China insurance outlook revised on easing of lockdown rules

AM Best has revised its market segment outlook on the China non-life insurance industry to stable from negative due to the segment’s improved underwriting performance and better growth prospects as China eases its zero-tolerance COVID-19 policy.

The rating agency states that non-life companies’ net profit increased by 20% year over year as of the third quarter of 2022.

As the non-life segment in aggregate has a relatively high net premium leverage, the improvement in underwriting performance was magnified in the overall net profit, which was more than sufficient to offset the recent less favourable investment returns.

Improvements in the segment’s underwriting performance were attributed to benign catastrophe activity for the year to date, and a slowdown in economic activity given COVID-19 lockdowns, and therefore, a lower accident rate.

“The large insurance companies typically have more favourable operating outlooks given their strong capabilities to source profitable business and manage down acquisition costs amid market reform,” said Christie Lee, senior director, AM Best.

“Traditional mid-sized and smaller insurance companies have thus sought to expand into non-motor lines of business or find their own competitive edge to navigate the motor comprehensive reform while pursuing profitability.”

Improved investment outlook

To support the economic growth impacted by pandemic-related lockdowns, China’s central bank set a relatively loose monetary policy that is divergent from the rest of the world. As a result, government bond yields and bank deposit rates have been trending downward, which makes the search for yield more challenging.

At the same time, both investment returns from equities and fixed income instruments have recorded worse than historical levels.

With a relaxation of several tough COVID-19 restrictions, combined with a change in policy direction to support the struggling real estate sector’s fundraising, the investment outlook for insurance companies in 2023 is expected to be better relative to 2022.

China’s non-life industry generated total direct premiums of CNY1.25 trillion ($179 billion), or premium growth of 10% as of the first ten months of 2022, while direct paid losses rose by just 4.1%.

The motor comprehensive reform rolled out in September 2019 has diluted the motor’s contribution to the overall segment from 63% in 2019 to 53% in year-to-date October 2022.

The segment’s growth continues to be steered by non-motor lines, where the three largest non-motor lines of business – health, agriculture, and liability – combined recorded remarkable growth of approximately 20% over the first ten months of 2022, compared with the same period last year, on the back of government policy and regulations.

Given that China’s non-life segment is marked by relatively high net premium leverage, a sustainable and profitable underwriting performance in a post-pandemic environment when economic activities resume, is a key factor to maintaining a Stable outlook for the non-life insurance segment in the future.