Shanghai free-trade zone

Doubts cast on free-trade zone's business potential

PUBLISHED : Saturday, 12 October, 2013, 12:00am
UPDATED : Saturday, 12 October, 2013, 3:23am

Mainland insurers are expected to open branches in the Shanghai free-trade zone, although analysts remain cautious about the benefits.

They say business volume written by the branches is likely to be insignificant, although the opportunities on offer will help property and casualty insurers diversify away from the less lucrative motor vehicle insurance business.

Foreign trade and cargo passing through the trade zone was expected to increase as shipping companies would enjoy favourable treatment and preferential tax rates, said Sally Yim, a senior credit officer at rating agency Moody's Investors Service.

"We see big opportunities in marine or cargo insurance and liability insurance," Yim said.

China Pacific Property Insurance (CPPIC), a unit of China Pacific Insurance (CPIC), the mainland's third-largest insurer, has set up a branch in the free-trade zone, and Shanghai-based Dazhong Insurance has won approval for one.

Yim said the cargo and liability insurance business would help diversify insurers' product portfolios from vehicle insurance, which accounts for more than 70 per cent of their premium income. The business was barely profitable, with a combined ratio of 99.8 per cent for CPPIC, she said.

A combined ratio of less than 100 per cent indicates an underwriting profit, while anything over 100 indicates a loss.

Kenneth Yue, a director and senior analyst at CCB International Securities, said cargo and liability insurance accounted for a small portion of non-life insurers' premium incomes.

Citing the first-half results of PICC Property and Casualty, the mainland's largest non-life insurer, Yue said liability insurance accounted for 4 per cent of its premium income, while cargo insurance was 1.8 per cent.

Demand for cargo and liability insurance has been low, although these types of insurance are more profitable than vehicle insurance.

For PICC, the loss ratio, which indicates the amount of money paid out in claims, was 33.6 per cent for cargo insurance, while it reached 64 per cent for vehicle insurance, Yue said.

CPIC's management was more positive about the business opportunities in the trade zone and said last month that it expected the government to provide tax exemptions for transport and liability insurance, according to a Morgan Stanley report. It also expects the zone to benefit property and casualty operations and provide infrastructure investment opportunities.

But an analyst, who spoke on condition of anonymity, said that although the zone would provide more incentives for non-life insurers to diversify away from vehicle insurance, the benefits would be insignificant.

"Insurers expect tax incentives, but so far we have seen no details," she said. "And until the zone is well developed, it will be difficult to assess the business volume. But even then we don't expect significant revenue."

Yim agreed. "Having a presence in the zone is unlikely to bring in significant growth in business volume," she said.

But she expects large non-life insurers including PICC and Ping An Insurance will nonetheless seek to set up branches in the trade zone.