Further liberalisation of Chinese commercial motor insurance pricing could weaken underwriting margins, says Fitch Ratings in a new report which outlines some of the threats facing the general insurance sector.

Motor insurers are likely to drop their premium rates to the lowest permissible limits, leading to a deterioration in loss ratios.

“The claims frequency has declined since the implementation of the trial deregulation of commercial motor premium pricing in June 2015. The mechanism of non-claim discount has incentivised insurers from not reporting small claims, but this impact is only likely to be marginal in 2017. Furthermore, the ongoing escalation in policy-acquisition costs due to market competition will exacerbate the narrowing in underwriting profitability,” said the international rating agency in the report titled "China Non-Life Insurance Market Dashboard 1H17" .

Referring to catastrophe risk, Fitch expects this to remain a key threat to operating stability. It is inevitable for smaller insurers to increase their reliance on reinsurance to mitigate their claims from severe weather-related events such as flooding.

In the investment arena, Fitch said: “We believe insurers' ability to support cash outflows associated with their 'short-tailed' claims liability may be affected if they were to further raise exposure to alternative investments such as infrastructure debt investment plans or trust products. Most insurers have increased investment allocation in less liquid alternative investments to boost investment yield.”