The Chinese insurance market is changing rapidly in 2016. But challenges are outweighing opportunities for most companies at the moment. Peak Re has recently shared its views with Asia Insurance Review magazine on 2016 China market overview. The original copy can be found in their September 2016 issue.
During the first half of 2016, a clear and distinct difference between property and casualty (P&C) and life business was seen in the China market.
The premium growth rate of P&C insurers decreased significantly to single digit for the first time in 30 years. In contrast, life companies achieved a high growth rate of 50%.
According to the China Insurance Regulatory Commission (CIRC), the total premium income between January to June rose 37.29% year-on-year to RMB 1.881 trillion (US$ 283.1 billion), in which RMB 463.2 billion (US$ 69.7 billion) came from P&C insurers and RMB 1.418 trillion (US$ 213.4 billion) from life insurers respectively. Whilst life premium reaches RMB 1.418 trillion, the industry is expected to make an RMB 1.1 trillion pay out for expected maturities and surrenders of life insurance policies this year. This is a testimony that life insurance in China still focuses mainly on short term savings products rather than protection products.
Slower economic growth has affected the P&C insurance growth rate; there is little opportunity in the equity market, so many insurers have turned to industrial and non-listed equity investments. The investment return for the latter is huge but the risks and challenges attached to it are also significant. This gives insurance asset management great uncertainty.
Affected by the volatile equity market and the increase in cost, Chinese insurers saw their profits shank in the first six months of 2016 and fell by 54% year-on-year. The frequent occurrence of catastrophes in China this year has also brought much uncertainty to the sector’s year-end results.
Foreign P&C insurers only comprise around 2% of market share in China, more or less the same as 2015. In general, new P&C insurers, in particular foreign P&C insurers, have a much lower market share than their net assets, which means most of the foreign players tend to focus on profit generation and cash flow rather than business expansion.
From the regulatory aspect, C-ROSS was implemented earlier this year. The insurance and reinsurance industry has now entered into a new regulatory stage. There are also two major policy changes: the commercial motor rate reform and the change from business tax (BT) to value added tax (VAT).
The Ministry of Finance and State Administration of Taxation implemented the VAT system on 1 May 2016, changing it from BT (5%) to VAT (6%).
As the price and tax are now separated, the premium income calculated under the new system will likely be reduced. With a 100 unit premium income, it will be booked as 100 in the original BT system, but will only be counted as 94.34 under the new VAT system. In addition, the VAT system will also affect insurance companies’ calculation on cost ratio and loss ratio. With the same amount of business done, the premium income – the denominator of these ratios – will become smaller, and will hence amplify the ratios. Therefore, the pricing of reinsurance deals will have to be adjusted accordingly.
All insurers must adjust their business model, operating procedures and pricing models to adapt to the changes.
In Peak Re’s view, the implementation of VAT will have a negative effect on the country’s P&C business which cannot be ignored. The burden on staff, systems and procedures has increased; but, the offset cost is limited. In effect the move has become a tax increase.
How to adjust the price for further business and how to adjust the policies and treaties which are already in effect to reflect this change is an urgent issue the industry needs to resolve.
Property & Casualty market
New players enter into the market
The Shanghai Insurance Exchange was officially launched in June 2016, which will focus on international reinsurance, marine insurance, bidding for very large insurance deals and special risk insurance. This initiative is seen as an important step in building Shanghai as a global (re)insurance hub. Six new P&C insurers started operations in the first half of 2016, and CIRC has also given the greenlight to another eight companies.
Government to purchase commercial insurance
In recent years, Chinese municipal
have started to purchase
insurance directly for their local communities and transfer some of the bailout responsibilities via insurance products to the private sector. Lines include Nat Cat, liability, credit and surety insurance, with CAT programmes taking up the largest portion.
This trend was continued in the first half of 2016: In May this year, the eighth anniversary of the Wenchuan earthquake, the Chinese Government finally launched an earthquake insurance policy. The insurance scheme, which applied in urban and rural residential areas nationwide, will cover homeowners for destructive earthquakes and other perils caused by and following the earthquake such as tsunamis, fires, explosions, and landslides.
Other initiatives include the Shenzhen and Ningbo governments purchased CAT insurance; the Shanghai government purchased integrated liability insurance; the Yunan local government purchased earthquake index insurance; and the Guangdong government purchased CAT index insurance, to name a few examples.
