Rating agency AM Best has opted to maintain its negative outlook on the Chinese non-life re/insurance market, partly due to the impact of motor reform on premium growth and underwriting performance.
Alongside this reform are execution risks and negative profitability impact arising from expansion of non-motor lines, although this could be beneficial for long-term sustainability, AM Best feels.
Analysts also warned of a potential rise in impairment losses from fixed income investments.
However, offsetting these negative factors is the relatively quick economic recovery from COVID-19 damage that China has shown, as well as strong regulatory involvement in guiding the industry for quality growth.
China is ahead of other major economies in its economic recovery having been the first nation to battle the coronavirus outbreak, and is the only G-20 country with a positive real GDP forecast in 2020, according to the International Monetary Fund (IMF).
The country’s non-life insurance market registered a year-over-year increase of 7.2% in direct premium written (DPW) in the first ten months of 2020, following a solid 10.7% expansion in DPW in 2019.
Notably, this growth was steered by non-motor lines of business, particularly health (which grew by 35.8%), agriculture (21.8%), engineering (19.2%), and liability (18.1%).
The market’s largest business segment, motor, also continued to grow, albeit at a slower rate, now making up slightly less than 60% of the market as of October 2020, versus 70% of industry DPW five years ago.
In contrast, credit and surety, which has historically been a strong driver of growth among non-motor segments, was the only line of business to record a contraction in premiums.
With the regulator’s recent announcement of plans for a comprehensive reform of motor insurance, AM Best believes that the premium income and underwriting profitability of the motor segment is likely to come under pressure over the next 12 to 18 months.
“We expect the nonmotor lines of business to continue steering the future growth of the Chinese non-life market in view of the low insurance penetration and strong government support in these segments,” the rating agency said.
“However, insurance companies are also likely to face execution risks in portfolio restructuring and challenges in risk selection, while the underwriting profit margins for these emerging segments (such as health, and credit and surety) remain unfavourable and exhibit a deteriorating trend.”
That said, AM Best is confident that Chinese non-life players have learnt from previous experience and are generally choosing to pursue more measured and sustainable growth in line with the CBIRC’s agenda to enhance internal controls and underwriting discipline.
