Crouching Tiger, Hidden Dragon

Transcription

Crouching Tiger, Hidden Dragon
INSIDE EMERGING MARKETS
Crouching Tiger,
Hidden Dragon
As China’s insurance market continues to
develop at a world-leading pace, its P&C sector
will finally enter a phase of sustainable growth
and underwriting profitability, predicts
Dr Jianzhong Yao and Dr Kai-Uwe Schanz
China’s insurance market percent respectively.
has resisted the drag of
Reflecting the fragility and
a host of internal and external vulnerability of global conditions,
challenges to maintain one of
a slowing domestic economy
the fastest growth rates in the and unabated competition in
world, albeit the most recent
domestic insurance markets,
pace of expansion was the
growth has slowed to its lowest
2011
growth by P&C line
slowest in four years.
level since 2008. However, China
Strong regulatory
remains one of the world’s
fastest160 support is
146.6%
shaping disciplined
development
expanding
insurance
markets,
140
of the country’s
with the sector consistently
120insurance market
to help growth
continue
on
a
outgrowing the country’s vibrant
100
sustainable and
sound
footing.
economy. Accordingly, non-life
80
China’s P&C insurance
market
is
a
insurance penetration (premiums
60
42.4%
case in point. 40
as 27.7%
a share28.1%
of GDP) increased
22.6%
22.9%
21.3% 24.2%
16.7%
In 2011, total20P&C
premiums
from 0.7 percent19.4%
in 1995 to 1.2
in China reached
percent in 2011 (Source: Swiss
0 478bn yuan
(source: China Insurance Market
Re). In addition, more recently
Annual Report 2012) or $76bn at
underwriting profitability has
the average exchange rate during
improved markedly.
that period. This represents
growth of 19 percent from the
Motor continues
Source: China Insurance Market Annual Report 2012
previous year (see chart), with
to dominate
motor and non-motor business
The drop in growth is primarily
expanding by 17 percent and 25
attributable to a significant
isk
s
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ot
or
Growth (%)
O
P&C premium
and
growth rates
rate 2004-11
China's P&C premium
and
growth
Premium (in billion yuan)
Annual growth rate
500
32.0%
30.0%
100
112
128
2004
2005
18.7%
17.2%
403
158
2006
Source:
China
Insurance
Annual
Report
Source:
China
InsuranceMarket
Market Annual
Report
20122012
72
22.3%
14.1%
200
0
30
23.2%
300
35
209
2007
245
478
299
25
20
15
10
5
2008
2009
2010
2011
0
Growth rate (%)
Billion yuan
400
40
34.5%
slowdown in motor business
growth from 39 percent in 2010
to 17 percent in 2011. Car sales
in 2011 fell to the lowest level in
13 years as economic stimulus
measures expired. Further, traffic
control schemes and restrictions
on new car registrations were
introduced in some large cities
in order to alleviate the growing
problems of pollution and traffic
congestion.
Despite its relatively poor growth
performance in 2011, the motor
line remains China’s biggest
P&C insurance segment by far. It
accounted for 73 percent of total
P&C premiums, slightly down
from 75 percent in 2010.
The share of enterprise property
amounted to 7 percent, while
liability and non-motor personal
lines remain underdeveloped and
offer substantial room for growth
and portfolio diversification.
The chart opposite exhibits the
growth rate per business line.
Credit guarantee insurance grew
by a stunning 147 percent in 2011,
mainly driven by the government’s
resolve to boost this form of
coverage, which is of particular
importance to SMEs.
Following the global economic
slowdown, many (non-state
owned) SMEs in China suffered
cash shortages as access to loans
became increasingly difficult. Both
the central and local governments
have been pushing insurers and
other financial institutions to help
address this challenge by initially
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INSIDE EMERGING MARKETS
Third-largest
reinsurance market
Retention rates in China’s P&C
sector are comparatively high,
at around 85 percent. Only 15
percent of original business
is ceded to reinsurers. This is
close to the global average and
significantly less than in other
countries with comparable GDP
per capita levels.