These Government-led insurance products could bring larger opportunities to the industry with the increasing demand on both insurance and reinsurance. It also presents a step in the right direction as it helps China’s insurers achieve their social management functions via underwriting and paying of claims. At the same time, it enhances the Government’s approach to the wider management of social and economic risks.
Commercial motor rate reform
Motor insurance remains the largest line of business in China’s P&C industry, which contributed 81.5% to the premium growth in the first half of the year. 49.9% of industry profits came from motor.
In July 2016, after a year of trials in 18 districts, commercial motor rate reform was finally introduced nationwide. After the reform, motor rates now enjoy greater flexibility, both in terms of increasing the penalty coefficient for claimants or giving more discounts for no claim.
Data shows the number of policies sold at pilot areas had a 20% year-on-year increase while the average premium was lowered. Premium income, according to industry growth rates, stood at 10-12%. The industry was able to maintain its normal growth rate after offsetting the decrease in premium and industry growth.
Currently, it has been noted that the number of small claims and actual claims payment has dropped significantly, compared to before the reform. The insured’s decision to give up small claims in order to maintain or reduce their premium may be a major reason for such a decrease.
Nevertheless, it is still too early to draw any firm conclusions about the rate reform as we will need at least three underwriting years of information to see the real impact on claim frequency and claim amounts.
We also note that the distribution cost for motor insurance has further increased which eats away the profit that could have been brought about by the reform. So this makes it very hard for small and medium sized insurers, who rely on intermediaries, to win business.
Like the general market, the life market in China also holds significant promise, but there are also pitfalls and unique circumstances. Currently, policies bought by customers are still savings-type products similar to banking products, i.e. an emphasis on investment, not protection, short durations, etc.
Protection products have to be “sold” to customers rather to be seen as a precautionary measure they should acquire in advance. These products are also perceived as low value without immediate return. More significantly, Chinese culture sees people shy away from discussion of death, disability and illness: these remain taboo subjects to a large extent.
Chinese life insurers should develop protection products with value and some form of return. There are innovative ideas being developed globally, for example, lifestyle underwriting where the customer is motivated to voluntarily disclose medical information regularly.
There are also other unique factors which make the China life market more interesting but also challenging.
Longevity and demographics are an issue. The One Child policy has led to low birth rates and it also means that one child will need to support two parents. At the same time, single people will have no-one to take care of them in their old age.
The current short-term savings products are not suitable to build-up old-age savings and as in many other countries, the State pensions are “not enough to live but too much to die”. Unfortunately, it is quite difficult to develop attractive pension products in the current investment environment.
As mentioned earlier, insurance products are not seen as a precautionary protection by the Chinese population. People do not buy long-term care products when they are young and when the premium is much lower. But when they finally see the need for such products, the premium will then be considered as too high or simply not affordable.
To combat this, life insurers in China are creating innovative products which include the provision of places in their own company-run homes for the elderly once they are needed.
Another observation is that the image of the life business remains generally negative, not only in China but also other parts of the world, mainly driven by the unpleasant user experience and products sold do not fulfil what the customers really need. As insurance is about selling a promise to pay when legitimate claims come in, building the trust with policyholders is very important. Hence, the insurance industry should work together to enhance the overall image.
Customer behaviour is also changing quickly in China with access to mobile technology, anywhere and anytime. Chinese consumers prefer to seek advice from friends and peers, who give a “real” user experience, rather than from an insurance agent. They also want to hear positive experiences on social media before purchase and to feel that the life insurer actually cares about them as an individual or as a family. More importantly, when customer decides to buy an insurance product, they want to buy it immediately and not to be deferred by the traditional complicated and cumbersome underwriting process.
Online sales have become a very important distribution channel in today’s world, but unfortunately, the current products sold online require either sophisticated consumers with insurance knowledge or is limited to basic and simple products, easy to understand but with low sum insured. Hence, we believe it will be good for the industry to explain the benefits and policy conditions without using insurance-specific terminology to tap into this customer segment.
China market will continue to have huge potential
Although the China market is facing a lot of challenges, it continues to have huge potential as this market is still heavily under-insured. Taking the flooding situation in Hubei and Anhui as an example, economic loss already exceeded RMB 75.2 billion but the insured loss was only RMB 1 billion, which is less than 2% of the economic loss.
With the increasing awareness of insurance, the Chinese Government predicts the premium spending per capita will reach RMB 3,500 by 2020. With China’s 1.425 billion population, the premium income of the Chinese market could reach RMB 4.987 trillion.