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China P&C outlook turns negative on motor stress: Moody’s

28th October 2021 - Author: Matt Sheehan

Moody’s has issued a negative outlook for the property and casualty (P&C) insurance sector in China, based on the expectation that motor lines will continue to bear underwriting losses beyond 2021.

Non-motor lines are likely to support premium growth at low single-digit percentages in 2021 and mid single-digit percentages in 2022, compared with 4.4% in 2020, analysts believe.

This is because China’s still-low P&C insurance penetration and ongoing government policies to support selected coverages such as agricultural insurance will support insurers’ non-motor business.

However, Moody’s also warns that falling pricing adequacy and a rising exposure to extreme weather events will limit insurers’ non-motor underwriting profit, which, together with persistent motor line losses, will strain their overall underwriting performance.

Meanwhile, risk-based capitalization will remain strong, supported by insurers’ accumulated earnings, mainly from still strong investment income.

And the risk of capital erosion from natural disasters remains low despite the industry’s rising catastrophe exposures.

“A further increase in Chinese P&C insurers’ motor loss ratios is likely as more policies are migrated to a new pricing regime at reduced pricing and with a broader coverage. In addition, Chinese authorities’ increasing policy focus on reducing policyholders’ premium costs weighs on insurers’ profitability prospects,” says Kelvin Kwok, a Moody’s Analyst.

Moody’s further noted that insurers’ holdings in alternative investments such as trust plans and debt investment schemes will reduce further relative to their capital base.

However, low interest rates under current accommodative monetary policies underpin insurers’ demand for the yield enhancement offered by equities.

As a result, the risk of capital erosion from potential defaults on insurers’ alternative investments will decline but insurers’ exposure to equity market volatilities will rise.

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