Chinese insurance market still booming but rule changes could dampen mood

The Chinese non-life and life insurance markets continue to grow at an impressive rate despite the recent slowdown in the overall economy. Ping An Insurance (Group) Company of China, established in 1988 in Shekou, Shenzhen and now listed in Hong Kong and Shanghai, recently reported healthy third quarter results despite issuing a gentle warning about the challenges ahead. The group net profit was up a staggering 45.8% for the quarter from CNY38.674m last year to CNY56.405m in the third quarter of this year. The group, which has insurance, banking, investment and internet finance operations, reported non-life premium up 15.7% to CNY121.6m from CNY105.1m in the third quarter of last year. Life premiums were up 16.2%.hideThe group reported a combined ratio of 94.4% against 94.9% in the third quarter of last year. These are figures that European and US insurers would love to report in the currently highly competitive markets over there. But Ping An modestly described the figure as ‘steady and healthy’ growth. “Life insurance business maintained steady and healthy growth, while individual life insurance recorded robust growth in new business with a stable increase in agent productivity. Ping An Property & Casualty steadily grew its market share, recording excellent business quality and profitability. The net investment yield of our insurance funds rose steadily,” stated the group. Ping An said that in the third quarter of 2015, China’s economy entered into the ‘New Normal’ phase. Investment growth slowed down and consumption growth remained stable. “The economy environment was still complex. Ping An continued to implement its strategy to emphasise both its core finance business and the internet finance business, and maintained a stable and healthy growth in terms of its overall performance,” stated the company. “Looking ahead, China’s economy initiated a ‘twin-engine’ mode to support its structural upgrade and transformation. The financial and internet industries will witness the new revolution and integration, while opportunities and challenges will co-exist. We will closely monitor the changes of external economic environment, continue to maintain the steady growth of our core business, and further explore the internet finance model and business innovations,” added the group. Results such as this have helped push China’s insurance market rapidly up the world rankings. By 2013 China was the world’s 5th largest life market, 3rd largest non-life market and the 6th largest insurance market overall. State-run news agency Xinhua quoted insurance regulatory chief Xiang Junbo as saying in January that China is set to become the world’s third largest insurance market this year. Swiss Re states that non-life insurance premiums jumped 17% in real terms in 2014, the 13th straight year of double-digit growth. Patrick Zeng, China Head for Allianz Global Corporate & Specialty (AGCS), recently gave a speech at the group’s Property Fachforum in Frankfurt, Germany, entitled China—A Dynamic Insurance Market for Foreign Insurers. The figures he gave showed that total gross premiums in the Chinese market rose from €128.7bn in 2009 up to €212.1bn in 2013. Life business grew from €91.9bn to €135.6bn while non-life rose from €36.8bn up to €76.5bn, over double. China non-life insurance premiums grew by 12% in 2013 and 15.5% in 2014. By products, motor remains by far the biggest non-life line with 78% of the total cake. Property is next biggest with 6%, then agriculture with 5%, credit and guarantee, accident and health and liability all have a 3% share and cargo and hull has 2%. As the market rapidly matures the domination of the motor business is expected to recede. Mr Zeng explained that the Chinese insurance sector is dominated by state-owned enterprises (SOEs). PICC has by far the biggest share with 34%, Ping An has 17.9%, China Pacific has 12.6% and other domestic insurers have 33.4% of the market. Foreign insurers only had a 2.22% stake in 2014 according to the China Insurance Regulatory Commission (CIRC). Of these French insurers control 49% with AXA Tianping holding 40% and Groupama 9%. Next biggest is AIG with 7%, then Starr with 6% and Allianz has 5%, according to CIRC. Allianz arrived in China in the 1980s. It established representative offices in Beijing, Shanghai and Guangzhou in 1994 and Allianz Insurance Company Guangzhou Branch (AZCN) was set up in 2003. AGCS China Division was established within AZCN, focusing on corporate & specialty risks in 2013. The problem for Allianz and its international rivals is that this is an increasingly competitive market, rates are falling in many lines and it still remains difficult for international insurers to make headway for regulatory and cultural reasons. Mr Zeng reported that of the 13 major lines only five saw rate increases in 2014. Rates for life employee benefits, environmental, financial institutions, medical malpractice and catastrophe exposed property business were all up 55%, he reported. Motor, accident and health employee benefits, general liability, professional liability, workers’ compensation and non-catastrophe exposed property lines were down 0-10%. D&O business was down 10-20% and marine cargo by 5-10%, said Mr Zeng. Supervision and control of the sector is carried out by the China Insurance Regulatory Commission (CIRC). The CIRC reports to and carries out administrative functions delegated by the State Council and is therefore not an independent regulator, financed by levies on insurers’ net retained premiums. The reported new strategic objective of CIRC is the preference for ‘quality over quantity’ and provides the backdrop for the planned introduction of new risk-based solvency regulations next year. They could have quite an impact on the market and will certainly force an improvement in the way in which Chinese insurers manage their risk. The CIRC announced the final version of the new risk-based solvency framework, China Risk Oriented Solvency System (C-ROSS), in February of this year. Lloyd’s China, the Chinese operation of the London-based insurance market, explained that the transitional period commenced immediately and required Chinese insurance companies to prepare two sets of solvency reports based on both an existing and C-ROSS system. This system of dual reporting would continue until the official implementation date of C-ROSS, yet to be determined by CIRC, explained Lloyd’s. As with Solvency II, Europe’s new capital adequacy and reporting standard, C-ROSS has three pillars that cover quantitative capital requirements, qualitative supervisory requirements and market discipline/transparency requirements. It requires enhanced risk management controls and processes for local insurers. In April, Qin Lu, Swiss Re President for China, explained that it had conducted a survey on how well the non-life insurers have prepared for the C-ROSS system and released the findings during the reinsurer’s C-ROSS seminar series in Beijing, Shanghai and Shenzhen in March. Benny Yuan, Actuary of Swiss Re, reported that 40% of insurance companies with