China non-life margin pressure lingers: Fitch

Fitch Ratings sees ongoing pressure on underwriting margins and expects catastrophe claims to continue to undermine insurers’ operating stability.

Nevertheless, Fitch anticipates insurers’ ability to raise capital to fund business expansion to remain intact. Scale advantage will sustain large insurers’ operating profitability. Smaller insurers with thin margins will depend on ongoing capital replenishment to support their growth.

The agency expects motor insurers' claim ratios to rise steadily because of downward pricing adjustments after the third round of motor insurance pricing reform in March 2018.

However, a recent regulatory initiative to discipline motor insurers to control the structure of their acquisition cost is likely to alleviate the pressure of escalating expense ratios, Fitch noted. Insurers with limited operating scale or no niche in sourcing quality business will still find it a challenge to achieve break-even in their underwriting margins. Scale advantage and wide distribution coverage, however, will enable major insurers to sustain profitable underwriting results, the agency noted.

Fitch expects increased frequency of losses from natural catastrophe perils to continue to threaten operating stability of non-life insurers in China. Claims from typhoons or flooding-related events coupled with persistently soft pricing conditions undermined insurers' loss ratios in the commercial property insurance segment in 2018. Insurers will be relying on reinsurance protection to mitigate their catastrophe exposure, Fitch noted.

Non-motor insurance will remain the key growth driver, although the trade tension between China and the US could pose uncertainty over overall growth dynamics, the agency said. Growth in non-motor business will continue to outpace motor premium expansion. Fitch expects demand for non-motor business is likely to remain strong, underpinned by low insurance penetration and regulatory support. Pricing liberalisation is likely to moderate motor premium growth, while demand for motor insurance policies could drop if stagnant new auto sales persist, the agency said.

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