Chinaâ€™s life insurance industry has generated the significant majority of premiums during the past few years â€” as well as the majority of scandals, negative headlines and regulatory scrutiny â€” but a crackdown on that sector has led to a slump in growth so far this year and renewed interest in the non-life segment.
On the face of it, the story looks promising. Premium income in 2017 grew by 13.8% to Rmb1 trillion (US$160 billion). That might pale in comparison to the life side, where premiums grew to Rmb2.5 trillion after more than 20% growth, but the sector is still growing at double the rate of the overall economy and is already the worldâ€™s second-biggest non-life market by premium.
â€œAs developed markets face tepid growth, China is the growth engine of the worldâ€™s non-life market, providing as much premium increase as North America and Western Europe combined,â€� according to a report by analyst Christie Lee at AM Best. â€œIn addition, Chinese regulators have made tremendous efforts aimed at improving insurance companiesâ€™ risk management and corporate governance.â€�
Even so, the sector has been struggling during the past couple of years. More than two-thirds of premium income comes from motor insurance, which suffered after de-tariffication in 2015 and 2016 affected margins. And the outlook remains tough.
â€œIntense competition, increasing investment risks and a tightening regulatory environment will continue to create a challenging operating environment for Chinese non-life insurance companies,â€� said Lee, who adds that smaller players in particular will struggle to remain competitive as they lack the economies of scale and technical skills of their bigger competitors, which means they face issues with renewal persistency, higher acquisition costs and less bargaining power with reinsurers.
While Lee maintains a negative outlook on the overall non-life sector, the biggest players are in a stronger position. The top five companies represent 70% of market share and, says Lee, take advantage of strong data analytics capabilities to deliver better underwriting results, due to more sophisticated pricing and risk differentiation modelling.
Indeed, PICC alone holds a 34% market share and Ping An Property & Casualty has nearly a 20% share.
This dominance could be reinforced by the next phase of motor insurance reforms, announced last June, which allow insurers even more autonomy in pricing. Ultimately, this normalisation of motor policies will create a more sustainable and healthy market, but in the short run the freedom to offer deeper discounts will squeeze margins further as the smaller players drag pricing down. Slower new car sales have only added to the price wars.
Slender underwriting margins mean that Chinaâ€™s non-life insurers are particularly reliant on investment income. In 2017, this worked out fine as risk assets delivered strong returns, but the high concentration of domestic assets in Chinese non-life insurersâ€™ portfolios is more of a concern as volatility has returned in 2018.
The strong hand of the state also has a significant influence in directing investments. State-owned insurers such as PICC have been forced into supporting the stock market in the past and are currently being encouraged to engage in loan-type and alternative investments in support of Belt-and-Road or domestic infrastructure projects.
â€œBecause these investments come with longer duration and lower transparency of the underlying risks, AM Best feels that these portfolios face an increase in both credit risk and the potential for asset/liability mismatch,â€� says Lee.
The government would also like to direct the sector towards a more balanced mix of products, away from the over-reliance on motor and towards lines such as agriculture, liabilities, accident and health, credit and surety. Again, the development of these new areas is likely to favour the bigger players, which have the capacity to develop new products.
And further pressure is being exerted on the smaller companies through the compliance burden of increasingly sophisticated solvency and risk management requirements.
As Lee concludes, the current operating environment in China will favour non-life companies with robust balance sheets, higher financial flexibility, diverse business portfolios and advanced distribution capabilities.
This should lead to a wave of consolidation, strategic partnerships and technology investments among the also-rans.
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