Best’s Market Segment Report: AM Best Maintains Negative Outlook on China’s Non-Life Insurance Industry

HONG KONG--(BUSINESS WIRE)--AM Best is maintaining its negative market segment outlook on China’s non-life insurance segment, citing underwriting profitability that is under pressure amid market reform.

A new Best’s Market Segment Report, titled, “Market Segment Outlook: China Non-Life Insurance,” states that pressure on premium growth and underwriting performance due to comprehensive reform of motor insurance; execution risks and negative profitability impact arising from expansion of non-motor lines; and potential rise in impairment losses from fixed income investments are key supporting factors for the negative outlook.

China’s non-life insurance market registered a year-over-year increase of 7.2% in direct premium written (DPW) in the first 10 months of 2020, following a solid 10.7% expansion in DPW in 2019. Notably, this growth was steered by non-motor lines of business, particularly health, which grew by 35.8%, agriculture (21.8%), engineering (19.2%) and liability (18.1%). The market’s largest business segment, motor, continued to grow, albeit at a slower rate and now makes up slightly less than 60% as of October 2020, versus over 70% of industry DPW five years ago. Credit and surety, which has historically been a strong driver of growth among non-motor segments, was the only line of business to record a contraction in premiums.

With the regulator’s recent announcement of plans for a comprehensive reform of motor insurance, AM Best notes that the premium income and underwriting profitability of the motor segment is likely to come under pressure over the next 12-18 months. AM Best expects the non-motor lines of business to drive future growth of China’s non-life market given low insurance penetration and strong government support in these segments. However, insurance companies are also likely to face execution risks in portfolio restructuring and challenges in risk selection, while the underwriting profit margins for these emerging segments, such as health, and credit and surety, remain unfavourable and exhibit a deteriorating trend.

Nonetheless, AM Best notes that non-life market players have learned from experience – when rapid expansion in unfamiliar lines led to detrimental losses – and are now opting to pursue measured and sustainable growth in line with the China Banking and Insurance Regulatory Commission’s agenda to enhance internal controls and underwriting discipline. Smaller insurers may need to explore new areas of business and develop new competencies to find strategic niches, rather than compete against industry giants in commodity price wars.

Despite challenges from the economic impact of the pandemic and regulatory changes, the capital adequacy of China’s non-life insurance market remains solid, as evidenced by an industry average China Risk Oriented Solvency System (C-ROSS) ratio of over 270% as of second quarter of 2020. The upcoming C-ROSS Phase 2 implementation in 2021 is expected to further encourage insurers to take on a risk-adjusted management mindset.

To access the full copy of this market segment report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=303903.

AM Best is a global credit rating agency, news publisher and data analytics provider specialising in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in New York, London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

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