The detariffication of the motor insurance market in 2015, as part of wider motor pricing reform in selected provinces of China, has led to a modest reduction in the annual growth rate of motor premiums to 10% (see Figure 10). The effects of reform have been largely predictable, leading to market disruption, increased costs in acquiring and retaining policyholders and increased price competition in an already highly competitive environment.
As a result, JLT Re estimates that the average motor premium cost has declined by 2% per year since 2015 as the annual average growth rate for new vehicles in China has grown by 12%. This sharp risk-adjusted rate reduction has increased pressure on underwriting margins (see Figure 11) and has reached the point where the median motor policy is being priced at or below economic break-even levels.
Despite the increased competition, detariffication is not an uncontrolled ‘free-for-all’ race to the bottom in terms of prices. The regulator is keenly aware of the impact high expense ratios are having on the longer term development and viability of the motor insurance market. Insurers are now required to disclose the commercial discounts applied to premiums for vehicles, as well as the average acquisition cost, in order to retrospectively compare with provinces that have yet to be fully detariffed. Unsurprisingly, the largest insurers support an arrangement which sets an upper limit for acquisition cost ratios whilst also limiting the degree of price competition to increase profitability. This is expected to have a positive impact on underwriting margins for motor business if all insurers can maintain sufficient discipline.
FIGURE 10: GROWTH OF MOTOR INSURANCE PREMIUMS, 2014-2017
SOURCE: China Insurance Statistics, Ministry of Public Security of China
FIGURE 11: UNDERWRITING PERFORMANCE OF MOTOR INSURANCE, 2014-2017
SOURCE: China Insurance Statistics