China: Competitive market opening up

The Chinese property/casualty market is highly competitive and pricing remains flat in most lines, apart from the inevitable cyber and D&O. The insurance market has posted an overall underwriting loss in the last few years, and premium income has stalled since the Covid-19 pandemic took hold, but observers believe the market will rebound this year. Tony Dowding reports

China is the second-largest insurance market in the world, with more than $0.7trn in premium in 2021, accounting for 10.1% of the total global insurance volume, according to Swiss Re. Non-life premium volumes contracted by 0.7% as the de-tariffication of motor insurance sparked fierce competition and rate reductions. Motor premiums contracted by 6.6% due to de-tariffication, and this was partly offset by a 10.6% in medical insurance premiums in China.

However, Swiss Re says it expects a strong rebound in China, with non-life premiums up an estimated 3.7% this year and by 4.7% in 2023, although this is still well below pre-pandemic double-digit growth rates. Indeed, the strong growth rates seen in China before the pandemic have slowed, As Allianz states in its Global Insurance Report 2022: “The Asia and China story is still largely valid in the 2020s. Anyone looking for growth will have to turn to Asia. But there can be no more talk of ‘China hype’. As recently as 2019, before the Covid-19 crisis, many observers (including us) had assumed that China would replace the US as the world’s largest insurance market by premium income around 2030. A few crises later, this seems all but impossible.”

It adds: “Current projections suggest that China will probably have to be patient until about 2050. Several factors contribute to this. First, is the slowdown in China itself. Second is the strengthening of the US, which looks set to emerge stronger from the recent crises.”

Haoming Zhou, country manager for China, insurance, AXA XL, says: “Like in the past, competition is stiff in the Chinese commercial insurance market, and it impacts premium level. More and more insurers are looking to diversify their book to non-motor because the motor tariff reform may impact their business in motor insurance.”

Peggy Ding, placement leader, Marsh China, notes that in 2021, 87 P&C insurance companies in China generated total premium of RMB1,367.6bn, with a premium growth rate of 0.7%. The market saw an overall underwriting loss of RMB13.8bn in 2021, with a further loss of RMB2.9bn compared with 2020. The underwriting profit margin was -1%, resulting in an overall combined ratio of more than 100%.

She says non-auto insurance business achieved a premium income of RMB590.3bn, a growth rate of 10.6%, the same as that in 2020, and a market share of 43.2%, 3.9% up year on year. Looking at 2022 so far, Ding says that in the first half of 2022, China’s P&C insurance companies achieved a total of RMB803.4bn in original insurance premium, an increase of 9.4% year on year, of which non-auto insurance business accounted for RMB405.8bn in premium income.

Zhou says that market hardening is only in selective areas of commercial lines, for example where the treaties of domestic insurers are not able to fully absorb the risks, such as mega total sum insured risks (large infrastructure, electronic production plants, or energy facilities).

In this instance, he says, terms and conditions have remained unchanged. Also market hardening can be seen in products such as offshore winds, D&O for US listed companies, or commercial general liability for certain products, with moderations in these ‘distressed classes’, he says.

Inflation is a major concern globally for the insurance sector, but Fitch Ratings said recently that inflation currently remains relatively benign in China and the country has yet to tighten monetary policy. However, it added: “Our economic scenario assumes that non-life insurers and reinsurers will only be able to pass on 80% of claims inflation to their clients during 2022-2024. As a result, underwriting margins will deteriorate by approximately 2pp-3pp on average in China.”

Classes and capacity
On property insurance, Aon’s Global Market Insights Report Q2 2022 states: “Appetite and competition have been strong for well-performing, larger, lighter-hazard risks, while risks needing international capacity have experienced more moderate market conditions. Insurers are keenly focused on profitable growth. Pricing remained flat as local insurers competed for well-performing risks.”

