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September, 2011 China Close to Opening Its Auto Insurance Market A.M. Best Analyst: Foreign Players May Ease Loss Pressure in Motor Market

By Rebecca Ng China is close to opening its highly regulated compul- sory third-party motor liability insurance market to foreign insurers, a move A.M. Best Co. believes “will alleviate solven- cy pressure for domestic non- life companies and premium pressure for motor products” Car buyers shop for vehicles in China. Car sales in China are driving insurance growth in the sector. Sales in China climbed 6.7% in July. in a market hobbled by dete- Imaginechina via AP Images riorating underwriting condi- tions. at consultancy Accenture. The motor market constitutes more than 70% of China’s Rising claims costs and falling premium rates are produc- nonlife industry. “With a strong growth of above 30% in ing negative underwriting results in China, according to the compulsory motor insurance market in recent years, consultancy Celent. “The increase of compensation levels, the domestic nonlife companies are having some solvency medical costs, price of motor parts and labor costs resulted pressure,” said Hong Kong-based MM Lee, general manager in an increase of the average cost of claims. The regulator of analytics with A.M. Best Asia-Pacific Ltd. Lee indicated the decreased the premium rate for third-party liability insur- problem is caused by the imbalance of demand and supply ance and raised the liability amount since 2008, which has forces. worsened the situation,” said Wenli Yuan, a senior analyst at China first introduced compulsory liability insurance Celent. in 2006. Currently, there are 33 Chinese property/casualty When the CIRC first introduced compulsory liability insurers operating in the market. In 2010, the market report- insurance, a universal premium rate was set with a fixed loss ed an operating loss of 7.2 billion yuan (US$1.1 billion). Of limit of 60,000 yuan. Since July 2007, the floating premium that, underwriting losses accounted for 9.7 billion yuan, rate came into effect. “Renewal policies which have favor- offset by 2.5 billion yuan in investment income, according able claim records can enjoy a premium discount, so the to the China Insurance Regulatory Commission (Best’s News average premium per policy is decreased,” said Yuan. Service, Aug. 5, 2011). The average premium rate for automobile insurance is The three big nonlife insurers, including PICC Property likely to fall by low single digits based on the floating rate and Casualty, China Pacific Property Insurance and Ping An scheme in China, said equity analyst Olive Xia at Core Pacif- Property and Casualty, all recorded combined ratios above ic-Yamaichi in a research report. Flexible pricing for automo- 100 in 2010, while all three were below 100 in 2008 and bile insurance is expected to “intensify price competition below 90 in 2007, noted A.M. Best. going forward,” she said. The high claims ratio, particularly for non-passenger Although most insurance companies had underwrit- vehicles, has been a drag on the domestic motor insurance ing losses for compulsory third-party liability insurance for sector, as insurers are “still trying to find the right operating motor vehicles, they are seeing underwriting profits for model,” said Sharon Khor, head of insurance in greater China ■ Continued: Motor, page 2

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■ Motor upside potential, said international law firm Clyde & Co in From page 1 a report. commercial motor vehicle insurance, which also allows One area of optimism for insurers is the CIRC’s consid- overall motor vehicle insurance to be profitable, said Yuan. ering whether to open the market for compulsory motor “Currently, there is already high competition in the motor insurance to foreign firms, “allowing overseas insurers to vehicle insurance market. The Chinese regulator might have boost their business in the world’s largest car market,” noted concerns about increased competition,” she said. the law firm. Strong compulsory motor Yuan said foreign play- insurance market growth also Top 10 Motor Insurers in China in 2010** ers can help China to form a “healthier” growing motor means that demand has been (Yuan Billion) vehicle insurance market increasing much faster than 2010 2009 the supply, driving up prices, Premium Premium with their “advanced technol- according to A.M. Best. Names Income Income ogy and risk management “From a regulatory per- 1 PICC Property and Casualty Insurance Co., Ltd. 30.58 25.02 experience.” spective, the authority would 2 Ping An Property & Casualty Insurance 12.05 7.99 She said because foreign like people to be able to Company of China Ltd. property and casualty insur- 3 China Pacific Property Insurance Co., Ltd. 9.25 6.77 afford insurance, or buy at an ers have not gotten approv- 4 China United Insurance Holding Co. Ltd. 4.64 4.69 adequate rate,” said Lee, add- 5 China Continent Property & Casualty 3.36 2.87 al from the regulator to sell ing the opening up of the Insurance Co. Ltd. compulsory third-party liabil- market “will ease forces like 6 Sunshine Property and Casualty Insurance 3.29 2.26 ity insurance for motor vehi- domestic nonlife insurers’ Co., Ltd. cle, they are at a disadvantage 7 China Life Property & Casualty Insurance 3.03 2.29 solvency pressure and motor Co. Ltd. in selling commercial motor premium rising pressure.” 8 Insurance Co. Ltd. 2.65 2.04 vehicle insurance as “custom- In China, many foreign 9 Tianan Insurance Co. Ltd. 2.31 1.93 ers usually want to buy this insurers who have been in 10 Yong An Insurance Co. Ltd. 1.67 1.79 business line from the same the market some time are **In terms of premium income in 2010. insurer.” failing to generate satisfacto- Source: Insurance Association of China. Yet even as the CIRC ry profits. Many are taking a reviews deregulation, contin- long, hard look at the feasibil- uous business growth with a ity of their relationships with scalable market size are key Audio: the local partners. However, concerns among domestic they are not about to quit, as players as they contemplate Listen to the entire interview with MM Lee at potential industry integration, they see China as an under- www.ambest.com/audio. insured market with huge said Khor.

