HONG KONG (S&P Global Ratings) July 14, 2020--S&P Global Ratings believes China's forthcoming comprehensive auto insurance reform will further squeeze the already strained underwriting profits of domestic property/casualty (P/C) insurers. The auto insurance sector's growth prospects will turn even gloomier amid lowering premium rates and the subdued outlook for new car sales. This will speed up the shift toward non-auto business lines over the next two years. In addition, capital market swings and lower-for-longer interest rates will likely dent the P/C sector's investment income in 2020, constraining the sector's overall earnings.
On July 9, 2020, the China Banking and Insurance Regulatory Commission (CBIRC) released a request for comments on the implementation of comprehensive auto insurance reform. The regulator aims to support consumers' interests through price cuts with expanded coverage during this phase of reform. The proposed reform includes compulsory motor third-party liability with increased coverage and various phases of motor pricing reform with updated premium adjustment factors and a commission cap.
We expect the auto insurance sector's premium rate to contract over the next two years as a result of adjusted pricing factors and the reduced commission cap. The sector's annual premium growth dropped to 4.5% in 2019, from 12.4% in 2015, the first year of auto insurance pricing reform. The impending reform will likely trigger another round of market competition, making it harder for the sector to make underwriting profits. While lower traffic during the COVID-19 lockdown improved combined ratios for the auto insurance business, we view the improvement as temporary following resumed traffic volume and the masses' reluctance to use public transport.
Amid heightening competition in the sector, we expect the reform to widen and enhance product offerings in this traditional business line, and allow insurance providers to exercise increasing discretion on risk selection and actuarial pricing. This, we believe, will prompt more sustainable growth for the sector. In our view, large P/C insurers are in a better position to defend their profitability by drawing on their advantages in economy of scale and diversified distribution channels.
We expect a marginal underwriting loss for China's P/C insurance market overall in 2020 and 2021. The domestic P/C sector's expansion to non-auto business lines will likely accelerate, particularly among the small and midsize P/C insurers. For the first five months of 2020, non-auto insurance grew a strong 13.9% year-over-year, representing 42% of the P/C sector's total premium. Such a product shift is increasing pressure on the sector's underwriting performance. Accident and health, and credit guarantee insurance will likely be loss making. In particular, credit guarantee insurance is under pressure from rising delinquencies amid a dim economic outlook.
From now on, we expect the non-auto insurance sector to tighten its underwriting strategy, along with the regulator's attention to promoting disciplined growth for the country's P/C sector over the next three years. In June this year, CBIRC released a draft three-year action plan for the P/C sector, aiming to achieve Chinese renminbi 1.7 trillion premium with 1.5% penetration by 2022. The sector's risk management framework will likely evolve, following CBIRC's increasing oversight on product governance and risk control. In light of the limited underwriting expertise of the P&C sector, particularly around commercial business lines, we expect market participants to increase their use of reinsurance.
In our view, the comprehensive auto insurance reform will promote greater diversity in China's P/C sector.
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;|
|Secondary Contacts:||Eunice Tan, Hong Kong (852) 2533-3553;|
|Terry Sham, CFA, FRM, Hong Kong (852) 2533-3590;|
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