CHINA: MANDA­TORY CAR IN­SURANCE MAR­KET FACES FUR­THER LOSSES

Source: Fitch Rat­ings, 21 Au­gust 2012

Insurance - - INDUSTRY UPDATES -

Ac­cord­ing to Fitch Rat­ings, in­sur­ers op­er­at­ing in China’s com­pul­sory mo­tor in­surance mar­ket (CMIM) face fur­ther un­der­writ­ing losses in the next one to two years due to ris­ing claims, tightly reg­u­lated pric­ing and the po­ten­tial for fur­ther com­pe­ti­tion.

This is ex­pected to lead to a mod­est de­cline in over­all mo­tor in­surance un­der­writ­ing mar­gins in a sta­ble out­look for China’s non-life in­sur­ers. How­ever, ag­gres­sive com­pe­ti­tion might lead to a big drop in mar­gins and could re­sult in a neg­a­tive out­look for the sec­tor.

Fitch Rat­ings be­lieve that the higher med­i­cal ex­penses and ris­ing re­pair costs in­sur­ers are paying out may lead to a de­te­ri­o­rat­ing claim ex­pe­ri­ence. The loss ra­tio of the CMIM sec­tor is likely to be con­sis­tently above 80% in the short term, af­ter 82.3% in 2010 and 81.9% in 2011.

On­go­ing un­der­writ­ing losses are un­likely to lead to Chi­nese prop­erty and ca­su­alty in­sur­ers re­duc­ing their ex­po­sure to the CMIM mar­ket. The over­all un­der­writ­ing re­sults of most ma­jor in­sur­ers’ mo­tor books are still prof­itable and be­cause ev­ery driver must have a CMIM pol­icy, in­sur­ers feel they need to be in the CMIM busi­ness in or­der to cross-sell prof­itable com­mer­cial poli­cies. In fact, com­pe­ti­tion in CMIM is likely to in­crease in 2012 fol­low­ing the lib­er­al­i­sa­tion of the mar­ket for for­eign in­sur­ers in May.

Re­gard­less of poor un­der­writ­ing re­sults, Fitch Rat­ings be­lieve that CMIM will be at­trac­tive to for­eign in­sur­ers be­cause it will al­low them to strengthen their mar­ket pres­ence in China with­out work­ing with lo­cal in­sur­ers, and to build up their distri­bu­tion out­lets. One of the most im­por­tant ben­e­fits for for­eign in­sur­ers of the open­ing up of the CMIM mar­ket is that for­eign com­pa­nies will be able to at­tract a new cus­tomer base and bun­dle other in­surance prod­ucts when they pro­vide manda­tory car in­surance cov­er­age.

The lat­est fig­ures from the In­surance As­so­ci­a­tion of China show the un­der­writ­ing deficit for the en­tire CMIM mar­ket, which pro­vides a manda­tory min­i­mum level of third-party li­a­bil­ity in­surance to mo­torists, rose to CNY11.2bn in 2011 from CNY9.7bn in 2010. Af­ter ac­count­ing for CNY2bn of in­vest­ment re­turns, the in­dus­try re­ported an op­er­at­ing loss of CNY9.2bn in 2011.

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