Global Writers Weigh China Auto Insurance Options By Rebecca Ng serving 73,000 drivers in Chongqing, Beijing and Zhe- Foreign insurers are eager to see whether China’s jiang, and will open another branch in Guangdong, insurance regulator will further open the country’s according to Tang. vast automobile insurance market to competition, but As an active player in auto market, Tang said Liberty capital concerns, service differentiation by region and “welcomes” the China Insurance Regulatory Commis- questionable profitability will still make entry deci- sion’s move toward opening mandatory third-party sions complex for many. liability insurance to foreign insurers and “will be “Service is our winning formula worldwide and interested in developing this new business.” China is no exception. The challenge is to differenti- With more than 18 million new vehicles, including ate our services among local companies in various passenger cars and commercial vehicles, registered provincial markets,” said Jackson Tang, China manag- in China in 2010, “the market and its potential is big” ing director of Liberty Insurance Co. Ltd., a subsidiary when compared with the 15.6 million new vehicles of U.S.-based Liberty Mutual Group. in Western Europe, according to Germany-based insur- Liberty has had an auto insurance business in er Allianz SE. Chongqing, its China headquarters, since 2005. It is “This offers a huge opportunity, but with a high now the leading foreign auto insurer in the country, ■ Continued: auto, page 3

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■ auto provide consumers with more choices and project a From page 2 “progressive” image for the industry, said Tang. claims ratio in the Chinese market this also bears “Indeed, experiences in the U.S. and the other challenges for profitability of third-party motor busi- well-developed insurance markets have shown that ness, which an insurer has to assess with care,” said a reduction in market entry barriers for auto insur- Kamesh Goyal, regional chief executive of Allianz ance results in healthy competition, lower premiums Insurance Management in Asia Pacific, based in India. and expanded coverage, which are for the benefits of He said in China, the insurer is offering noncom- both consumers and insurers,” he explained. pulsory motor business with a local partner in Guang- Global reinsurers have raised concerns about the dong province. “An opening up of the third-party funding capability of Chinese direct insurers for busi- market would enable us to do motor business more ness developments, particularly motor insurers who efficiently,” said Goyal. are facing problems with Since it inception in “Service is our winning formula claims management with 2006, Liberty noted man- worldwide and China is no excep- rising loss ratios. datory third-party liability tion. The challenge is to differ- Munich Re expects insurance has operated entiate our services among local premium income in well, serving millions of companies in various provincial China will rise to about Chinese drivers. But some markets.” 1.1 billion euros (US$1.6 problems have harmed the Jackson Tang billion) in 2011, driven industry efforts, Tang said. China managing director of by the demand for motor For example, “some prov- Liberty Insurance Co. Ltd insurance. “The motor inces run a loss in MTPL, insurance market in many and rejections to accept established markets has MTPL applications are not been unprofitable follow- “The motor insurance market in uncommon though legally many established markets has ing strong price wars. not correct.” been unprofitable following strong However, we don’t see The CIRC has taken price wars. However, we don’t see that profitability in China measures to address these that profitability in China will be a will be a concern in the issues, such as introduc- concern in the short-term.” short-term,” said John ing differential tariffs in Wilkinson, Munich Re’s John Wilkinson certain provinces and Munich Re’s CEO CEO for Greater China. enforcing acceptance of for Greater China “What makes the Chi- MTPL applications. At the nese motor insurance mar- same time, the Beijing- ket different to markets in based insurance regulator Europe is the regulation is considering opening “An opening up of the third-party of insurance rates and its MTPL to foreign-invested market would enable us to do short-tail character, making companies. motor business more efficiently.” the business profitable for If implemented, Tang Kamesh Goyal primary insurers and rein- said, this opening would regional chief executive of surers,” he said. help improve the perfor- Allianz Insurance Munich Re noted the mance of MTPL and the Management in Asia Pacific large primary insurers in overall auto insurance China need to “find the market, with consumers benefiting from the introduc- capital to support their immense growth.” The use of tion of best practices from foreign markets and com- reinsurance, compared to subordinated loans, provides petition. flexibility, and a reinsurer’s consulting services and risk Tang believes there are “practices, systems and partnership can help reduce the capital amount insur- techniques” in mature country markets, such as the ers need to support the increasing demand for motor United States, where auto carriers have decades of cover in China, where car sales jumped 32% last year. experience in underwriting and pricing auto insur- “The demand from these large transactions has ance, that can be used in China, where the “rela- risen sharply in the last few years,” said Wilkinson. tively young industry still has tremendous room for In the first half of 2011, China saw a 14% growth improvement.” in motor insurance premium income compared Opening MTPL to foreign-invested companies will ■ Continued: auto, page 4

