August 21, 2012 / 9:38 AM / 5 years ago

TEXT-Fitch:China mandatory car insurance market faces further losses

(The following statement was released by the rating agency)

Aug 21 - Insurers operating in China’s compulsory motor insurance market (CMIM) face further significant underwriting losses in the next one to two years due to rising claims, tightly regulated pricing and the potential for further competition, Fitch Ratings says. We expect this to lead to a modest decline in overall motor insurance underwriting margins, which is already factored into the stable outlook for China’s non-life insurers. However, if competition led to a big drop in margins it could result in a negative outlook for the sector.

We believe the higher medical expenses and rising repair costs insurers are having to pay out could lead to a deteriorating claim experience. The loss ratio of the CMIM sector is likely to be consistently above 80% in the short term, after 82.3% in 2010 and 81.9% in 2011.

However, ongoing underwriting losses are unlikely to lead to Chinese property and casualty insurers reducing their exposure to the CMIM market. The overall underwriting results of most major insurers’ motor books are still profitable and because every driver must have a CMIM policy insurers feel they need to be in the CMIM business in order to cross-sell profitable commercial policies. In fact, competition in CMIM is likely to increase in 2012 following the liberalisation of the market for foreign insurers in May.

Regardless of poor underwriting results, we believe CMIM will be attractive to foreign insurers because it will allow them to strengthen their market presence in China without working with local insurers, and to build up their distribution outlets. One of the most important benefits for foreign insurers of the opening up of the CMIM market is that foreign companies will be able to attract a new customer base and bundle other insurance products when they provide mandatory car insurance coverage.

The latest figures from the Insurance Association of China show the underwriting deficit for the entire CMIM market, which provides a mandatory minimum level of third-party liability insurance to motorists, rose to CNY11.2bn in 2011 from CNY9.7bn in 2010. After accounting for CNY2bn of investment returns, the industry reported an operating loss of CNY9.2bn in 2011.

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