P&C sector strained by market volatility, life insurers grappling with low returns.
China’s insurance sector is facing mounting challenges as asset-liability mismatches threaten the stability of life insurers, according to a report by S&P Global Ratings. The life insurance sector, in particular, is struggling to meet guaranteed payouts, with returns failing to keep pace with market conditions.
As interest rates fall and market volatility increases, S&P Global Ratings warns that the situation will likely worsen. The agency anticipates stricter regulatory measures to address these growing concerns, adding further pressure on insurers.
Strain on Life Insurers
Life insurers are particularly vulnerable, with smaller and mid-sized companies bearing the brunt of slower economic growth, rising unemployment, and policy lapses. Since 2015, interest rate mismatches have plagued the sector, and declining bond yields have exacerbated these issues.
While regulators have imposed caps on pricing interest rates, experts suggest that additional tightening may be required to mitigate the widening gap between liabilities and returns.
In an attempt to manage these liabilities, insurers are expected to shift towards floating-return products, including participating policies, universal life, and unit-linked insurance. However, these products carry higher compliance risks and may not appeal to all consumers, potentially impacting market demand.
As a result, the growth of life insurance premiums is projected to slow down, dropping to an estimated 5%-8% over the next two years, compared to 10.2% in 2023.
Property and Casualty Sector Faces Challenges
China’s property and casualty (P&C) insurance sector is also grappling with market volatility. The sharp decline in interest rates and unstable capital markets have placed significant strain on P&C insurers, raising the likelihood of underwriting losses in 2024.
Extreme weather events, including recent occurrences like Typhoons Yagi and Bebinca, have already inflicted considerable economic and insurance losses. The demand for catastrophe insurance is expected to rise as insurers prepare for more frequent and severe weather-related claims.
S&P Global Ratings predicts that the P&C sector’s combined ratio—a key measure of underwriting profitability—will remain between 100% and 102% in the coming years, signaling tight margins for the industry.
Government Initiatives and Growth Potential
The Chinese government’s push for more affordable insurance, including programs like inclusive health coverage and expanded catastrophe insurance, adds another layer of complexity for insurers. Although these initiatives open new growth avenues, they are expected to deliver thinner profit margins.
In addition, sectors like auto insurance and construction-related coverage, historically key areas of growth for the P&C market, are experiencing a slowdown, further complicating the outlook for the sector.
Despite these immediate challenges, China’s insurance market remains significantly underpenetrated, offering considerable long-term growth potential. However, insurers must first navigate through tough economic conditions, which may involve asset write-downs and stricter regulatory oversight.
The path to recovery will be fraught with difficulties, but for those able to adapt to the evolving landscape, the long-term profitability of China’s insurance sector remains promising.
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