China motor insurance market faces imminent risks: Moody’s

The Chinese motor insurance industry faces imminent risks of further deregulation in commercial (i.e. non-mandatory) motor insurance premiums, in addition to competitive pressure.

This is the finding of rating agency Moody’s, which also said that it expects underwriting performance for the industry to still be broadly break-even as insurers become more disciplined and selective in underwriting in order to improve profitability.

It also noted that a mitigating factor the weakening profitability in motor is tightened claims management and potential reforms to mandatory third-party (MTP) motor liability insurance, which would help improve the loss ratio.

The rating agency added that increasing participation by foreign insurers should keep competitive pressure high. The report points out that since the opening up of the MTP motor market in 2012, almost all of the foreign incumbents have entered this market, and, as a group, they have consistently recorded overall premium growth of between 20 percent and 30 percent in recent years, although from a low base.

While Moody’s expects foreign players' market share to remain low, it said that their increasing participation and their established experience overseas will add to their impact on China's insurance market.

For the Chinese property and casualty (P&C) insurance industry as a whole, Moody’s said the outlook is stable over the next 12-18 months, albeit with risks skewed somewhat more to the downside.

"Premiums should grow at an annualised pace of 15 percent-20 percent in the coming 12-18 months, versus 16.5 percent in 2013. This should resume the uptrend in non-life insurance penetration (premium as percent of GDP), which at 1.3 percent in 2012 remained low compared with other economies with similar GDP per capita and stage of economic development," said Sally Yim, a Moody's vice president and senior credit officer.

"While we expect China's GDP to grow at a slightly slower 6.5 percent-7.5 percent for 2014 and 2015, compared with the 7.7 percent recorded in 2012 and 2013, P&C insurance premiums should exhibit strong growth, reflecting the rebound in motor vehicle sales and demand for general insurance, especially in personal lines, as government polices continue to support household income and consumption, and as we see rising urbanisation rates and general insurance awareness in China.

"Nonetheless, competitive pressure in the industry will remain high, as underwriting capacity remains abundant on the back of a flurry of new entrants and capital that have come in since 2011, when underwriting performance was more favourable," she added.