The relatively low cession rate
primarily reflects the dominance
of motor insurance, which usually
exhibits higher retention levels
than commercial lines business,
for example. According to the
China Insurance Market Annual
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isk
s
th
ia
lr
al
Sp
ec
He
de
nt
e
ci
te
Ac
an
Gu
ar
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re
Cr
Ag
ric
ul
ili
tu
ty
o
ab
rg
pr
Li
m
M
Co
Ca
or
m
op
er eri
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l
160
146.6%
140
120
100
80
60
42.4%
27.7% 28.1%
40
22.6%
24.2%
22.9%
21.3%
19.4%
16.7%
20
0
ot
Growth (%)
2011 growth by 2011
P&Cgrowth
line of
business
by P&C
line
Billion yuan
Source:
China
Insurance
Market
Annual
Report
Source:
China
Insurance Market
Annual
Report
2012 2012
Report 2012 and the Yearbook
combined ratios at historical lows
of China’s Insurance 2012, total
(PICC 94.0 percent; Ping An 92.2
reinsurance premium volume
percent; CPIC 93.9 percent).
P&C premium
2004-11
(domestic cessions
only) in and growth
The rate
market’s
loss ratio declined
Premium
(in
billion
yuan)
2011
amounted
to
79.4bn
yuan
by
1.9
percentage
points to 61.2
500
40
Annual
growthChina
rate
34.5%
($12.6bn),
making
the
percent, as did
the commission
35
32.0%
ratio, due to effective measures
30.0% third-largest reinsurance
400 world’s
30
market.
taken by the regulator and the
23.2%
22.3%
insurance association to curb25
300 P&C business made up about
18.7%
17.2%
72 percent of the total volume.
excessive competition – for 20
14.1%
example, by capping
commission
200 The top three P&C reinsurance
478
403
15
players are China P&C Re, Swiss
levels 299
through so-called industry
245self-discipline agreements. 10
100 Re and Munich Re, which have
209
158
5
128
a combined
market share of 88
By contrast, the expense ratio
112
developed unfavourably and 0
0 percent.
2004saw2005
2008
2009 to 2010
2011
a sharp2006
increase2007
in
continued
increase;2011
a major
Source: China
Insurance
Market Annual
ceded
business
asReport
the2012
China
reason for this was rising labour
Insurance Regulatory Commission costs, especially in management
(CIRC)’s commitment to sound
compensation.
and stable solvency levels boosted
demand for capital relief from
Challenging investment
reinsurers. Meanwhile, solvency
environment
pressures are expected to remain a Current investment returns
driver of cession growth in China. declined in 2011. In addition,
In addition, the opening of
the industry had to cope
compulsory third-party liability
with impairment losses as a
business to foreign insurers
result of continuing financial
and the partial deregulation of
market volatility, which led to
commercial motor rates should
a sharp decline in insurers’ net
be a further boon to reinsurers,
asset position (before capital
especially for those that are able to injections).
offer related product development,
Strong underwriting profits were
pricing, underwriting and
not sufficient to offset adverse
reserving services.
developments on the investment
The Chinese P&C market’s
side. Returns on equity for the
overall combined ratio further
sector generally deteriorated,
improved in 2011 to 95.3 percent,
mainly reflecting reduced
from 97.4 percent in 2010. The top “underwriting leverage” (net
three players made a particularly
premiums as a share of equity)
significant contribution to this
and “investment leverage” (assets
development and recorded
as a share of net worth).
Growth rate (%)
offering small (insurance-based)
loan guarantees to SMEs.
Special risks insurance – which
includes aviation/space, nuclear
power and offshore energy – also
expanded significantly by 42
percent.
As of the end of 2011, China
had 60 P&C insurance companies,
including 39 domestic and 21
foreign firms. The top three
insurers were able to defend and
even consolidate their dominant
market position, and accounted
for two thirds of the total
premium income in 2011.
Foreign players still play a
marginal role with a collective
market share of 1 percent. One
reason for this is their virtual
absence from the motor market.
As most Chinese drivers tend to
purchase both compulsory and
voluntary coverage from the same
provider, restrictions on foreign
insurers writing compulsory
motor third-party liability
business have effectively barred
them from entering the motor
segment.
However, at 22 percent, the
foreign segment grew faster than
the market as a whole in 2011;
and foreign insurers could gain
additional market share following
the opening of compulsory motor
business (see chart page 82).
73
INSIDE EMERGING MARKETS
In short, for the majority
of Chinese P&C insurers the
growth of premium volumes and
assets fell short of the amounts
required for capital injections.
These injections became
necessary because of major
asset impairments, coupled with
strong business growth, which
put pressure on insurers’ solvency
margins.
The CIRC made it clear to
market participants that solvency
margins and overall capital
adequacy must not be eroded
by asset impairments (or rapid
premium growth).
Given the exceptional growth
momentum displayed by China’s
insurance markets, sound and
effective regulatory standards are
of the utmost importance. The
CIRC is committed to ensuring
that regulations keep pace with
the challenges characteristic of
a dynamic market environment
and has taken (or announced) a
series of measures to reflect this
commitment.
