China's ongoing motor premium deregulation to narrow margins further: Fitch

China's ongoing deregulation campaign on commercial motor insurance pricing is likely to damage motor insurers' capability to improve their underwriting margins, said Fitch. 

China’s ongoing deregulation campaign on commercial motor insurance pricing is likely to damage motor insurers’ capability to improve their underwriting margins, Fitch Ratings said in its latest report.

This March, the China Banking and Insurance Regulatory Commission (CBIRC) initiated the country’s third round of motor-pricing deregulation. Each region is subject to different pricing limits, but the minimum permissible limits associated with underwriting and distribution channels have been widened further, when compared with the previous two rounds of reforms implemented in 2015 and 2017 respectively.

This time, the top industry watchdog also allows non-life insurance companies to use their own experience to determine motor-premium pricing in three provincial regions, namely, Shaanxi Province, the Guangxi Zhuang Autonomous Region and Qinghai Province.

Fitch expects underwriting margins of China’s non-life insurance sector to narrow as the regulator continues to deregulate pricing. Insurers are likely to reprice commercial motor policies to the lowest permissible limits, causing underwriting deficits to persist for market players with small operating scale and limited pricing capability.

Fitch believes that the deterioration in motor-claim ratios, coupled with higher policy acquisition costs from fierce competition, will undermine overall combined ratios in the near term.

Scale advantage, however, will still enable major insurers to remain profitable, according to the report. Currently, China’s non-life insurance market is dominated by the three largest players — the PICC Property & Casualty Company, Ping An Property & Casualty Insurance Company of China, and China Pacific Property Insurance.

The combined market share of these three companies in the motor insurance sector stood at 66.9 percent as of the end of the first quarter, according to media reports.

As such, competitors with weak margins will require capital infusions from shareholders or will need to issue capital supplementary bonds to maintain solvency adequacy.

Last year, the sector’s solvency adequacy remained healthy, but most major insurers reported a moderate decline in their ratios in the first quarter of 2018 from higher premium growth, which saw the sector expand by more than 17 percent over the quarter by direct premiums, Fitch Ratings said.

The rating agency believes that ongoing expansion will strain insurers’ solvency adequacy and drive up net premium leverage in the near term, despite escalating trade tensions between China and the US posing uncertainty on the sector’s growth dynamics.

The sector’s comprehensive solvency ratio amounted to 270 percent at the end of 2017 on an aggregated basis, comfortably exceeding the 100 percent regulatory minimum.

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