Cat lines boost growth in China but also mean volatility: S&P

China's reinsurers are investing in technology and systems to support a rapid expansion of nonmotor and, in particular, catastrophe insurance in the country. These business lines will help sustain growth, although they could expose the sector to more profit volatility.

That's according to an article S&P Global Ratings published today, titled ‘A Decade Since The Sichuan Earthquake, Catastrophe Reinsurance Is Gaining Momentum In China.’

"The ongoing expansion into nonmotor P&C business offers new growth avenues but will expose Chinese reinsurers to potential volatility, given the rising uncertainties associated with catastrophe exposures, insufficient underwriting expertise, and evolving risk-management frameworks," said S&P Global Ratings credit analyst Wenwen Chen. "By our estimates, the reinsurance cession rates for China's P&C sector will stabilize at around 9 percent by 2020."

The report also notes that 2018 marks the 10th anniversary of a massive earthquake in Sichuan province that caused disastrous losses of life and property. Back then, less than 1 percent of losses were covered by insurance claims. In the decade since that disaster, authorities have invested in systems to improve everything from construction standards to insurance markets.

China's property and casualty (P&C) penetration has deepened since 2008, but remains low, with national coverage worth less than 2 percent of GDP. S&P said it anticipates that domestic reinsurers will increase investments in catastrophe modeling to counter uncertainties, following the growing catastrophe exposures. This also comes after the establishment of China's first earthquake catastrophe model in 2015.

China already has the world's second-largest agricultural insurance market; however, the system is heavily subsidized. “Besides strong growth prospect of agriculture insurance, we also expect primary insurers to provide more innovative agriculture insurance products to underpin demand. In the first five months of 2018, for example, agricultural premiums from the primary insurance market rose by 33.9 percent year-on-year,” the report said.

Given that proportional-treaty accounts for a large portion of the reinsurance premiums in China, the domestic reinsurers' returns mirror that of the primary insurance markets, which have been subject to continuous motor pricing reforms, soft premium rates environment amid frenetic competition, and rising regulatory costs.

"Despite constraints, the potential for China's reinsurance markets remains promising. Nor is the growth or interest just domestic. We expect more international peers to set up operations," said Chen.

Until 2015, China had only one dedicated domestic reinsurer, but has since issued three additional licenses. As of July 31, 2018, there are seven global reinsurers with branches in China.

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