Broker's View

Slower growth expected in China’s non-life insurance sector

Only an increase in motor insurance premiums caused by an acceleration in sales of new vehicles could push profit growth into double digits

PUBLISHED : Tuesday, 03 January, 2017, 5:30pm
UPDATED : Tuesday, 03 January, 2017, 10:24pm

Profits at China’s non-life insurers are unlikely to see double digit growth in 2017 unless there is an acceleration in new car sales which boosts motor insurance premiums, according to Fitch.

The country’s economic slowdown will weaken near-term demand for insurance policies, the ratings agency said.

“Premiums growth for the non-life sector is likely to decelerate further in 2017,” said analysts Terrence Wong, Joyce Huang and Jeffrey Liew in a sector outlook note for the coming year.

The sector reported single-digit growth of 9 per cent in the first nine month of 2016, compared with 11.4 per cent during the same period a year earlier.

Motor insurance, the major business class in non-life insurance, saw direct written premiums rise by

9.28 per cent year-on-year in the third quarter of 2016, down from 12 per cent growth in 2015.

The slowdown was partly because the first trial deregulation of commercial motor insurance pricing was rolled out by the China Insurance Regulatory Commission (CIRC), initially in six Chinese regions starting in June 2015, then in 12 more provinces and cities from January 2016.

Deregulation has the effect of producing higher acquisition costs as market rivalry increases. This, coupled with an influx of new players, could further constrain major insurers’ capability to improve their margin.

Major motor insurers with scale advantage are likely to sustain their underwriting profitability in the coming year
Fitch analysts

A recovery in the growth of new car sales had to some extent mitigated the impact of the deregulation trials, according to the Fitch analysts, who don’t see deregulation further narrowing the underwriting margin of motor insurers in the near term.

“Major motor insurers with scale advantage are likely to sustain their underwriting profitability in

the coming year, in our view,” the report said.

“We believe smaller insurers will still find making a significant turnaround in their underwriting

results in their motor insurance a challenge due to their relatively higher fixed costs.”

Fitch believes the long-term growth prospects for the sector look promising, given regulatory changes aimed at improving insurance penetration rates and insurers’ efforts to expand their product reach nationwide.

Fitch said that an expansion in premiums from motor insurance could slow if growth in new car sales slides, but rising car ownership in lower-tier cities and motor upgrade requirements might be enough to drive demand for automobiles.

Among non-motor sectors, the launch of regulatory initiatives will further spur demand for catastrophe insurance, accident and health insurance and agriculture insurance, Fitch said.

It expects non-motor insurance lines, such as liability, to report faster expansion than the motor class, given its relatively low penetration rate.

Liability insurance reported growth of about 20 per cent in the first nine months of 2016.

In addition to profitability, Chinese non-life insurers can sustain “sound capital buffers to facilitate their business expansion despite the introduction of a new capital regime in 2016”.

Chinese insurance companies have been required to comply with a new risk-based capital framework, the China Risk Oriented Solvency System (C-ROSS), since January 2015. Recent statistics from CIRC show the average comprehensive capital ratio computed under C-ROSS was 278 per cent at the end of June 30 for the non-life sector and 418 per cent for the reinsurance segment, well in excess of the 100 per cent regulatory minimum.

Slower market growth will not undermine insurers’ flexibility to raise capital either, the report said, but non-life insurers will face reinvestment risk in the coming year when their fixed income securities mature in the current low interest rate environment.

“Fitch believes insurers are likely to continue to shift part of their assets towards investment properties or less liquid instruments, such as debt schemes or trust products to capture higher investment yields, in our view,” the report said.

Insurers’ liquidity could decline further in 2017, notwithstanding the sound level of cash and deposits to net claim reserves as of the end of 2015.

business-article-page