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NEWS

Chinese Insurers' Earnings Will Erode Amid Coronavirus Outbreak


Chinese Insurers' Earnings Will Erode Amid Coronavirus Outbreak

HONG KONG (S&P Global Ratings) Feb. 4, 2020--The outbreak of the novel coronavirus will likely weigh on Chinese insurers' earnings and revenues in 2020. S&P Global Ratings expects potential equity market volatility and persistent reinvestment challenges to strain domestic insurers' bottom lines as business activities slow down from reduced face-to-face engagements with customers.

"We anticipate that the capital buffers for our rated insurers, though narrowed, will remain sufficient at existing rating levels," said S&P Global Ratings credit analyst WenWen Chen. "Meanwhile, the pressure on capital could be more pronounced on smaller insurers without strong parent group support in China's large insurance market, which is dominated by key domestic insurers."

LIFE

Life insurers' efforts to focus on enhancing traditional tied agency distribution may come to a standstill given concerns over human-to-human transmission. The reduced propensity to meet agents to discuss financial planning and insurance coverage will hinder the distribution of protection-type policies. Particularly, we anticipate that new business activity will contract during the first half of 2020. Hubei, the province most affected by the coronavirus, serves as one of the top 10 markets in China, accounting for approximately 4.3% of the sector's gross premiums written in 2019.

2020 will likely see the repeat of 2018's earnings challenges amid headwinds from the investment market and persistently low interest rates. China's stock market slumped by 7.7% when it reopened after the Chinese New Year holidays.

We expect low interest rates to increase reserve provisioning needs for life insurers, narrowing their capital buffers further. Heightening risk appetite among our rated insurers in 2019 has increased their vulnerability to the volatility in equity capital markets. This is even though earnings improved in 2019 from investment gains and revised tax policies.

While the claim expenses associated with the outbreak remain uncertain, medical costs for future treatments may burden insurers. As of Feb. 3, 2020, the Ministry of Finance and local governments have planned to allocate total funding of Chinese renminbi 47 billion (US$6.7 billion) to assume responsibility of medical-related costs. We anticipate that eventual mortality claims will be moderate given the seemingly low fatality rate of the coronavirus infection.

The outbreak could increase insurance awareness in China, and may help the longer-term development of the country's life insurance sector. As the world's second-largest life insurance market, China's growth potential remains strong. We anticipate an accelerated revolution of traditional insurance distribution fueled by technology advancements as insurers seek to distribute policies remotely.

P&C

The coronavirus outbreak will strain China's property and casualty (P&C) sector as insurance companies see thinning profitability.

A lower economic outlook and increasing claims may pinch the already shallow pockets of Chinese P&C insurers. A highly competitive market and ongoing motor pricing reforms have pulled down profitability. And a slowing economy may lead to higher delinquencies for credit guarantee insurance contracts.

In our view, the outbreak may limit auto sales volume in early 2020, affecting the already dim growth prospects for motor insurance. To cope, the sector had refocused its attention toward non-motor lines. As of end-2019, non-motor insurance premiums account for 37.1% of the sector (up from 33.4% in 2018).

The non-motor insurance sector's strong premium growth is mostly funded by sales of accident and health contracts, which remain a loss-making business line. The increasing awareness of protection arising from the coronavirus outbreak could hike the demand for accident and health insurance. But the profitability of the non-motor insurance sector will likely remain subdued should the same pricing philosophy persist.

Demand from business interruption, event cancelation, and liability-related coverage could rise as policyholders seek to insulate themselves against man-made and natural calamities. However, we continue to perceive limited underwriting expertise and technical pricing as broader concerns about insurers' ability to underwrite such coverage.

This report does not constitute a rating action.

S&P Global Ratings, part of S&P Global Inc. (NYSE: SPGI), is the world's leading provider of independent credit risk research. We publish more than a million credit ratings on debt issued by sovereign, municipal, corporate and financial sector entities. With over 1,400 credit analysts in 26 countries, and more than 150 years' experience of assessing credit risk, we offer a unique combination of global coverage and local insight. Our research and opinions about relative credit risk provide market participants with information that helps to support the growth of transparent, liquid debt markets worldwide.

Primary Credit Analyst:WenWen Chen, Hong Kong (852) 2533-3559;
wenwen.chen@spglobal.com
Secondary Contact:Eunice Tan, Hong Kong (852) 2533-3553;
eunice.tan@spglobal.com

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