Chinese insurers will need more capital

Non-life insurers in China will continue to require new capital as their expanding portfolios put further strain on their solvency ratios, rating agency Fitch has said in a new report.

Steady sales of motor vehicles, greater penetration of non-motor insurance lines and insurers' effort in expanding their product reach will continue to underpin the growth dynamics of the sector in 2015.

But with non-life insurers' net retained premiums continuing to outpace their generation of internal surplus, they will continue to need infusions of new capital. Most major non-life insurers have already reported a decline in solvency buffers in 2013 due to weak underwriting results and rapid expansion; major listed non-life insurers' solvency ratios were still below 200% at end-1H14, Fitch said.

Net premium leverage in terms of the ratio of net written premiums to shareholders' equity for the sector has remained high, indicating insurers' weak capacity to withstand potential earning shocks.

The market also faces other challenges. The underwriting profitability for commercial motor insurance is likely to remain weak in the near term given keen market rivalry. Fitch expects underwriting deficits from compulsory third-party liability motor insurance to persist due to tightly regulated pricing.

While some insurers have tried to stage turnarounds through stricter expense control and better claim management, Fitch expects insurers with limited operating scale to continue to suffer underwriting losses.

It added that claims associated with natural disasters will remain the main source of underwriting volatility for most non-life insurers despite the low penetration rate for catastrophe coverage.

The higher frequency of weather-related loss and persistent soft pricing conditions in commercial property insurance will continue to weaken property insurers' operating margin.

The introduction of a proposed new risk-based capital regime, China Risk Oriented Solvency System (C-ROSS), is likely to spur insurers to re-evaluate their strategies associated with underwriting, reinsurance and investment, Fitch added.

In contrast to the current solvency regime, the C-ROSS would apply different capital risk charges on different insurance lines. Insurers with thin capital resources might retreat from those business lines with high capital risk charges and weak underwriting results. Insurers could reduce their exposure to risky assets if these securities strain their capital adequacy.

The stable sector outlook reflects Fitch's expectation that insurers will maintain sound flexibility to replenish their capital to support business expansion, despite weak underwriting performance. The sector outlook could be revised to negative if there is a dramatic deterioration in the motor class's underwriting result due to intensifying rivalry and significant impairment loss from asset volatility.

Fitch added that it could change the sector outlook to negative if losses from major natural disasters greatly dampen insurers' solvency position on an industry-wide basis. Fitch believes most Chinese insurers will continue to prudently manage their risk accumulation through catastrophe modelling and reinsurance coverage.