News Non-Life12 Sep 2019

China:Outlook on non-life market remains negative - AM Best

| 12 Sep 2019

International credit rating agency AM Best is maintaining its negative outlook on the China non-life sector, owing to persistent pressure on the motor business, execution risks as the market turns toward a non-motor-focused business model and the industry's dependence on investment returns to support earnings.

The latest Best’s Market Segment Report, “Market Segment Outlook: China Non-Life Insurance”, also notes that the ongoing US-China trade war inadvertently has lowered consumer and business sentiment on the mainland. For the second quarter of 2019, China reported its weakest quarter-on-quarter GDP growth in decades, registering just 6.2%.

Although the US tariffs are notable, the current slowdown of China’s economy in large part is due to domestic pressures, including a decline in the pace of infrastructure investment, a cooling down of construction and a decrease in industrial output.

AM Best expects that China’s economic growth will continue to expand moderately in the coming quarters, with GDP growth remaining in the 6.0-6.5% range.

Profit pressure

AM Best says that overall, the profit margins of the Chinese non-life insurers are likely to remain under pressure in 2019.

China’s top four non-life insurance companies account for about two-thirds of the market. AM Best notes that the top four companies’ overall combined ratio deteriorated slightly to 98.1% in 2018. In 2018, the weighted net profit of these insurers declined by 15% year-on-year, while the weighted average return-on-equity dipped by 3.3 percentage points.

Notwithstanding the economic headwinds, China’s non-life insurance segment expanded by 12% in 2018 and by 11.1% year-on-year for the first half of 2019.

Motor

Since the regulator’s move to liberalise the motor insurance segment, non-life insurance companies have had to revisit their business strategies, shifting to include a more sustainable and diversified portfolio of non-motor business lines. The execution risk in these business transformations is significant, as insurers will have to cope with a steep learning curve on product development, achieve adequate pricing without a historical record and establish a long-term sustainable distribution network.

Motor business also experienced a slower rate of growth in 2018, as new car sales decreased as a result of the increased pricing autonomy from motor de-tariffication. This has helped to improve the loss ratio of major insurers, but at the same time has raised acquisition costs.

China’s non-life market in 2018 also saw a rise in bond defaults, widened credit spreads and a volatile equity environment that were significant drivers of non-life insurers’ plunging net profits. Despite some first-half 2019 improvement, the results of China’s non-life insurers likely are to remain relatively volatile given that earnings are highly correlated to the domestic investment market’s performance.


 

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