tech insurance services, and leveraging the Shanghai Insurance Exchange to explore insurance products, technologies, and models lawfully and compliantly, deepening the pilot of tech insurance risk compensation mechanisms based on market principles.
Shortly before the release of the Plan, the National Financial Regulatory Administration also issued a “Notice on Strengthening Financial Services for Tech Enterprises Throughout Their Lifecycle” (hereinafter referred to as the “Notice”), requiring the continuous promotion of a financial system that adapts to the gradual cultivation of tech enterprises and the accelerated formation of comprehensive lifecycle financial services for tech enterprises.
“The issuance of the aforementioned Plan and Notice is of significant importance. Firstly, it strengthens financial support by ensuring that tech enterprises receive the necessary funding at every stage of their development, which helps solve the problems of difficult and expensive financing for tech enterprises, promoting their healthy and rapid growth. Secondly, it optimizes the financial service system, guiding financial institutions to focus more on providing customized financial products and services to tech enterprises to meet their diverse financial needs. Additionally, it promotes the positive interaction between technological innovation and finance, where technological innovation provides new business areas and growth points for the financial industry, and the financial industry provides necessary funding support and risk management tools for technological innovation, facilitating the sustainable and healthy development of the economy and society,” said Wang Peng, an associate researcher at the Beijing Academy of Social Sciences, in an interview with the Financial Times.
The Potential of Tech Insurance
Tech insurance refers to the use of insurance tools as a means of risk dispersion, where insurance companies provide compensation or insurance payouts for the property losses, profit losses, or research funding losses of tech enterprises or research institutions due to various risks encountered in research, production, sales, after-sales, and other operational activities, as well as the civil compensation liabilities they should bear for causing property or personal injury to shareholders, employees, or third parties.
With the development of technological innovation, the demand for insurance services from tech enterprises is also evolving. The primary demands of tech enterprises for insurance services are personalized, intelligent, and comprehensive lifecycle services.
In recent years, China’s insurance industry has focused on national security and industrial frontiers, leveraging high-level tech self-reliance and self-strengthening as an essential aspect of serving national strategies. It has actively contributed to providing financing and credit enhancement for specialized, sophisticated, and innovative enterprises. On one hand, it has gradually built a relatively complete, multi-level, professional, and specialized tech financial service system, meeting the diverse needs of tech enterprises and strategic emerging industries across the entire chain and lifecycle. On the other hand, it has utilized the advantage of insurance funds as patient capital, employing equity, debt, loans, and other tools to enrich investment strategies and support the construction of a strong technological nation.
For instance, Shandong Province has established a tech insurance service system and developed the “Lu Ke Bao” series of exclusive tech insurance products. For tech enterprises purchasing “Lu Ke Bao” products for the first year, the Shandong provincial government provides a subsidy of up to 50% of the premium, with subsequent years receiving up to 30% of the actual premium paid, and a maximum annual subsidy of 300,000 yuan per enterprise. Additionally, to encourage enterprises to develop the first set of equipment, the first batch of new materials, and the first version of software, reducing the risk losses in the innovation process, relevant departments have implemented a series of measures to support the compensation mechanism pilot work for the “three firsts” insurance. They guide insurance companies to innovate insurance types, expand insurance coverage, and provide insurance services. For example, China PICC has used insurance mechanisms to enhance the independent controllability of industrial chains and supply chains, developing the “three firsts” insurance and leading the formation of China’s integrated circuit co-insurance body. As of the end of October 2023, China PICC’s insurance business supporting technological self-reliance and self-strengthening has undertaken risk protection amounts exceeding 10 trillion yuan.
Challenges Facing Tech Insurance
Despite the promising potential, tech insurance also faces several challenges in its development. According to incomplete statistics, there are currently about 20 types of tech insurance in China, covering various risks such as product research and development, intellectual property protection, and loan guarantees for tech enterprises. However, according to data from the China Insurance Association, from 2017 to 2020, tech insurance provided risk protection of over 1.79 trillion yuan for related enterprises and institutions, with cumulative payouts exceeding 2.263 billion yuan. This coverage falls far short of the risks faced by tech enterprises in China.
