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China to test market-based auto insurance pricing mechanism as soon as May

China plans to pilot a more market-based pricing mechanism for commercial auto insurance as early as May in ongoing reforms to give auto insurers more flexibility to set premiums reflecting the risk profile of their customers and operating expenses, two industry sources told S&P Global Market Intelligence.

The pricing of commercial auto insurance in China is based on a benchmark premium derived from a benchmark pure risk premium, adjusted for factors including distribution channels, individual driver and vehicle records, and no-claim discounts. The benchmark premium differs from region to region.

Regulators first gave insurers in a limited number of areas more pricing freedom in June 2015, expanding the policy to most regions the next year. A second phase in June 2017 allowed further flexibility. The people, who participated in a meeting with the Chinese insurance regulator March 22 in Beijing, said the pilot regions will be the provinces of Shaanxi and Qinghai and Guangxi Zhuang Autonomous Region.

The new mechanism could become nationwide policy in 2019, they added.

Insurance companies are still in discussions with the regulator on including a wider range of factors in the calculation of the benchmark pure risk premium, which represents the expected cost of claims for the risk under consideration, both sources said. One of them added that the new factors to be introduced may include car models and driving habits.

Auto insurance, comprising both commercial and compulsory segments, is the largest revenue source for Chinese nonlife insurers. In 2017, Chinese property and casualty insurers recorded auto insurance premiums of 752.11 billion yuan, or 71.3% of the sector's total gross written premium, according to China Insurance Regulatory Commission data.

After the second phase of the reforms, drivers with good road-safety records in most regions were able to pay premiums as low as 38.25% of the benchmark premium, compared with 43.35% in phase one and 70% before the reforms, the China Insurance Regulatory Commission said in June 2017. In March, the regulator further expanded pricing flexibility for some regions, including allowing customers in Sichuan province to pay as little as 25.35% of the benchmark premium.

The pilot program is expected to last for one year, the second source said, adding that the regulator will extend the policy changes to other regions if the trial goes smoothly. If it does not, the insurance regulator may still halt the plan.

As of March 27, US$1 was equivalent to 6.28 Chinese yuan.