Section 4: CHINA P&C INDUSTRY: WELL CAPITALISED, FIERCELY COMPETITIVE AND IN NEED OF DIVERSIFICATION

25 October 2018

The China P&C market continues to be dominated by the fiercely competitive motor insurance sector, which currently accounts for about 70% of gross premiums written. Whilst this percentage has reduced from 80% over the last three years (see Figure 10 on page 10), it remains a major source of revenue for many insurers, especially as a substantial portion of this is retained net of reinsurance.

The desire to move into more profitable lines of business has been a key driver behind this shift. JLT Re, along with regulators and rating agencies, has long recognised the need for diversification. This, in turn, increases the need for specialised underwriting expertise and improved risk modelling to be developed, particularly as insurers move into agriculture, property-catastrophe and casualty lines.

Despite solvency ratios decreasing between 2015 and 2017, the Chinese P&C market remains well capitalised (see Figure 4). Additionally, the breakdown of required capital by major risk categories remains largely stable (see Figure 5), albeit with a slight increase in credit risk, which may be due to increased allocations to alternative investments.

FIGURE 4: CHINESE P&C MARKET SOLVENCY RATIOS

chinese p&c market solvency rates

NOTE: Excludes start-up companies. Number of companies in each category: Overall (62), Top 3 (3), Large (10), Medium (30), Small (19); as at 11 September 2018 SOURCE: China Insurance Statistics

FIGURE 5: MINIMUM REQUIRED CAPITAL (MRC) BREAKDOWN OF CHINA P&C INDUSTRY

minimum required

SOURCE: China Insurance Statistics

The Chinese P&C industry remains highly fragmented between the top three insurers (PICC, Ping An and China Pacific), plus a few other large insurers, and the rest of the market. At the end of 2017, the top three and other large insurers held 86% of market share and generated positive returns on capital (RoC), despite highly competitive market conditions. The benefits of scale in the Chinese P&C sector – particularly given its heavy dependence on motor insurance – has resulted in a two-tier market, as illustrated in Figures 6 and 7.

As a result, the following key observations can be made:

  • There is a huge disparity in performance between the top three and large insurers, versus small and medium-sized carriers. The benefits of scale (and diversification) are most clearly demonstrated in the inverse relationship between size and management expenses (as shown by Figure 6). This is where the top three insurers have a significant competitive edge over the rest of the industry. The top three and larger insurers also benefit from better underwriting controls and risk selection whilst being able to spread their capital requirements across a much larger premium base. This is the single biggest differentiator in terms of overall profitability (as measured by RoC) across the entire industry.
  • In comparison, small insurers have loss ratios and management expense ratios that are, on average, 10 points and 15 points, respectively, higher than their larger competitors. Smaller insurers are also more dependent on riskier asset portfolios to generate higher investment yields and boost their bottom lines in the face of increasing underwriting losses and expense costs.
  • There is a small but noticeable improvement in loss ratios over time across the industry with the exception of small insurers, whose performance has been more volatile and is a reflection of poorer risk selection.
  • As shown in Figure 7, industry RoCs have declined as a result of increasing capital bases from a build-up of retained profits (top three and large insurers) or capital injections (small and medium-sized insurers) over time.
  • Similar to a number of other markets in Asia-Pacific, P&C insurers in China are heavily over-expensed, with total expense ratios ranging from 35% to over 55% of gross premiums. This is widely recognised across the industry and many carriers have responded by partnering with the technology sector in an attempt to reduce operating costs (see callout overleaf).

FIGURE 6: OPERATING RATIOS OF CHINA P&C INDUSTRY BY TIER, 2014-2017

operating ratios

NOTE: Excludes start-up companies SOURCE: China Insurance Statistics

FIGURE 7: RETURN ON CAPITAL & SURPLUS (RoC) BY TIER, 2014-2017

return on capital

NOTE: Excludes start-up companies SOURCE: China Insurance Statistics

video

Market Insight China

Read the next section
video

中国市场观察 - 中文版 | 2018年10 月

下载完整报告
video

Market Insight China - English | October 2018

Download the full report here