China is increasingly becoming a difficult environment for non-life reinsurers, as competition and the regulatory environment are adding to top-line and profitability pressures, according to a new A.M. Best special report. The Chinese life reinsurance market, meanwhile, has doubled its premium size since 2012 but must deal with heightened capital pressure.
The report, titled, “Reinsurance in China: Underwriting Challenges for Non-Life, Capital Pressure for Life”, states that many of the issues challenging non-life reinsurers have resulted from the implementation of the China Risk-Oriented Solvency System (C-ROSS). 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 cedents more bargaining power not only on pricing, but also on terms and conditions, which has squeezed profit margins even further. For growth, non-life reinsurers are looking at Belt and Road initiatives and captive insurers, as well as potential business arising from the second phase of C-ROSS.
According to the report, life and non-life reinsurers also need to be wary of potential competition from Hong Kong, as regulators there are working on a C-ROSS equivalence, which may allow Hong Kong reinsurers to be treated as onshore reinsurers in China. Although several years off, changes could attract new capital to the Hong Kong market as companies look to enter China’s reinsurance market.
Regulations and government policies will continue to play a large role in steering the direction of China’s reinsurance industry’s development, while also indirectly impacting reinsurance demand. As the market prepares for the second phase of C-ROSS, one task will be to further optimise the solvency regime and recalibrate insurance risk charges for health, motor and credit lines, which may further reshape the non-life reinsurance environment. On the life side, the market has entered a new stage of transformation. Whether financial reinsurance’s strong historical growth will continue is dependent on potential regulatory decisions and an increasingly competitive market environment. As regulators push the industry to refocus on protection and serve the real economy, protection reinsurance will grow, fuelled by rapid growth in the direct market.
A.M. Best believes that a talent shortage at a growing number of reinsurers and the need for a commensurate increase in salaries, even as profit margins decline, have contributed to the difficult operating environment for China’s reinsurers. However, the increased demand for talent is attracting non-state-owned or non-reinsurance background personnel to the industry, which could help make these traditionally conservative companies more commercialised and competitive.