For example, it has enhanced its
regulatory standards governing
(enterprise) risk management.
Both the life and health and P&C
sectors are required to strengthen
their risk governance frameworks,
for example, by establishing a role
that is equivalent to a chief risk
officer.
Also, information disclosure
requirements have been tightened.
In addition, insurers need to
adopt quantitative measures
consistent with the notion of
economic capital as their key
risk management tool. These
requirements include specific
stipulations on risk appetite and
risk reporting.
P&C split by lines of business
P&C lines
of business split
Commercial
Commercial
property,
property,
6.9%
6.9%
74
Liability,
Liability,
3.1%
3.1%
Accident,
Accident,
2.2%
2.2%
Agriculture,
Agriculture,
3.6%
3.6%
Credit,
Credit, 2.4%
2.4%
Other
Other lines,
lines,
6.4%
6.4%
Motor
Motor
73.3%
73.3%
Source:
China
Market
Annual
Report
2012
Source: China
Market
Annual
Report
2012
Source:Insurance
China Insurance
Insurance
Market
Annual
Report
2012
P&C market
share
2011
P&C
shares
2011
P&C market
market
shares
2011
China
China Export
Export &
&
Credit
Credit Ins.,
Ins., 2.1%
2.1%
Foreign
Foreign players,
players,
1.1%
1.1%
Rest
Rest
domestic,
domestic,
16.2%
16.2%
Sunshine,
Sunshine, 2.8%
2.8%
China
China Continent,
Continent,
3.4%
3.4%
China
China Life
Life
P&C,
P&C, 3.4%
3.4%
PICC,
PICC, 36.3%
36.3%
China
China United,
United,
4.4%
4.4%
CPIC,
CPIC,
12.9%
12.9% Ping
Ping An,
An, 17.4%
17.4%
Source: China
Market
Annual
Report
2012
Source:Insurance
China Insurance
Market
Annual
Report
2012
Source: China Insurance Market Annual Report 2012
ODr Kai-Uwe
Schanz is a senior
adviser to Asia
Capital Re
Solvency II – Chinese-style
In this context, the CIRC has
announced that it is looking to
gradually establish a solvency
supervisory system that is
consistent with international
standards of risk-based capital
Cargo,
Cargo, 2.1%
2.1%
O Dr Jianzhong
Yao is senior vice
president of Asia
Capital Re
regimes and the three-pillar
approach of Solvency II (which
comprises capital adequacy, risk
management, risk disclosure). This
system would replace the current
solvency framework in China,
which is similar to the European
Union’s Solvency I regime.
Another recent focus of
regulatory activity has been
investment management. In
order to provide insurers with
further degrees of freedom in an
increasingly difficult investment
environment, the CIRC has
permitted them to invest in hybrid
and convertible bonds. Insurers
can also invest up to 50 percent
of their total assets in unsecured
corporate bonds – up from 20
percent previously.
Also, under some draft rules,
insurers would be allowed to
invest up to 10 percent of their
total assets in private equity – up
from the current 5 percent. This
would potentially unleash flows of
about $50bn of fresh capital into
unlisted firms.
Last but not least, the dominant
motor line of business is set to
undergo major changes in the
wake of material regulatory
changes. Firstly, compulsory
third-party liability, which has
been the prerogative of domestic
insurers since its inception in
2006, will be opened to foreign
players. This liberalisation should
also help overseas entities to boost
their minuscule market share in
voluntary (commercial) motor
business.
However, major obstacles still
need to be overcome. These
include limited distribution
channels and the inability to
fully capitalise on underwriting,
client segmentation and pricing
capabilities under the current
regulatory regime.
Another major motor-specific
development is the forthcoming
deregulation of commercial
rates to replace the current tariff
introduced in 2007. However, only
qualified insurers will enjoy the
freedom to set their own rates and
conditions.
The most important criterion
to be met is that any qualified
insurer will have to have
maintained a solvency ratio of at
least 150 percent in each of the
two preceding years of operation.
This could mean that only a
single-digit number of insurers
will be able to benefit from the
deregulation of commercial motor
insurance.
In summary, China’s P&C
insurance industry is entering a
phase of more sustainable and
healthy growth, accompanied
by improving underwriting
performance and far-sighted
regulatory responses that both
alleviate the pressures from the
current investment environment
and pave the way for China’s
adoption of world-class solvency
regulations and supervisory
standards.
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