On 19 September this year, the China Banking and Insurance Regulatory Commission (CBIRC) introduced a comprehensive motor insurance reform to address a number of pressing issues plaguing the industry such as high pricing, high handling fees, over-extensive operations, unruly competition and data distortion.
While the reform is meant to improve the industry as a whole, some industry insiders have expressed concerns that it might cause motor insurance premiums to decline and ultimately affect the profitability of insurers.
According to AM Best analytics senior director Christie Lee, the comprehensive motor reform, combined with dampened growth of new car sales, as a result of the economic fallout from COVID-19, is expected to pressure premium growth of the market’s largest line of business, motor, further as well as the profitability of Chinese non-life insurers over the short term.
“While the CBIRC targets to raise the industry loss ratio from 65% to 75%, and lower the overall expense ratio from 35% to 25%, AM Best notes that uncertainties remain and that the non-life market’s combined ratio may exceed 100% during the transitional period,” she said.
Despite the short-term challenges, however, the reform will ultimately be beneficial for the industry in the long haul.
Ms Lee said that the agency considers the reform and its effects to be credit positive to the industry over the medium to long term, given that the insurance regulator aims to fix fundamental legacy issues through this exercise – including high acquisition commissions, inaccurate data reporting and undisciplined competition.
“The motor reform will also allow insurance companies greater discretion in risk selection and risk-based technical pricing. Consequently, non-life insurers’ ability to navigate these challenges will be determined by their respective technical capabilities.”
In addition, AM Best notes that along with projected enhancements in data accuracy and improvements in reserve prudence, the motor reform will contribute to long-term market sustainability while encouraging non-life companies continually to boost risk-management capabilities. A