China Insurance 2021: Balancing Growth With Governance (2024)

Chinese regulators are accelerating their supervision of the insurance sector. The government has been slowly reacting to insurers' governance lapses of three to four years ago, building into a critical mass of regulations playing out now. S&P Global Ratings views this clampdown as difficult for entities but as ultimately credit positive for the sector.

After decades of annual double-digit premium gains, China's insurers are entering an era of more disciplined growth. This should curtail aggressive practices. This includes life insurers' previously heavy use of high guaranteed-return products, and property and casualty (P/C) entities' reliance on high-cost growth.

We believe negative credit trends have now stabilized for life insurers, given the constructiveness of regulatory measures. In contrast, credit trends remain largely negative for P/C insurers, reflecting strained underwriting results amid competitive pricing.

Authorities Pull Insurers Back From Their Riskiest Tendencies

Regulators seem intent on promoting higher-quality growth for the sector. This is suggested in the steady rollout of new regulations since the start of 2020, and early 2021 (see table 2), and in increased penalties meted out to rule breakers (see chart 1). Regulators may even publicly name entities for rule violations, or perhaps ban products. China has issued regulations governing aspects of product updates, investment allocation, and risk management.

Table 2

Impending new accounting rules will push insurers to revamp their business strategies, in our view. The new rules are China's version of International Financial Reporting Standards 17.

China's regulators will also likely launch a trial in early 2021 for the second phase of the China Risk Oriented Solvency System (C-ROSS) framework. This phase refines the risk-weightings on insurers' capital and forces entities to be more transparent about their exposure. The second phase was introduced in concept in 2018.

As Insurers Innovate, The Government Regulates

We also see the government's increased regulation as a response to institutions' innovations. As entities experiment with new products and distribution, overseers must monitor the risks.

This was most dramatically seen in November 2020 with the cancellation of the Ant Group IPO, what was poised to be the world's biggest listing, amid tightening fintech regulations.

The roots of regulators' activism go back to February 2018, when authorities took over Anbang Insurance Group Co. Ltd. (now known as Dajia Insurance Group).

The story is old but it echoes on. The China Banking and Insurance Regulatory Commission (CBIRC) only wrapped up its takeover of Anbang in February 2020. Shortly after, in July 2020, CBIRC took control of another four insurers: Huaxia Life Insurance Co. Ltd., Tianan Property Insurance Co. Ltd. of China, Tianan Life Insurance Co. Ltd. of China, and Yian Property Insurance. CBIRC said it took over the firms to protect policyholders.

Most recently, in January 2021, CBIRC imposed administrative supervisory measures on an online P/C insurer, Anxin Property & Casualty Insurance Co. Ltd. amid concerns about its solvency adequacy. Not long after that (on Jan. 25, 2021), CBIRC issued new requirements to govern insurance companies' regulatory solvency position, with additional measures addressing entities' overall solvency.

The Anbang action has transformed the shape of market share of Chinese insurers (see chart 3). It also put entities on notice that the era of easy growth was over.

Much of the gains of previous years has come from life insurers selling short-dated products with high guaranteed returns. They sold them to a public keen for inflation-beating income with low risk.

Anbang used its flow of premium income to invest in a string of trophy assets, including the historic Waldorf Astoria hotel in New York City. At the time of Anbang's takeover, in February 2018, officials said they were concerned about the firm's solvency.

The message is unmistakable and continues to be enforced: Regulators want insurers to grow responsibly. This means less focus on short-term investment products with a single premium and more focus on long-term products with a regular premium protection.

Life Insurers Aim For Less Growth, Less Volatility

While the reforms are sometimes hard on growth and, indeed, on entities, they also have positive credit implications, in our view.

We expect life insurers to continue product reforms in 2021, to shift away from short-term investment instruments. Even so, profit margins should recover in the year. We project the Chinese economy will expand 7% in 2021 as the country bounces back from COVID. Meanwhile, the pandemic has sharpened people's sense of risk and appetite for insurance.

The big insurers that hew closest to China's new reforms should fare best. Their established infrastructure will help them manage the switch to long-term regular premium products--what regulators favor. The large firms have been investing heavily in training agents to market and sell the new products. This should also help with the transition.

We note that some of the biggest life insurers, such as New China Life Insurance Co. Ltd., have been indecisive in their product strategy through the cycle, resulting in more volatility in their new business margins.

For the small and midsize life insurers, the adjustment will be more painful. This includes the bank-owned life insurers. These firms have fewer resources to develop products, distribution channels, and infrastructure. They could also find increased compliance costs more onerous.

Long-term regular premium products have better margins than the short-term investment instruments that was previously much in demand. The life insurance sector will likely return to double-digit sales growth in 2021 from a 6.9% rise in 2020.

Regulators also want entities to better manage their asset-liability match. Low interest rates, volatile capital markets, rising counterparty risk, and a lack of long-dated assets have all complicated insurers' reinvestment job.

Some life insurers have in recent years increased allocation to high-risk investments (such as equities, real estate, and alternative assets) to boost returns. This exposes entities to heightened credit and market risks, and result in earnings volatility. This was apparent in 2020 when China's economy slowed sharply and default rates spiked.

One recent example can been seen in the rising uncertainty about China Fortune Land Development Co. Ltd.'s (CFLD) ability to address its financial obligations. Ping An Life Insurance Co. Ltd. owned about one-quarter of CFLD as of end-2019.

We anticipate that regulators' tighter controls on investment will prompt insurers to deepen their understanding of such risky, volatile assets. Authorities emphasis on using "look-through" measures to assess investment decisions should also increase risk controls.

Amid ongoing volatile capital markets, the life insurance sector's increasing focus on insurance margin should stabilize profitability. This contributes to our more positive view on China's life insurers.