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■ auto insurers, said Yinyin Huang, vice president and senior casu- From page 3 alty treaty underwriter with Swiss Re. The industry believes with the first half of 2010. Considering the 39% growth this slowdown is due to a broad motor market slowdown, observed for all of 2010, growth of Chinese motor insur- with factors including “higher oil prices, restrictions on car ance market “has obviously slowed down from its peak purchases in cities such as Beijing to alleviate traffic condi- speed,” with challenges arising from “underwriting selec- tions and the expiration of tax incentives for the purchases tion, sales channel control and claim management” of of small cars,” said Beijing-based Huang.

Ping An Confident as Motor Market Prepares for Reform By Rebecca Ng “It is impossible for motor insurance to always (Group) said it sees “continuous remain in rapid growth,” said Ma. He explained that motorization in China” along with tighter insurance regula- during the regulatory improvement process, intermedi- tion as creating new business opportunities that will offset ary fees such as commissions and handling fees, which any threat from the opening of the compulsory third-party were “running off from [the incomes of] insurers have liability motor insurance market to foreign players. returned to the premium,” leading to premium growth. The China Insurance Regulatory Commission pro- “Following the expansion of the premium base, the posed in August to deregulate the compulsory third-par- premium proportion contributed by new motor sales ty liability insurance market for motor vehicles in China may decline, but China’s motorization in the mid to long and open the market to foreign insurers, following a rise term has not yet finished, and China will continue to be in loss ratios among domestic nonlife players. the largest motor sales country in the world,” Ma said. The CIRC said the move will serve its goal of “protecting Amidst economic recovery, China has surpassed the the best interests of the insured and to promote healthy United States to become the world’s largest new vehicle market development for sales market since 2009. As motor insurance,” said Yin- a result, the auto insurance yin Huang, vice president Top Three Insurers China Motor market is “growing rapidly,” and senior casualty treaty The Chinese motor insurance market is dominated by said Jackson Tang, manag- underwriter at Swiss Re. the following three companies, listed with 2010 pre- ing director of Liberty “Overall, we believe mium income from motor business. Insurance Co. Ltd., a sub- opportunities are more 1 PICC Property and Casualty 30.58 billion yuan sidiary of U.S.-based Liber- than challenges,” said Yong- 2 Ping An Property and Casualty 12.05 billion yuan ty Mutual Group in China. feng Ma, deputy general 3 China Pacific Property Insurance 9.25 billion yuan “Driven by regulation manager of motor insur- Source: China Insurance Regulatory Commission. of pricing competition, the ance at Ping An Property auto insurance line began and Casualty Insurance Company of China Ltd., the to report underwriting profit in 2009,” said Tang. “As auto second-largest nonlife insurer in the country. insurance accounts for 70% of the property and casualty In view of the regulatory environment, “stricter regu- insurance sector in China, its profits have turned the lations and healthier market environments will contin- P&C sector around, after years of underwriting losses.” ue,” said Ma, adding that as the industry benefited from Ma added that “no matter if the market is open or not, market improvements, “the growth trend of the profit- Ping An P&C has already developed domestic competi- ability of the industry will continue.” tive advantages in sales channels, risk management, tech- In addition, the promotion of online sales of motor nology and services.” insurance and the enhancement of market discipline in the The insurer said new channels like telesales and nonmotor insurance sector have improved the domestic cross-selling have reported “substantial” effectiveness, motor market operating environment, he said. with telesales motor insurance already contributing PICC Property and Casualty, the largest nonlife and profit. For customer service, the company provides road- motor insurer in China, earlier said it will face a num- side assistance free of charge, noted Ma. ber of challenges in the second half of 2011, including For risk management, he said Ping An established a the end of government policies to encourage the pur- “secure” customer database, and conducts “risk identifica- chase of vehicles and the introduction of vehicle pur- tions and detections” through the combination of adopting chase restrictions in some cities, along with the slowing growth of vehicle sales. ■ Continued: ping an, page 5

