1、Insurance 10 March 2010 China Special Report Chinese NonLife Insurers: Market Competition Limits Upside Sumary Fitch Ratings expects rising insurance awareness and the growing economy to support continued robust growth in Chinas nonlife insurance market. However, the increasing number of new entran
2、ts in the market and the commoditised nature of business have led to fierce price competition and por underwriting performance. Strong growth in lowmargin business will continue to pressure nonlife insurers profitability and capitalisation, while firms will continue to need external capital to fund
3、business growth if they are to maintain adequate solvency margins. The longterm viability of Chinas nonlife insurance market rests on an improvement in underwriting performance. This demands stricter market discipline and claims management to generate stable underwriting profits, while reducing the
4、reliance on volatile investment income. In addition, the introduction of new products could help nonlife insurers diferentiate themselves from firms that primarily compete in the homogeneous motor insurance segment. Credit Positives/Oportunities Underdeveloped market: Despite continual strong premiu
5、m growth, Chinas rate of nonlife insurance penetration remains among the lowest in Asia, at only 1% of GDP in 2008. Motor insurance still dominates the market, while other segments are lowly penetrated or untapped. The low insurance penetration, coupled with ongoing economic development, suggests fu
6、ture strong growth potential in this market. Interest rate increases: Fitch expects interest rates to rise in H210, which should help improve nonlife insurers investment returns incrementally through higher deposit rates and bond yields. However, the more volatile stock market expected in 2010 folow
7、ing the strong rebound in 2009 could make it dificult for insurers to improve equity investment returns. This may partly ofset the impact of rising interest rates. Credit Negatives/Threats Aggressive competition from small players: Large companies mainly face competition from younger and smaller dom
8、estic competitors and have been losing market share to them. Fitch expects price competition to remain intense given the still small market share of these latecomers and the commoditised nature of business. Although increased regulatory focus on the rationality of competition and insurers solvency i
9、s positive in terms of improving market discipline, its effectiveness in enhancing underwriting margins remains to be seen. Vulnerability of capitalisation to high business growth: The fierce price competition has resulted in por underwriting performance and weak internal capital generation capabili
10、ty. Ongoing strong growth in lowmargin business could consume capital quickly, and capitalisation still needs to be cautiously managed despite the capital replenishment in 2009. Catastrophic risk: Catastrophic risk will be a rising concern as insurance penetration increases. The development of an ap
11、propriate reinsurance scheme and prudent risk and capital management could potentially mitigate this impact. Analysts Joyce Huang, CFA +886 2 8175 7602 Stanley Tsai, CFA +852 2263 9920 Jeffrey Liew +852 2263 9939 Related Research Insurance Rating Methodology (December 2009) Nonlife Insurance Rati
12、ng Criteria (Global) (March 2007) Chinese Life Insurers: Growth Story Remains Intact (March 2010)Insurance Chinese NonLife Insurers: Market Competition Limits Upside March 2010 2 Overview Chinas nonlife insurance market has grown strongly in recent years, thanks to rising disposable income, increase
13、d economic activity and the resulting demand for insurance coverage. In particular, the substantial wealth accumulation has led to an increase in automobile and household property ownership, prompting greater demand for auto and homeowner insurance. Growth in corporate assets has also driven demand
14、for commercial property insurance. Between 2003 and 2008, the sectors premiums grew at a CAGR of around 22%, rendering China the second largest market by premium income in Asia (after Japan). (See Chart 1 for the premium growth trend.) Nonetheless, Chinas penetration rate of only 1% of GDP in 2008 r
15、emained among the lowest in Asia, and insurance density of USD34 per capita was also low, compared with developed markets (Japan: USD829 and US: USD2,177, according to Sigma Report No. 3 (2009). The devastating earthquakes that occurred in May 2008 caused total economic damage of around RBM150bn. Ho
16、wever, the overall insurance industry sufered only RMB1bn in losses. Fitch believes that these comparatively low insurance penetration and density rates, coupled with ongoing economic development, suggest future strong growth potential in this market. Despite the strong growth momentum, nonlife insu