risk management systems saw an increase in solvency ratio after the C-ROSS rollout. This compared with 15% of insurers that have no or little risk management in place. “To a certain extent, this reflects the positive effect of risk management on solvency ratio,” concluded Swiss Re. Mr Lu reported that the survey found that foreign companies are better prepared than Chinese companies in terms of risk management, partly because of the global requirement on risk management from their parent companies. “The majority of Chinese companies have set up risk management committees and have adopted reinsurance as a risk management tool. Large companies clearly outperform their smaller counterparts in terms of organisational structure,” said Swiss Re. Mr Lu added that insurers should ‘accelerate’ preparation from working level to management level. “That means the management should pay due attention and improve corporate governance at the level of risk management, so that they can enjoy better solvency results under the new regulation,” stated the reinsurer. “The survey results also show that insurers with better risk management tend to have more positive expectation on business growth for virtually all business lines,” concluded Swiss Re. Credit rating agency AM Best said that the new rules would certainly have an impact on the reinsurance market for Chinese risks. It said that rules issued by the CIRC in February had generally resulted in lower base risk factors on reinsurance recoverables, compared with the factors set out in the original proposal. AM Best added that the framework on the reinsurance credit risk capital requirement calculation remained largely unchanged but noted that stricter requirements would still be imposed on placing reinsurance with offshore reinsurance companies. Direct insurers that choose to cede to onshore reinsurance companies that fulfill regulatory solvency requirements will have a lower credit risk charge imposed on their reinsurance recoverables, stated the credit rating agency. Offshore reinsurers will be required to post additional collateral to secure their payables to direct insurance companies in China. AM Best said that, as a result of this, it believes direct insurers will likely revise their reinsurance programmes or panel of reinsurers in order to better manage their solvency requirements that arise from reinsurance credit risk under C-ROSS. “More reinsurance placements are expected to be diverted to onshore reinsurance companies, with a corresponding reduction of offshore reinsurance purchases. In other insurance markets, some regulators also impose stricter requirements on reinsurance placed with offshore reinsurance companies. China’s insurance industry has already anticipated that more reinsurance will be retained in the local market under the new solvency regime,” stated the credit rating agency. In the near term, AM Best expects this change in C-ROSS will trigger higher reinsurance concentration in the local market. In the longer term, more international or regional reinsurance companies will seek to build a presence in China. This will strengthen the CIRC’s governance on reinsurance companies that aim to take a share in China’s insurance industry as a whole, which is presumably exactly what the regulator wants. “For international reinsurance companies currently with operations in China and retroceding a large volume of business offshore, capital requirements will also likely increase according to the credit risk factors for retrocession recoverables under C-ROSS. Therefore, these reinsurers may need to strengthen capitalisation of their operations in China, implying better security to China’s direct insurance companies transacting with these reinsurers,” added the credit rating agency. Reinsurance companies that operate in China, which include China Re, Gen Re, Hannover Re, Lloyd’s, Munich Re, Scor, Swiss Re and Taiping Re, together reported a 35% rise in reinsurance premium to CNY97.8bn (US$15.6bn) in 2013, reported AM Best. It added that C-ROSS will also provide guidance to Chinese insurance companies in understanding and linking capital requirements with three broad categories of risk that underpin their operations: insurance risk, market risk and credit risk. In July, the credit rating agency further reported that some two thirds of Chinese insurance companies experienced a drop in solvency adequacy ratios in the first quarter of 2015 under the new standards, according to CIRC. Also 13 insurance companies failed to reach the adequate solvency level under the C-ROSS system in the first quarter. The CIRC is also keen to reform the intermediary sector. The Commission issued a guideline for the reform of the sector in a bid to improve services and system quality, according to a statement made by the regulator in September. The guideline outlines major tasks, a time line and direction for the revamp based on a major investigation of intermediaries carried out since April 2014. During his recent speech in Frankfurt, Patrick Zeng of AGCS explained that the share of business handled by intermediaries is rising. He said that the intermediary channel realised non-life premium of €6.8bn by the third quarter of 2012. Intermediaries now account for around 14% of total non-life business that represents an increase from 8.8% in 2010 and 10.6% in 2013. Mr Zeng reported that there were some 501,000 individual non-life agents at the end of 2013. The corporate insurance agency sector numbered 2,121 companies in China at the end of 2013. The insurer explained that non-life agents are allowed to represent a maximum of three companies but this is under pressure. “The broking sector has shown rapid growth over the last few years, but is now being urged to consolidate by the CIRC in an effort to raise professional standards. The number of broking licences rose to 416 at the end of 2012 but has been effectively frozen since June 2013,” said Mr Zeng. Brokers are going well in China and have increased their premium volume handled at a rate of over 20% a year. Mr Zeng said that brokers handled non-life premiums of CNY30.74bn (US$ 4.76bn) in 2013, giving them an overall market share of 6.4%. Brokers were mainly active in commercial property and engineering, where they handled 32.3% and 63.6% of premiums respectively, he added. Of the global brokers, Aon has opened six branches, JLT three branches, Marsh seven branches and Willis 22 branches. The leading local brokers are Jiangtai that has 44 branches and Huatai that has 24 branches. Mr Zeng explained that some banks offer mortgage and insurance packages to homebuyers, but bancassurance is far less significant for the non-life than the life market. “Most large commercial accounts are handled on a direct basis by insurers’ production departments. Major state-owned companies utilise their in-house brokers, therefore for foreign insurers, the local cedent is the only channel to access this business sector,” he said, again underlining the scale of the challenge facing international corporate insurers as they try to break into this huge market.

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