Rating agency AM Best has maintained its negative outlook on the China non-life re/insurance sector, citing persistent pressure on motor business and a dependence on investment returns to support earnings.
Analysts also highlighted potential execution risks as the market turns toward a non-motor-focused business model.
Adding further pressure is the backdrop of the ongoing US-China trade war, which has inadvertently lowered consumer and business sentiment on the mainland.
For the second quarter of 2019, China reported its weakest GDP growth in decades, and AM Best anticipates that the country’s economic growth will continue to expand only moderately in the coming quarters.
China’s top four non-life insurance companies account for about two-thirds of the market, and analysts noted that the top four companies’ overall combined ratio deteriorated slightly to 98.1% in 2018.
Last year, the weighted net profit of these insurers declined by 15% year-on-year, with profit margins likely to remain under pressure in 2019.
Notwithstanding the economic headwinds, China’s non-life insurance segment expanded by 12% in 2018 and by 11.1% year-on-year for the first half of 2019.
Non-life insurance companies in China have had to revisit their business strategies to include a more sustainable and diversified portfolio following the regulator’s move to liberalise the motor insurance segment.
AM Best believes that companies will face a steep learning curve on product development, and may face difficulties in achieving adequate pricing and forming sustainable distribution networks.
Motor business also experienced a slower rate of growth in 2018, as new car sales decreased as a result of the increased pricing autonomy from motor de-tariffication. This has helped to improve the loss ratio of major insurers, but at the same time has raised acquisition costs.
China’s non-life market in 2018 also saw a rise in bond defaults, widened credit spreads and a volatile equity environment that were significant drivers of non-life insurers’ decreasing profits.
Despite some improvements over the first half of 2019, overall AM Best expects the results of China’s non-life insurers to remain volatile given that earnings are highly correlated to the domestic investment market’s performance.