Chinese auto insurance profits will likely take a hit from a fresh wave of regulatory reforms making payouts more expensive for carriers, despite the benefits from fewer accident claims in the pandemic, Moody’s said.
In a new report released Thursday, the New York-based credit ratings agency projected that costs will rise as motor premium growth in China also “meaningfully” slows to mid- to high-single-digit percentages in the next 12 to 18 months from 10.7% in 2019.
The expected impact comes after the country’s top insurance regulator implemented reforms this month that raise compensation amounts of motor insurance policies while limiting insurers’ ability to pass those costs on to consumers via premium hikes. In an earlier report, Moody’s called it a “credit negative” move for China’s property and casualty insurance industry.
“To offset the increase in motor loss ratios, we expect insurers will cap commission expenses growth. Coupled with weaker investment income growth from lower bond yields, insurers are likely to report lower earnings in the next 12-18 months,” Moody’s analyst Kelvin Kwok said.
Since 2016, China has undergone a series of phased pricing reforms within its motor insurance sector, which comprised 63% of all Chinese insurance premiums in 2019, state-owned China News Service said.
The first phase, ended in June 2016, liberalized rules on pricing to allow insurers to offer more discounts, and to promote competition in the sector, according to S&P Global. The following year, the government implemented phase two, which allowed higher discounts on premiums. A third phase designed to further decrease premium costs for consumers launched in March 2018.
Though these reforms have indeed helped spur greater competition in the market, they’ve also constrained motor insurers’ ability to improve their underwriting margins, Fitch Ratings said in a report released in November.
On Sept. 3, the China Banking and Insurance Regulatory Commission implemented an additional wave of reforms, including an increase in the total liability limit for compulsory motor vehicle policies to CNY 200,000 ($29,563) from CNY 122,000 ($18,034). The government also implemented stricter guidance for the motor insurance market against delays in commission reporting and aggressive market practices.
The pandemic has helped to shore up top Chinese motor insurers’ underwriting performance, with the loss ratio of the top three companies dropping 0.3%, to 4.0%, in the first half of 2020, Moody’s said. The loss ratio of the companies is expected to shrink this year due to tighter underwriting practices.
Still, the new reforms could further erode the sector’s weak combined ratio, which was 99.5% in 2019, as the reduction of the assumed expense ratio and claims cause premiums to lower. The sector continues to face disruptions to new business from COVID-19 and low vehicle sales, Moody’s said.
The agency also reaffirmed its outlook on Chinese property and casualty insurers, citing strong capital levels that were supported by fewer driver claims.