Non-life reinsurers face headwinds in China

Reinsurers face underwriting challenges in the non-life business in China due to lower demand and higher competition, according to rating agency AM Best.

Non-life reinsurance demand is declining due to the introduction of the Comprehensive Solvency Ratio (C-ROSS), according to the agency. Motor is the major contributor to growth in China’s insurance industry, accounting for over 70 percent of non-life direct premium income. Prior to C-ROSS at the start of 2016, under the Solvency I regime, capital requirements used a simple volume-based approach.

After C-ROSS took effect on January 1, 2016, however, the motor base premium risk charge was set between 8.43 percent and 9.3 percent, noticeably lower than the risk charge in other risk-based capital regimes. Given that motor accounts for over 70 percent of the non-life direct premium, the solvency regulation change resulted in an improvement in the non-life direct insurers’ capital positions. In contrast, the property base premium risk charge was set between 29.1 percent and 40.2 percent, which changed reinsurance purchasing behaviour: Insurers ceded less motor premium but more property risk (in excess-of loss-treaties, due to their severity volatility). Nevertheless, the increase in demand for property cession and other lines of business could not make up for the loss from a declining reliance on reinsurance in the motor line, according to AM Best.

The changes in demand for reinsurance have led to further problems, the rating agency continued in the report titled “Reinsurance in China: Underwriting Challenges for Non-Life, Capital Pressure for Life”.

A glut of reinsurance capacity and growing retention by the direct industry pose clear threats to reinsurers’ profitability. In addition, the oligopolistic structure of the direct market gives large cedants more bargaining power not only on pricing but also on terms and conditions. This squeezes profit margins even further, especially on the proportional treaties, making them thinner and thinner. In fact, in the 2017 renewal period some of the international reinsurers—both on- and offshore— decided to scale back their portfolios in China, by substantially downsizing their participation or even dropping treaties that no longer met their internal return on capital requirements.

The competition is not strictly between on- and offshore reinsurers. Medium-sized direct insurers are joining the party by writing inward reinsurance, which not only boosts their top line but also means they are getting high-quality, more diversified nation-wide business by writing first-tier companies’ treaties. In China, direct insurers may write inward treaty business only if they have a financial strength rating from an international rating agency and are registered in the CIRC’s reinsurance registration system.

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