Opening of Motor Insurance Market in China Is Credit Positive for Foreign Insurers

Opening of Motor Insurance Market in China Is Credit Positive for Foreign Insurers

Last Tuesday, the US and Chinese governments released a “Joint Fact Sheet on Strengthening US-China Economic Relations,” which suggests that China will open up its mandatory third-party (MTP) liability motor insurance business to foreign insurance companies upon the completion of amendments to relevant regulations. The MTP market opening is credit positive for foreign insurers as it will remove a key constraint on their business. On the other hand, the new regime will likely result in domestic incumbents facing increased competition that may put pressure on premiums. Nonetheless, we expect that the new regulation and increased competition will pave the way for a more efficient industry that benefits all participants.

The Chinese government currently bars foreign insurers from offering MTP coverage, and regulates MTP premiums, which make up about 30% of total motor premiums. Although the MTP business is loss-making as a standalone business line, being able to offer MTP coverage is crucial because it is usually sold as part of a larger motor insurance package that includes the more lucrative voluntary property coverage.

As a result, foreign insurers’ inability to sell MTP coverage directly puts them at a significant disadvantage to domestic players in the motor insurance market. As motor premiums accounted for 74.4% of China’s property and casualty (P&C) insurance premiums in 2010, an inability by foreign insurers to gain a foothold in this important market undermines their efforts to promote broader brand recognition and cross-selling opportunities. We believe this lack of access explains why foreign insurers’ collective market share has been consistently below 1.2% after a decade of doing business in China and explains why some insurers have exited the market.

Opening up the MTP market to foreign insurers would be a significant and positive step that will enable them compete with domestic players in the motor insurance segment and the overall insurance market. Although there is no guarantee that the relaxation will help foreign insurers’ near-term profitability, it will give them access to the broader market, without which they will not be able to achieve the economies of scale they need to be viable.8

In contrast, opening up the MTP liability motor insurance to foreign insurers would certainly lure some of the business away from domestic insurers. However, we believe domestic insurers will still maintain their market-share lead over the next three to five years because of their competitive advantage in scale, brand recognition and distribution.

The de-regulation of the MTP market would also threaten domestic insurers’ profitability if some players adopt aggressive pricing strategies on voluntary property coverage to gain or maintain market share. Currently, motor insurance (including both MTP and voluntary property covers) is still profitable for major domestic P&C insurers as they reported combined ratios of below 95% in first half 2011, indicating at least a 5% profit margin on net premiums earned.

However, we expect that the opening of the MTP market will promote more efficient risk-pricing within the industry, paving the way for further reforms including tariff liberalization that would benefit all market participants given the technical expertise that the foreign insurers can share from their experience in the overseas motor insurance business.