Foreign insurers are looking to capitalise on the opening of the motor market and rising M&A activity in China. This follows the removal of restrictions to write Compulsory Third Party Liability Insurance (CTPL), according to a new industry survey by KPMG.
The survey, titled - Are You Ready for the Challenges and Opportunities of China’s Motor Insurance Reforms? - includes insights and responses from 90 percent of China’s non-life insurance market by premium and 60 percent of the market in terms of the number of companies. The motor insurance segment comprises over 70 percent of the non-life insurance market and the lifting of restrictions has meant that they can now compete with the domestic insurers and begin to take market share.
The survey highlights China as one of the most promising insurance markets globally. Foreign-owned insurers currently with only 1 percent of the market are set to grow their participation through access to the entire non-life market, or by acquiring large stakes in existing domestic market players, as some have already done and others are attempting. Since CTPL was opened to foreign insurers, nine companies have been granted a licence to conduct CTPL business and seven of them have started writing CTPL policies.
Tony Compton, Head of Insurance Consulting, KPMG China, says: “Acquisitions are in play, but perhaps at first sight they may appear expensive, but there is a premium to be paid for rapid access to the Chinese non-life market, where growth will continue to be driven by motor insurance premiums for many years as the consumers, who are becoming more wealthy, continue to buy more cars. Motor penetration still remains low compared to developed markets, there is much room for growth. The number of insurers available for a tie-up with foreign entrants has fallen to no more than a handful, so the opportunity to gain this sort of access may soon be gone.”
As China’s economy continues to grow and urbanisation accelerates, demand for insurance will increase and continued higher expectation of services from consumers will drive insurers to become more customer-centric. The government is also committed to grow the insurance sector, which provides support for its policy goals. These factors have created highly favourable conditions for sustained growth of China’s non-life insurance market. It’s clear from the survey in response to growth and growing service level demands that the industry is also investing more in risk segmentation, new distribution, models, product innovation, and customer service.
Walkman Lee, Head of Insurance Sector, KPMG China, says: “As an increasing number of foreign insurers enter China’s CPTL market, competition will intensify and domestic insurers are set to feel more pressure, but they will defend their position tenaciously. The Chinese consumers, who have thirst for all things on line, may aid foreign insurers to grow market share if they can use their ‘out-of-China’ experience to develop their online direct propositions faster and more effectively than domestic players.”
The survey notes that relaxation of commercial motor insurance (CMI or non-compulsory) product and pricing regulation will provide large domestic insurers with another tool to potentially grow their market share through better risk selection, lower prices, and better insurance coverage to the disadvantage of smaller challengers. Meanwhile, 64 percent of the surveyed companies have started to conduct regular risk-based pricing analysis, compared to 33 percent in last year’s survey, indicating that insurers are attaching greater importance to customer selection and risk-based pricing methodologies in the run-up to CTPL liberalisation that KPMG expects to happen within a few years.
Encouragingly, some insurers have begun to implement more sophisticated and innovative motor insurance products and pricing models. For example, some are using telematic devices installed in vehicles, are coupled with GPS and mobile communication technologies to collect, transmit, and analyse driving behaviour in order to prepare for the coming deregulation of motor insurance product and pricing.
By the end of 2012, around 20 insurance companies were granted a telesales licence for motor insurance. An increasing number of insurance companies are pushing for internet sales and half of the companies surveyed have started implementing a cross-sell strategy. Sales generated by these new channels account now for 15 percent of most insurance companies’ business and in 2008 it was more or less zero, the growth is fast and is accelerating.
Compton adds: “Direct distribution channels, led by telesales of motor insurance, have started reshaping the insurance distribution system in the country. Cross-selling and internet sales through either insurers’ own online platforms or third party price comparison websites are beginning to strike chords with the consumers.”
The survey also notes that the combined operating ratio of the motor insurers has been below 100 percent since 2009 but is on a slightly deteriorating trend, nevertheless the young Chinese non-life insurance market has reached the critical milestone of sustained profitability and will continue to grow steadily over the coming years. Loss ratios are low and expense ratios are high when compared to the norm overseas. KPMG expects loss ratios to increase as liability levels rise with per capital wealth level increases. Insurers have started to look at their expense ratios and will implement transformations led by new technologies and digitisation to, not only improve customer service, but simultaneously reduce their expense ratios thereby keeping the market combined operating ratio in the healthy zone.
Lee concludes: “Despite possible delays, motor and other insurance product pricing will become more market driven. And as China’s economy continues to grow this is set to boost the insurance needs of consumers not only in first and second tier but in the faster growing third and forth tier cities. Therefore, despite a slowdown in premium growth in the past two years, we expect the motor insurance premiums on average to grow by 10 percent or more over the next three to five years. It's a good market to be in and we know there is demand from overseas insurers to also get a slice of the growing pie.”
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