17、rers have operated with rather low profit margins. This is due to the increasing number of new entrants in this market and the commoditised nature of business, which have led to fierce price competition. The declining premium rates have resulted in por underwriting performance and weak internal capi
18、tal generation capability. Without reasonable profits, rapid volume growth has the tendency to consume capital quickly, and insurance companies have therefore relied on external capital support to expand their business. 0 50 10 150 20 250 30 350 203 204 205 206 207 208 209 0 5 10 15 20 25 30 35 Prem
19、ium income (LHS) Growth rate (RHS) Chart 1: NonLife Sectors Premium Income and Growth (RMBbn) Source: CIRC (%) Products Motor insurance continues to dominate Chinas nonlife insurance sector, accounting for 69% of total premiums in 2008 (see Chart 2) and comprising compulsory thirdparty liability mot
20、or insurance (CTPL) and commercial otor insurance. CTPL was launched by the China Insurance Regulatory Commission (CIRC) in July 2006 and accounted for 33% of total motor insurance premiums in 2008. Motor insurance policies are normally for a term of one year, covering damage Chinas nonlife insuranc
21、e market has high growth momentum but low profit margins An ability to access external capital is essential for business expansion Motor insurance dominates the market, folowed by commercial property Price competition has been severe, particularly in the main product lines Cargo 3% Others 7% Motor 6
22、9% Liability 3% Accident PICC missed out on the equity market rally in the period. According to preliminary results disclosed by the CIRC, the nonlife sectors profitability remained weak although improved in 2009 (with an ROE of well below 10% under PRC GAAP), after sufering significant losses in 20
23、08. In view of the improved economic conditions, Fitchs sovereign team expects Chinas interest rates to rise in mid2010. An increase in interest rates should increase investment returns incrementally through higher deposit rates and bond yields. Nonetheless, Fitch expects that a more volatile stock
24、market in 2010 folowing the strong rebound in 2009 will make it dificult for Chinas insurers to improve their equity investment returns. The achievement of reasonable and sustainable profitability will require an improvement in underwriting practices and assetliability management, which takes time,
25、in Fitchs view. 4,00 2,00 0 2,00 4,00 6,00 8,00 10,00 205 206 207 208 H109 Underwriting profits Investment income Pretax profits Chart 6: PICCs Earnings Performance (RMBm) Source: The company Investment Given the shorttail nature of nonlife insurance, Chinas nonlife insurers have mainly allocated as
26、sets in cash and bank deposits, folowed by government bonds. Folowing the equity market corection in 2008, equity investments appear to have converged with other Asian markets at a lowteen percent share of total investments, down from a previous peak level of over 20%. Other investments (including p
27、roperty and infrastructure projects) remain small. See Chart 7 for a breakdown of PICCs investments. Bank deposits and fixed income investments dominate the asset portfolio Equity exposures converge with other Asia markets at a lowteen percent share of total investmentsInsurance Chinese NonLife Insu
28、rers: Market Competition Limits Upside March 2010 6 Although the regulator has continued to broaden investment channels (including the recent relaxation of the maximum level of investments in corporate bonds to 40% of total assets from 30%), Fitch considers this to be more beneficial to life insurer
29、s than nonlife insurers. This is due to the generally short duration of nonlife insurers liabilities and the relatively thin solvency margins, which constrain their risktaking capability. Reinsurance Arangement Chinas insurance companies have been able to determine their reinsurance arrangements bas
30、ed on their own assessment of risk exposures and underwriting capacity folowing the full elimination of the statutory reinsurance requirement in 2006. Nonetheless, until the implementation in October 2009 of the newly amended Insurance Law, insurance companies were required to give priority to reins
31、urers incorporated in China when ceding business. In addition, pursuant to the Insurance Law, net written premiums may not exceed four times the sum of a nonlife insurers issued capital, capital reserves, general reserves and surplus reserves under PRC GAAP in any financial year. Fitch notes that Ch
32、inas nonlife insurers have used reinsurance protections at various levels, and China Reinsurance Group and its subsidiaries, as the only local reinsurers, maintain the largest market share in the reinsurance market. However, some proinent international reinsurers with branches or subsidiaries in Chi
33、na (such as Swiss Re, Munich Re and Lloyds) have been playing an increasingly important role in this market. Capitalisation The rapid growth of lowmargin business has constrained the enhancement of non life insurers capitalisation. Large catastrophic losses and por investment performance in 2008 fur
