The P&C sector has turned to the non-auto insurance sector this year, following the downturn in the auto insurance sector. In particular, the agriculture and liability insurance segments have boomed this year. However, the expansion and diversification into these new lines of businesses is not without risk, says S&P Global Ratings.
The increasing frequency of natural catastrophes generated losses for agriculture insurance. Furthermore, the underwriting of liability lines requires specialised knowledge that is lacking in China. To cushion against this higher risk, the required capital from insurers when underwriting such risks is also the among the highest under C-ROSS.
In addition, increasing defaults among retail peer-to-peer lending platforms had raised issues about the profitability of credit guarantee insurance underwritten by Chinese P&C insurers. S&P continues to perceive this line of business as risky, given its high correlation with economic trends.
Capitalisation has weakened as Chinese P&C insurers venture into non-auto segments that are more capital intensive than other sectors. At the same time, the insurers have invested aggressively to boost investment yield and maintained returns to shareholders and dividend payouts. As a result, Chinese P&C insurers had increased leverage through issuance of subordinated debt/Tier Two instruments.
In S&P's view, these instruments are pure debt with limited equity content. The widening gap between the core and comprehensive solvency ratio signifies the increasing reliance on debt financing and insurers' sensitivity to funding costs.
What's more, the unprecedented strength of this year's typhoons brings a timely reminder about catastrophe losses and unmodelled risk exposures for Chinese P&C insurers as they diversify to non-auto commercial lines.
S&P expects the losses (mostly related to property damage, business interruption, and motor losses) to prompt greater pricing discipline and risk awareness about natural catastrophes. In addition, the rapid urbanisation of coastal cities could mean historical data are obsolete, pushing insurers to increase usage of technology to obtain real-time information on their cedants. More typhoons point to higher catastrophe losses.