Fitch comfortable with Chinese non-life outlook despite regulatory and economic concern

Fitch believes that Chinese insurers will continue to maintain “adequate” capital buffers to withstand underwriting volatility and asset risks despite the concerns voiced in recent months by the national insurance supervisor.

The rating agency believes, however, that catastrophe losses will remain a threat to insurers’ solvency stability.

Fitch said it believes China’s economic slowdown could “moderate” the country’s demand for non-life insurance products in the near term. Recent new rules will also serve to depress growth, according to the credit rating agency.

“The trial deregulation of commercial auto insurance pricing along with the implementation of value-added tax reform will reduce the growth momentum of Chinese non-life insurers. Premiums derived from the telemarketing channel are likely to steadily slide as the pricing advantage from this channel has been eliminated after the introduction of the auto pricing deregulation trials,” it stated.

“Fitch does not expect the deregulation trials to adversely impair motor insurers’ margin in the near term, notwithstanding downward adjustment of pricing rates by insurers due to competition. The sector has witnessed a reduction in loss ratio from lower claims frequency because the non-claim discount benefit gave insured persons an incentive not to report small claims. However, higher acquisition costs as a result of market rivalry and continued influx of new players will constrain insurers’ capability to improve their underwriting margin,” it added.

Fitch said it expects the capital buffer of the sector, in terms of the China Risk Oriented Solvency System, to remain “healthy” in the coming year. It said Chinese insurers’ flexibility to fund business expansion is likely to remain “intact”, despite slower growth dynamics.

“Most insurers have been able to improve their capitalisation through fresh capital infusion and surplus growth in the past two years. With the implementation of the new risk-based solvency system in 2016, Fitch believes insurers will put greater focus on improving capital efficiency and risk management capability,” it explained.

Reinsurance buying strategies among Chinese insurers will also help, said Fitch.

“The stable outlook reflects Fitch’s view that Chinese non-life insurers’ catastrophe risk will consistently be mitigated through proper reinsurance protection, given their current underwriting capacity. Claims from a string of weather-related events have adversely damaged insurers’ underwriting results in 2016. Fitch could consider revising the rating and sector outlooks to negative if net losses from major catastrophe perils severely undermine insurers’ solvency adequacy on industry-wide basis,” it concluded.