China's insurance sector on the upswing, but not without hurdles

How can companies navigate this complex market as 2024 approaches?

China's insurance sector on the upswing, but not without hurdles

Insurance News

By Kenneth Araullo

With many headwinds across the global insurance sector, it is not surprising that Asia’s largest nation also finds itself on the tail-end of what has been a very challenging year – one in which it saw a crackdown on its major financial institutions, a suspended death sentence for the former CEO of its top life insurance business, and a property market impeded by economic challenges. Altogether, 2023 has not exactly been the best year for China, and without even mentioning sanctions imposed by its biggest rival in the West.

That said, 2024 is shaping up to be a year of opportunities – albeit with challenges sprinkled in. In conversation with Insurance Business, Fitch Ratings APAC insurance senior director Terrence Wong (pictured above) highlighted that navigating the Chinese insurance sector will be a matter of knowing both opportunities and challenges, and how to make the best of the situation in the face of geopolitical and economic issues.

“In terms of the challenges, the National Administration of Financial Regulation just revised some solvency capital calculation rules. Because of these changes, we can see that smaller-sized insurers benefit from the revisions,” Wong said.

“Last year, the regulator imposed a more stringent solvency framework,” he said. “Higher capital requirements moderated the sector’s overall solvency position. Add to that the volatile capital market, along with higher premium growth as a result of the easing of the COVID restriction, led to a decrease in solvency adequacy in the first half of 2023.  Insurers generally reported lower surplus growth due to less favourable investment results.”

Wong noted that this development might have a larger impact on small to mid-sized companies.

“There is also the aspect of the individual life insurance agency channel in China,” Wong said. “Life insurers reported a substantial decline in the number of life insurance agents over the last couple years.  And this led to a decrease in new business sales for the life sector. I think this trend is likely to continue this year, but the magnitude of reduction is unlikely to be as severe as what we observed last year. The life insurance sector has tried to focus more on their productivity rather than the number of agents in driving the flow.”

Demand for life insurance products has also slowed, especially for longer-term health products. Wong notes that this is partially due to the competition from short-term health products. Consumer sentiment has not helped either, with Wong describing buyers as “not very optimistic,” which has slowed down demand as well.

Regulatory changes – what could they mean for China’s insurance?

On the regulatory side, however, Wong said that there have been developments that aim to lead to better outcomes for the industry.

“Regulators have actually tried to enforce that the assumptions on commission fees and commission rate caps on life insurance policies distributed through bancassurance should be consistent with the actual payments insurers pay to banks. There were inconsistent in the past. In some cases, the actual expense from insurers might be much higher than what was reported.  As a result of this new rule, this will put a certain limit on the amount of bancassurance expense that insurers need to incur when they sell a policy through a bancassurance channel,” he said.

Wong also noted interest rate pricing assumptions as another major development in China’s insurance system, with traditional products shifting from 3.5% to 3%. While he says that this might have an impact on new business sales, in-force policies are not affected.

“Compared to the interest rate that the consumer can obtain by putting the money in the bank, I think, to a certain extent, that a saving-type insurance product is still more attractive, especially from a longer-term perspective. That’s another element, but, having said that, whether that has any impact on the growth of new business, remains to be seen,” he said.

On the non-life side, Wong emphasised that one of the key developments in 2023 is the liberalisation of commercial motor premium pricings.

“For 2023, we don’t see this regulatory change as a threat to the operating margin of motor insurers although one can argue that companies may try to cut their premium prices to gain better market shares given higher pricing flexibility.

“We thought that further liberalisation of motor pricing in 2023 might have a positive impact on the sector as motor insurers are likely to have stronger incentive to strengthen their underwriting sophistication and segmentation. For instance, if there’s a driver with a bad track record, motor insurers will be able to demand a higher premium price,” he said.

Part two of this series, which will include Wong’s outlook on IFRS 17 adoption in the region and other developments, will be published in the coming weeks. Stay tuned.

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