New insurance development guidelines announced by the Chinese government in September will bring positive changes — as well as challenges — to the local property and casualty sector, experts told S&P Global Market Intelligence.
The guidelines released by China's State Council aim to enhance regulation, risk prevention and the "high-quality development" of the insurance industry, according to state media reports. A key aim of the new guidelines is the provision of more comprehensive catastrophe insurance.
The catastrophe goals of the new guidelines could be a "double-edged sword," CLSA analyst Edwin Liu said in an interview, as they could trigger an increase in premiums. There are also doubts about whether insurers have the sophisticated underwriting capability to ensure they can still make money by providing innovative insurance to customers, Liu added.
Still, property and casualty (P&C) insurers have the underwriting capability and have been actively using reinsurance to reduce risk from their balance sheet. Insurers have been using proportional reinsurance and excess of loss reinsurance to remove tail risk, as well as issuing natural catastrophe bonds, Liu said. In addition, insurers have been leaning on reinsurers to help model their exposure.
"There are a lot of improvements at the P&C insurers to try to have higher capacity to provide such natural catastrophe coverage," Liu said. "I'm actually quite comfortable in terms of their underwriting capability."
Product underwriting
The government is asking insurers to improve standards, which is not a bad thing, Steve Tunstall, general secretary of the Pan-Asia Risk & Insurance Management Association, said in an interview.
The market's products are considered cheap, which may not be sustainable as coverage gets enhanced, Tunstall said, adding that the development of product underwriting know-how is something that will take time.
Another priority for the government is improving insurance services for technology companies throughout their entire lifecycle. The National Financial Regulatory Administration aims to promote new products, refine policies and support pilot projects in areas such as cybersecurity insurance and research and development loss insurance.
Insurers might not get the perfect pricing for products covering the tech sector in the first few years, but they should be able to adapt as early as the second year, Liu said. If they quickly learn from their mistakes by utilizing historical data, they can take advantage of P&C's short repricing cycle, Liu added.
An insurance company does not need to be an expert in the technology being insured, Liu said. "What the insurance company need(s) to do is really just to track the claims data so that you know the trend of the underlying technology and you would not be surprised by any future adverse events."
EV risk
One potential pain point for Chinese P&C companies is underwriting electric vehicle risk.
Underwriting results from the book of new energy vehicles (NEVs) have remained unfavorable for many Chinese motor insurers, particularly those with smaller scale, despite strong premium growth due to the rising demand for NEVs, Terrence Wong, senior director for Asia-Pacific insurance ratings at Fitch Ratings, wrote in an email.
High repair and replacement costs for motor parts, relatively higher accident rates, pricing inadequacy and rapid technological change have all contributed to the poor underwriting performance of the NEV segment, and some insurers have opted not to participate in the segment.
Wong expects better economies of scale to lower the expense ratio of insurers' NEV insurance books. Improving the claims ratio of NEV insurance hinges on insurers' pricing sophistication and flexibility, and insurers are likely to report better results if they are able to build more sophisticated pricing models to segregate risks in NEV policies and determine the magnitude of premiums according to the risk profiles of insured policies, Wong said.
A new underwriting and pricing model may be required, S&P Global Ratings analyst WenWen Chen wrote in a September report, referring to EV insurance.
P&C insurers could also explore partnerships with EVs and battery manufacturers, cutting out middleman-associated expenses, while getting firsthand knowledge about specific EV models, Chen added.
Chen expects the EV insurance segment to post underwriting losses over the next two years. Consequently, only the large players or specialized writers might be able to develop viability in this segment, Chen added.
Smaller players
Regulators are aware that the P&C insurance industry is over-competitive and that there should be a process that allows some smaller players to exit, Liu said, noting that there are about 80 P&C insurance companies in China.
Smaller players are unlikely to just give up their license or completely exit the market. They will likely try to find a niche local market or segment where they can have a competitive advantage and grow at a slower pace, Liu said.