Two Rule Flaws and One Strategic Mistake at Xiang Hu Bao Caused a Death Spiral

I firmly believe that if the mutual aid model does not hold up, then none of the principles of insurance hold up, and insurance is a Ponzi scheme. The problems that arise at mutual aid platforms are all caused by poorly designed rules and operational mistakes, not by anything wrong with the principle of the model.

Xiang Hu Bao has been criticized within the industry as having entered a death spiral and being unsustainable. As a peer, comparing it with KangAi Commune, I believe that two flaws in Xiang Hu Bao's rules and one mistake in its growth strategy produced this outcome.

Flaw one: the waiting period is too short. For cancer and critical illness, Xiang Hu Bao's is three months; KangAi Commune's is twelve. Too short a period, for a platform that anyone can join with no threshold, creates a great deal of opportunistic behavior. This is one area where you cannot learn from insurance: buying insurance requires paying money up front, which is itself a cost imposed on opportunism.

Flaw two: no threshold for applying for aid. Under the zero-prepayment model, there is no constraint on users at all. If a user applies for aid and is turned down, it does not matter — there is nothing lost — so a mass of speculative applications will appear, and Xiang Hu Bao will be run ragged. Xiang Hu Bao charges 8 percent in management fees and still lost money; I suspect a great deal of it was spent on this. KangAi Commune, by contrast, sets a review deposit, so applying for aid carries a cost for fraud and dishonesty, and applicants think much more carefully before applying.

Those two flaws aggravated adverse selection: healthy people and honest people were squeezed out and quit in large numbers, while opportunists and people who did not meet the health requirements stayed. That produced the so-called death spiral.

On growth strategy, Xiang Hu Bao's fatal error was explosive growth. Does explosive growth conform to the laws of how mutual aid develops?

1. Mutual aid users are paying money in continuously, and what they get is protection — something intangible and poorly perceived. Users do not feel they are getting a good deal. Will they stay? And when large numbers of users leave, the exits are asymmetric: healthy people leave more readily than unhealthy ones.

2. Once you have run through the potential users, the strategy of balancing contributions through user numbers no longer works, and you have backed yourself into a corner.

Had it maintained balanced, stable, long-term growth, the contribution curve would have looked very good, the subtle education of users would have been far more effective, and the development of the platform and the industry would have been healthier.

Of course, looked at from another angle, the reason Xiang Hu Bao had these settings that I do not endorse may be that they had grander ideals — wanting to help more people quickly, or hoping to achieve through these measures some effect I cannot understand. That is a level I cannot reach.

Nor do I believe that KangAi Commune is necessarily right on these points; judging by their current effect, it may simply be a little more effective than Xiang Hu Bao. But the downside of KangAi Commune's approach is obvious: the Commune grows more slowly, users do not understand it, and their assessments are not necessarily positive.

The views above are purely personal, and criticism is welcome.