Are we ready for a perfect storm in China?

The recent development trend in the insurance market in China has generated new challenges for insurers. Without any exaggeration, such a trend can be a "perfect storm" that will re-shape the industry. Market players who are able to re-adjust their strategies to focus more on underwriting profit will have higher chances of surviving this storm and achieving sustainable growth.

Slowdown in market growth

The rapid growth of the insurance market in China has mainly been driven by the country’s economic expansion since 1980. However, from late 2011, economic growth has slowed; official estimates forecast GDP growth of 7.5% for 2012 – the lowest since 2004.

This economic slowdown has affected the insurance market. In the non-life market, for example, premium growth has obviously slowed since the beginning of 2012. There is a likelihood that the market will not see in the foreseeable future the stunning growth recorded in 2010-2011. A stressed capital market and the low yields of state treasury bonds have resulted in lower investment returns for most insurers.

As a result, we can see that cash flow for insurers is no longer as sufficient as before. Readjustment in reserve will have a bigger impact on insurers’ balance sheets; in addition, any change in rate will also result in significant change to business volume.

Impact from natural catastrophes

China is highly exposed to natural catastrophes. Economic loss from natural catastrophes is, on average, 3% of the annual GDP of the country. With increased insurance penetration in China, insurance losses are also on the rise.

In the first half of 2012, various natural catastrophes affected over 110 million people in China, resulting in a direct economic loss of USD 49 billion. In Aug 2012, typhoon Haikui hit the country’s eastern coast. The estimated insurance loss from this event is USD 232 million, out of which USD 13 million is for motor insurance, USD 132 million for enterprise property insurance and engineering insurance, and USD 73 million for agricultural insurance.

Based on our preliminary analysis, we predict that rain storms, floods and typhoons in 2012 will add 5-10 percentage points to the loss ratio of property and engineering lines this year.

With global warming, there is higher uncertainty over the frequency of future catastrophes and the damage these will cause, which in turn will significantly impact the future losses of insurers in this market.

Key challenges for the insurance industry

It is clear that the high level of profit the market saw in 2010-2011 will not continue. In the future, the profit of the insurance market will probably stay at a reasonable level. In China, the insurance industry is facing new challenges, which are summarised below:

  • Slowing premium growth and rising acquisition cost
  • Mounting regulatory pressure on customer service, i.e. faster claims settlement
  • Inadequate property primary rate with continuous downward trend
  • Stressed investment return
  • Increasing uncertainty from natural catastrophes

In the face of these challenges, those insurers able to shift gears will come out as winners.

Published December 2012

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