“Compared to the rapidly evolving trends in modern technology and the diversified, personalized risk management needs of tech enterprises, the development level, service depth, and professionalism of domestic tech insurance are still insufficient,” said industry insider Wu Zhongyan to the Financial Times. For example, the comprehensive risk management and dispersion mechanisms targeting the technological innovation needs of tech enterprises still need improvement, with the overall development of existing tech insurance and guarantee products lagging, and a noticeable lack of innovation in new full-industry chain risk management tools.
In terms of institutional setup, China has over 40,000 branches of property insurance companies, but fewer than 30 branches specialize in tech insurance, with only one specialized tech insurance company at the corporate level. Regarding risk protection limits, from 2017 to 2020, tech insurance’s risk protection limits for related enterprises and institutions accounted for only 0.08% of the total national property insurance protection limits. The reasons lie in the insufficient compatibility of tech insurance product services with supply and demand and the need for optimization and improvement in policy incentive measures.
“One of the difficulties in developing tech insurance is the challenging evaluation of technology risks,” Wang Peng believes. Tech enterprises involve a wide range of complex technical fields, making it difficult for insurance companies to accurately assess their potential technical risks. Moreover, the uncertainty and high risk of technological innovation increase the difficulty of underwriting for insurance companies. Additionally, due to the relatively short development history of tech enterprises, there is insufficient historical data to support the actuarial and pricing processes of insurance companies, making it challenging to develop tech insurance products. Consequently, the market’s tech insurance products are relatively limited, lacking personalized insurance products tailored to different types and stages of tech enterprises, significantly restricting the development of tech insurance.
Furthermore, tech insurance requires professionals with both technology and finance backgrounds to design products and assess risks. However, such talent is relatively scarce in the market, posing a challenge to the rapid development of tech insurance.
The Need for Improvement in Tech Insurance
Currently, self-reliance and self-strengthening in technology have been elevated to a strategic pivot for national development, making the development of tech insurance timely. Serving the real economy and supporting technological innovation is both the mission and responsibility of the insurance industry and a necessity for its deepening supply-side structural reform and transformational development.
The insurance demands of tech enterprises and the new fields and new business models generated by new technologies will create new growth points and broaden new development spaces for the insurance industry.
So, how can the development of tech insurance be further accelerated? Wu Zhongyan believes that insurance companies need to enhance their technological content and solidify their ability to support technological innovation. Compared to traditional fields, the risks associated with technological innovation are more complex and diverse. The traditional product design approach cannot meet the personalized, customized, and comprehensive protection needs of tech innovation risks, pushing insurance companies to provide support through more technologically advanced and professional insurance solutions. Currently, tech insurance products and services are relatively traditional and fragmented, focusing on mature enterprises and emphasizing economic compensation and credit enhancement functions. The role of financial intermediation has yet to be effectively realized. Therefore, a lifecycle insurance service concept should be established, providing differentiated, comprehensive, and all-process insurance protection according to the pain points of different industries’ innovation, such as R&D risks, achievement transformation risks, and market promotion risks. Additionally, leveraging the long-term and stable advantages of insurance funds to strengthen financing support for tech innovation enterprises, exploring win-win models for tech finance, and experimenting with investment funds in the tech venture capital field through “insurance-investment linkage” models can maximize resource sharing and provide one-stop risk protection, special services, and financing solutions for tech enterprises.
Wu Zhongyan proposes four suggestions:
- Deepen Collaboration with Government Departments: Actively communicate and collaborate with government departments to understand policy directions and market needs and jointly promote the development of tech insurance.
- Cultivate and Recruit Professional Talent: Increase efforts to cultivate and recruit professional talent in tech insurance. By conducting internal training and external recruitment, establish a high-quality team with both technology and finance backgrounds.
- Establish a Comprehensive Risk Management Mechanism: Enhance risk assessment and control capabilities. Utilize advanced technologies such as big data and artificial intelligence for comprehensive and in-depth risk assessment of tech enterprises. Additionally, establish sound risk dispersion and transfer mechanisms to reduce underwriting risks.
- Explore New Cooperation Models with Tech Enterprises: For example, insurance companies can collaborate with tech enterprises on technology and product innovation activities, sharing resources and risks. This approach will help promote the integrated development of technological innovation and the insurance industry, achieving mutual benefits and win-win outcomes.
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