China's P&C sector profits endangered over auto insurance reform

Auto insurance premium rates are expected tof all over the next two years.

China’s imminent comprehensive auto insurance reform will add more fuel to domestic P&C insurers’ woes and will hinder growth prospects of the auto insurance sector, according to an S&P Global Ratings report.

The reform is expected to further strain the already fatigued P&C underwriting profits as the auto insurance segment battles a gloomy outlook amidst declining premium rates and weak car sales. Moreover, capital market swings and lower-for-longer interest rates will likely dent the P&C sector's investment income this year and squeeze the sector's overall earnings, said analysts Wenwen Chen, Eunice Tan and Terry Sham.

The auto insurance industry’s premium rate will fall over the next two years on the back of adjusted pricing factors and the slashed commission cap, analysts forewarned. Annual premium growth dropped to 4.5% in 2019 from 12.4% in 2015, the first year of the pricing reform.

The forthcoming adjustment will likely prompt market competition anew, which will weigh down on underwriting profits, the report said. The combined ratios for the auto insurance segment will only be temporary and will revert back to normal once traffic volume resumes.

On the other hand, the reform will expand product offerings in the traditional business line and grant insurers more discretion on risk selection and actuarial pricing, which will push for more sustainable growth in the sector. Large P&C insurers are also in a better position to defend their profits due to their economies of scale and diverse distribution channels.

For this year until 2021, there will be a slight underwriting loss for the P&C insurance market. Domestic players’ expansion to the non-auto business line will possibly be fast-tracked. But another product shift will weigh down on underwriting, and accident and health and credit guarantee insurance will likely be loss making.

The non-auto insurance sector will tighten its underwriting strategy, along with the regulator's attention to promoting disciplined growth for the P&C sector over the next three years. Sectoral risk management framework will likely evolve, following the CBIRC's increasing oversight on product governance and risk control. In light of the limited underwriting expertise of the sector, particularly around commercial business lines, market participants will possibly increase their use of reinsurance.