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 th Sp ec ia lr al He de nt e ci te Ac an ar Gu Cr ed it re ul pr Co Ag ric Li ab ili tu ty o rg l Ca op m er eri ty ca m M 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 www.insiderquarterly.com 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 www.insiderquarterly.com isk s th ia lr al Sp ec He de nt e ci te Ac an Gu ar ed it re Cr Ag ric ul ili tu ty o ab rg pr Li m M Co Ca or m op er eri ty ca 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. www.insiderquarterly.com