P/C Insurers' Earnings Prospects Remain Subdued

Stiffer regulation will exert a bigger hit on the earnings of P/C insurers. Comprehensive motor reform will likely cut premiums and underwriting margins of the sector's major product line: motor insurance. Motor insurance premiums grew just 0.7% in 2020. Growth should stay moderate over the next two years.

The sector's shift to nonmotor business lines such as accident and health, liability, and agriculture cover could increase earnings volatility, given still limited underwriting and risk pricing expertise. The sector will need time to bolster actuarial and underwriting techniques, and refine its pricing models and risk selection before profits kick in.

We expect P/C insurers' nonmotor premiums to grow 15%-20% over the next two years. Some market participants with aggressive expansion in categories such as accident and health, and credit-guarantee insurance, have encountered increasing pressure in underwriting performance in recent years.

Regulators want entities to be more disciplined in managing these business lines. Accident and health cover, the P&C sector's biggest product segment after motor insurance, will likely remain lossmaking in 2021. This reflects the intense competition for such business and the high cost of distribution and customer acquisition. Regulators are watching the category. More rules may be forthcoming.

We believe credit guarantee insurance will take the biggest hit in premium growth over the next two years, as firms retreat from this business. Credit guarantee insurance contributed to earnings volatility, particularly in 2019 and 2020. This was particularly true during early 2020, when the pandemic raised counterparty risks and hit the economy. Credit guarantee insurance premiums declined 18.4% in 2020.

The rise in unemployment has contributed to increasing delinquencies for insurers' credit guarantee businesses. Those insurers that have focused their cover on individuals and small and micro-business owners were hit particularly hard. Some of these losses were associated with loans extended over peer-to-peer lending platforms.

CBIRC has also stepped into this arena, issuing targeted regulatory measures for credit guarantee insurance. P/C insurers that have insured such exposure have either cut their portfolio or demanded higher premiums.

Agriculture Insurance--P/C Players' Next Breakout Market?

Agriculture insurance is a more promising source of growth for the P/C sector. Insulating against losses faced by farmers on their crops, posed by increasing catastrophes, should be consistent with policymakers' initiatives.

Commercial insurers have pulled back from certain segments of this market, such as livestock insurance. This follows heavy claims associated with swine flu outbreaks in recent years. Reinsurers' appetite for these segments has also reduced. This has made it more difficult for insurers to manage their agriculture exposure through reinsurance.

The government wants to increase the availability of agriculture cover. Regulators granted a state-owned agriculture reinsurer an insurance license in 2020. It was the only entity to get such approval in the year. The newly formed agricultural reinsurer will likely play a key role in supporting such government initiatives.

We believe the larger P/C insurers will be more resilient to the evolving landscape, given they have better data, technology, and distribution. Regulators want 80% of certain P/C business lines to be fully digital by 2022. This will play to the strengths of the large firms.

Cross-border Insurers Seize On China's Opening-Up Measures

The growth potential of China's under-penetrated insurance market has the attention of international players. For those offshore entities that have already entered the market, we expect increased commitment. That's even though their market share will likely remain small over the next two years.

We believe cross-border insurers can find profitable niche markets in China. In addition, they can leverage the parent group's expertise in product offerings and risk management. Notably, AIA's China subsidiary has become the largest profit contributor to the wider AIA Group.

Offshore operators will likely be increasingly interested in buying out the remaining shareholdings from their local partners, to take full control of their China entities. This is in keeping with China's decision to open the insurance market to fully offshore-owned entities in 2020.

Offshore insurers may also seek partnerships to achieve growth in this market. Entities are in particular looking for partnerships to enhance their digital distribution. Examples include Samsung Fire & Marine Insurance Co. Ltd.'s joint venture with Tencent Holdings Ltd. for its China operations, and Allianz SE's sale of a 30% stake in its China subsidiary to JD.com Inc. in 2018.

Table 3

All Insurers Great And Small

Regulatory, market, and economic forces will push and pull China's insurance industry in 2021. The government wants to tame the sector to minimize systemic risks. Meanwhile, demand remains keen in this vast, under-penetrated market, ensuring growth rates will stay healthy. In particular, the life insurance sector will play an increasingly important role in the country's efforts to enhance the social security safety net as the population ages. We believe the P/C insurance sector will continue to support the evolving insurance landscape amid increasing urbanization and mounting frequency of catastrophes.

We anticipate the smaller Chinese insurers will bear the brunt of regulatory measures. The cost of distribution, technology, compliance, product development, and so on will be more burdensome for the small insurers.

Customers will largely differentiate in terms of brand and the perceived stability of the institution. This will surely play to the strengths of the large insurers.

There are so many powerful forces helping and hindering this industry, but perhaps the most unstoppable dynamic is ever-climbing demand and growth. We remain positive on the sector while appreciating that some of the smaller, more poorly governed players may experience setbacks.

Appendix

Table 4

Table 5

Related Research

• China's Suspension Of Ant Group IPO Another Sign Of Tightening Fintech Regulations, Nov. 17, 2020
• Insurance Industry And Country Risk Assessment: China Property/Casualty, Oct. 19, 2020
• Insurance Industry And Country Risk Assessment: China Life, published Oct. 19, 2020
• China's Careful Stimulus Dims Outlook For 2021, Oct. 15, 2020
• China Insurers Have To Balance Capital And Investments, July 22, 2020
• Auto Insurance Reform Squeezes China P/C Sector's Profitability, July 14, 2020
• COVID-19 Will Test Insurers' Resilience, March 25, 2020
• Chinese Insurers' Earnings Will Erode Amid Coronavirus Outbreak, Feb. 4, 2020

This report does not constitute a rating action.