34、ther weakened their capital strength. Although the capital replenishment in 2009 has improved the sectors capitalisation, Fitch believes that ongoing strong premium growth could quickly deplete capital. Therefore, external capital funding will remain necessary if insurance companies are to maintain
35、solvency margins at adequate levels. In addition, Fitch notes that some companies, including PICC and Ping An, have raised subordinated debt (rather than common equity) to increase their capital ratios. The drawback of this is that the closer such debt is to its expiry date, the less it will be coun
36、ted as capital in solvency calculations. See Chart 8 for the solvency ratios of Chinas three largest nonlife insurers. The CIRC mainly uses the solvency ratio (actual capital/minimum required capital) to measure the financial soundness of insurance companies. This measurement is similar to the Europ
37、ean Solvency I approach, and the minimum requirement is 100%. On top of this, the CIRC launched a new supervision scheme in January 2009 to classify insurance companies into four types (A, B, C and D) according to their solvency, internal control and various risks assumed. All the dimensions of type
38、 A companies meet the CIRCs requirements, while the regulator has the right to take different measures toward the other three types. These include placing restrictions on business expansion or new branch setups, or requiring the insurance company to raise new capital. Fitch believes the use of more
39、comprehensive benchmarks should enable early identification of potential risks and support the CIRC to take any preventative actions necessary. Capital replenishment in 2009 improved the sectors capital strength External capital remains necessary to fund business growth while maintaining adequate ca
40、pitalisation Nonlife insurers use reinsurance protections at various levels China Reinsurance has the largest share of the reinsurance market Others 5% Financial bond 14% Cash & bank deposit 4% Equity & funds 7% Corporate bond 1% Chart 7: PICCs Investment Breakdown at EndH109 Source: The company Gov
41、ernment bond 19%Insurance Chinese NonLife Insurers: Market Competition Limits Upside March 2010 7 0 50 10 150 20 250 PICC China Pacific Ping An 207 208 H109 Chart 8: Solvency Margins of the Thre Largest NonLife Insurers (%) Note: PICCs solvency margin would improve to 157% after the isuance of RMB5b
42、n subdebt in October 209 Source: The companies Fitchs Expectations Rising insurance awareness and the growing economy will support continued robust growth in Chinas nonlife insurance market. However, the longterm viability of the market rests on an improvement in underwriting performance. This deman
43、ds stricter market discipline and claims management to generate stable underwriting profits, while reducing the reliance on volatile investment income. In addition, the introduction of new products could help nonlife insurers diferentiate themselves from firms that primarily compete in the homogeneo
44、us motor insurance segment. Fitch expects interest rates to rise in H210, which should help improve nonlife insurers investment returns incrementally through higher deposit rates and bond yields. However, the more volatile stock market expected in 2010 folowing the strong rebound in 2009 could make
45、it dificult for insurers to improve equity investment returns. This may partly ofset the impact of rising interest rates. Capitalisation still needs to be cautiously managed despite the capital replenishment in 2009 as the ongoing strong growth in lowmargin business could consume capital quickly. Ca
46、tastrophic risk will also be a rising concern when insurance penetration increases. The development of an appropriate reinsurance scheme and prudent risk and capital management could potentially mitigate this impact. Fitch expects large companies to maintain relatively steady credit profiles, underp
47、inned by stabilised underwriting margins in the absence of severe catastrophes and good financial flexibility. However, the agency takes a more cautious view on small local companies as the potential capital strain fro new business expansion may pose significant challenges to them given their weaker
48、 ability to tap external funding. Foreign companies credit strength, meanwhile, should remain intact due to their prudent risk control and strong solvency margins. Longterm viability of the nonlife insurance market rests on an improvement in underwriting performance Interest rate hikes will improve
49、investment returns, but uncertainty increases in equity investments Capitalisation still needs to be cautiously managed, particularly among small local playersInsurance Chinese NonLife Insurers: Market Competition Limits Upside March 2010 8 Apendix 0 9 18 27 36 45 PICC Ping An China Pacific China United China Continent China Life Tianan China Export & Credit Sunshin
