China's insurance sector will continue its strong growth momentum over the next two years, although the growth is slowing down, says S&P Global Ratings.
The sector has seen significant regulatory changes following the formation in March 2018 of a super regulator, China Banking and Insurance Regulatory Commission (CBIRC).
S&P says it anticipates the regulatory framework, China Risk Oriented Solvency System (C-ROSS), will be updated by 2020, given the CBIRC's tighter stance. While the risk exposures of insurers are set to reduce, the mounting compliance costs will likely strain their profitability, particularly for small and midsize companies (SMEs).
“We have assessed the credit trends of the life insurance sector as negative since late 2015, and those of the bond insurance sector as negative since February 2016,” said the international ratings agency in a report issued this week.
Foreign life insurers are likely to strengthen their footprint within China following the removal of ownership restrictions. While their overall market share remains small, the sector's shift to focus on quality growth around protection insurance should sit well with foreign players.
China's highly competitive life insurance sector will continue to grow rapidly, supported by rising demand and awareness for insurance among an increasingly affluent and aging population.
S&P expects premiums to continue to grow at double digits following regulatory restrictions on the sale of short-term insurance policies since late 2016.
Asset liability management (ALM) remains the key risk for many Chinese life insurers due to the limited availability of long-duration assets to match liabilities. The insurers' increasing exposure to alternative investments exposes them to liquidity and credit risks. In S&P's opinion, rising defaults on fixed-income investments will affect some insurers' profitability.
The international credit agency estimates the industry's return on equity (ROE) to be around 8.0% and the return on assets (ROA) at about 1.0% over the next two years.
Growth in the non-life insurance sector will likely moderate to around 10% in 2018-2019, from 14% in 2017, due to motor insurance pricing liberalisation and slower new car sales. The reduction will, however, be counterbalanced by strong growth in non-motor insurance.
Declining profitability stems from intensifying domestic competition (particularly in motor insurance) and subdued investment returns amid volatile capital markets.
S&P estimates that P&C ROE will stay around 10.0% and the combined ratio will remain slightly above 100% in 2018 and 2019 (a ratio above 100% indicates an underwriting loss). To mitigate thinning underwriting margins, P&C insurers are likely to increase allocation towards less liquid investments to boost returns.
In S&P's view, insurers that have improved technology and therefore efficiency will be better able to withstand earnings pressure.
China's bond insurance sector plays an important role to support SME funding needs. Due to the limited availability of historical default data, S&P sees some underpricing of risks. The Chinese government's ongoing deleveraging efforts could lead the sector's growth momentum to decelerate, affecting profitability. Furthermore, the deteriorating credit quality of SMEs may result in underwriting losses for the industry.
Comparatively, China's bond insurance sector is less regulated than its banking and insurance sectors.
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