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■ ping an ratio and underwriting profit. From page 4 Since compulsive motor insurance was first intro- international actuarial methods with its underwriting sys- duced in China in 2006, the CIRC said the system tem to enhance underwriting quality. has operated effectively. Following economic chang- es, the regulator noted this mechanism has encoun- Lead Players tered new problems and requires more supervision The Chinese motor insurance market is dominated of insurers. The CIRC said it will study the opening by three companies: PICC Property and Casualty, Ping of this market to foreign insurers to introduce new An Property and Casualty and China Pacific Property technologies and management from overseas. Insurance. Premium income generated from motor busi- “There still [is] sufficient market competition in ness in 2010 was 30.58 billion yuan (US$4.78 billion), China, [with] around 50 property and casualty insurers 12.05 billion yuan and 9.25 at present,” said Ping An’s billion yuan, respectively, “As auto insurance accounts for Ma. The overall profitabil- according to the CIRC. 70% of the property and casualty ity of the domestic nonlife Beijing-based PICC insurance sector in China, its sector is “positive,” mainly P&C’s 2011 first-half net profits have turned the P&C due to rapid macroeco- profit rose 96.7% to 5.29 sector around, after years of nomic development of the billion yuan, driven by an underwriting losses.” country and continuous improving underwriting Jackson Tang improvement of the mar- environment in China. Its China managing director of ket environment. motor business turnover Liberty Insurance Co. Ltd “If the [compulsory rose 9.3% to 64.33 billion third-party liability insur- yuan (Best’s News Service, ance] market opens to Aug. 15, 2011). “It is impossible for motor insurance to always remain foreign insurers in the As at June 30, PICC in rapid growth.” future, we will learn the P&C’s motor combined advanced technology ratio was 93, compared Yongfeng Ma from them, in order to with 97.7 a year earlier. deputy general manager of motor insurance, Ping An provide better customer “The motor loss ratio Property and Casualty Insurance Company of China Ltd. service,” he noted. stayed the same but In the first six months the total expense ratio of this year, Ping An P&C declined [in 2011 first premium income from half]. That is enough to Audio: motor business rose 35% budge the combined ratio to 30.79 billion yuan. Ma down. Because the profit Listen to the entire interview with Yinyin said the company will margin is so small, even Huang at www.ambest.com/audio. look to maintain a “better a small shift in combined than the market” motor ratio will change profit a insurance growth. lot,” said Edward Jen, a Hong Kong-based equity ana- In 2010, China’s compulsive motor insurance sec- lyst with the insurance sector research department tor reported an operating loss of 7.2 billion yuan. Of at Samsung Securities Asia Ltd. that, underwriting losses accounted for 9.7 billion Although motor insurance accounted for 70% to 80% yuan, offset by 2.5 billion yuan in investment income. of PICC P&C’s total business, its underwriting profit In addition, insurers paid 12.34 trillion yuan for 12.28 growth was not driven by government policies encour- million claims, up 19% from 2009. They also made aging auto purchases, noted Jen, who added cost con- advance payments for salvage amounting to 95.97 mil- trol in terms of cost efficiency and natural economies lion yuan, up 18% from the previous year, according to of scale have helped the insurer improve its combined the CIRC.

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