For liability, the report notes: “Market conditions remained stable, with flat pricing, flexible underwriting and sufficient capacity. Local insurers focused on developing product liability portfolios…International insurers were cautious in their underwriting, especially for overseas risks, while local insurers were more flexible and accommodating, especially for low-medium risks and higher risks with low policy limits.”

However, for cyber, Aon says market conditions remained challenging as insurer appetite and capacity further contracted and price adjustments have continued to be imposed, with underwriting described as “stringent and rigorous”. It is a similar story for D&O, with market conditions remaining challenging, especially for companies listed overseas and notably for US-listed risks.

As for capacity, Ding says China has sufficient underwriting capacity in general. “However, we have seen a lack of underwriting capacity in property insurance projects that involve high insured value and advanced technology, and for projects requiring delay-in-startup insurance. Zhou agrees that generally, the market capacity is adequate except for the “distressed classes”, adding that insurers have limited appetite and capacity for some niche products as such professional indemnity and cyber.

Zhou points out that with the introduction of a ‘weather-related index’ product in China, large corporates can now supplement their insurance of traditional property and liability risks with index insurance to insure against the risks that were not easily covered in the past.

Haoming Zhou, AXA XL
Haoming Zhou, AXA XL

Market players
The top three P&C insurance companies in China are People’s Insurance Company of China, China Pacific Insurance Company and Ping An, with a combined premium income market share of 63.78%.

“The market is increasingly open for foreign insurance companies,” says Ding. “On 19 March 2021, the China Banking and Insurance Regulatory Commission (CBIRC) issued an update on ‘Regulations for the Administration of Foreign-funded Insurance Companies in the People’s Republic of China’, and lifted the restrictions on foreign shareholding ratios. Foreign insurance companies can now hold 100% of shares in their operation in China.”

The role of foreign insurers in China is growing all the time. The president of the Insurance Association of China recently said foreign insurers’ market share in the Chinese market has more than doubled during the past decade, as the country has been stepping up the opening-up commitments in the industry, according to a report in the China Daily. Foreign insurers’ market share has increased from 3.5% in 2012 to 7.8% in 2021, and their market share in key cities such as Beijing and Shanghai has exceeded 20%.

Regulation and opening up
According to a recent report by the Canadian Casualty Actuarial Society, with the Society of Actuaries and Canadian Institute of Actuaries, nearly 50 foreign insurers have entered the Chinese market since the 1990s.

The report, China: An Era of Insurance Innovation, says that in the past two years, the CBIRC has loosened many restrictions, allowing foreign insurers to compete in the market. In 2019, AXA acquired the remaining 50% stake in AXA-Tianping Property & Casualty, while new applications were approved for Allianz and ACE to operate insurance in China in 2020.

In a recent regulatory move, China’s regulator revised the quantitative and qualitative requirements under the China Risk-Oriented Solvency System Phase II and, according to AM Best, these recent changes to China’s solvency regime are expected to have a significant impact on the various insurance market segments and should allow for greater transparency in risks and capital quality.

Best said the move was credit-positive for the country’s insurance industry. It said capital recognition has been tightened under the updated solvency regime and the industry is expected to see a drop in admitted capital in solvency calculations.

Global programmes
For global insurance programmes, AXA XL’s Haoming Zhou says: “For both China-produced global programmes and overseas-produced global programmes, inclusion of China risks is only a problem when the pricing levels are inadequate. There are more inclusions of liability risks into global programmes compared to all other lines of business such as property. Overall, it is not getting easier to place any global programmes as the capability of global network management is usually limited to the global insurers. The global programme capability is greatly required in the Chinese market and is a key.”

Marsh’s Ding adds: “China’s stable market landscape coupled with keen domestic competition have resulted in low premium, sufficient underwriting capacity and moderated rate increase in recent years. Meanwhile, the global insurance market has been hardening, therefore it is increasingly challenging to incorporate Chinese risks into global insurance programmes as the market situation of China is very different compared with rest of the world.” 

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