China’s car market is the largest in the world with 372 million vehicles in 2020. Although car sales have slowed down since 2017, the market has shown great resilience to the COVID pandemic. Indeed, in 2020 Chinese car sales amounted to 25.3 million vehicles, a year-on-year decrease of only 1.9% amid the global pandemic. Auto insurance being mandatory in China, the Chinese car market sustains China’s growing car insurance industry. As a matter of fact, Chinese car insurance premium revenues have reached an all-time high of 818.8 billion RMB in 2019. However, new hurdles have emerged in the Chinese car insurance industry as the market matured. Between fierce competition, shifting demographics and new business plan, what future risks is facing the Chinese car insurance industry? 

According to China’s National Bureau of Statistics, there has been 247,646 traffic accidents in China in 2020. This represents only a 1.1% increase, even though over 25 million new vehicles were registered in China that year. With over 5 million kilometers of highways and 450,000 kilometers of paved roads in urban areas, China’s infrastructure has greatly improved over the years. Provinces with the most accidents per habitant are Hubei and Guangxi. Direct property losses caused by accidents decreased to 1.34 billion RMB in 2019 (down from 1.38 billion RMB the previous year). Thanks to this downwards trend, Chinese car insurance companies have benefited from an overall decrease in claims. As infrastructure and driver awareness keeps improving in China, the number of traffic accidents is expected to remain stable despite the yearly increase in vehicles.   

Car sales and regulations are forcing the Chinese car insurance industry to adapt

Car sales data shows that developing cities have the most potential

As the Chinese middle class is growing and benefiting from an increase in purchasing power, Chinese consumers’ habits and needs are changing. Sales data from China automobile dealers’ association, shows that the new growth engine for the industry is young adults living in developing cities. Indeed, the car market in China’s most developed urban centers (Shanghai, Beijing, Shenzhen, Guangzhou) is getting saturated. Meanwhile, tier 2, 3 and 4 cities are developing fast and offer a new generation of young consumers willing and able to afford a car. This translates to a 44% to 46% car ownership growth rate in developing cities against just 12.5% in the most developed urban areas. Considering that 96% of Chinese drivers are willing to take a commercial insurance (which is an optional coverage on top of the mandatory insurance), developing cities have a lot of potential for the Chinese car insurance industry. 

Shifting regulations have an impact on insurers’ bottom line 

The Chinese government has historically kept a close control of key industries in China and the Chinese car insurance industry is one of them. Since 2004, the Communist Party allows foreign insurers to have a license in China. In 2018 and 2019, the government even lifted some of the heavy requirements to set up a Chinese office for foreign insurers. The liberalization of the industry combined with the development of domestic insurers has led to a very competitive environment. As prices were getting out of hand, the Chinese government intervened in 2019 and again in 2020 through major reforms. These reforms regulated premium prices while increasing insurers’ liability and payouts thresholds. While these reforms benefit Chinese car drivers, they hurt premium profitability and force underwriters to rethink their business model. 

Good news for car owners: The Chinese car insurance industry is evolving toward a consumer-centric model

The digitalization of the industry compensates losses caused by regulations

4S stores have historically dominated China’s auto insurance distribution channels, followed by sales via call centers. However, online sales have gradually taken more and more space as a distribution channel, in 2020 reaching 39% of all car insurance sales. Because prices have been harmonized thanks to government reforms, Chinese insurers are shifting from a model competing on price to a more consumer-centric alternative. Thus, Chinese insurance companies are now focusing on the convenience and speed of their customer services, a major selling point for Chinese consumers. The digitalization of the industry allows more convenient distribution channels but also better services. Indeed, the use of big data and AI has significantly changed the Chinese insurance industry’s landscape. These technologies have allowed underwriters to cut on their expanses while supplying faster claim services and thus, keep growing premium revenues despite government reforms. 

An effective marketing campaign is paramount in a competitive market

As China’s insurance industry matures, it becomes more and more competitive. Industry giants are dominating the Chinese non-life insurance market as the 5 largest insurers possess over 70% market share. Because success and reputation are strong determinants for Chinese consumers and because prices are harmonized, smaller insurers are struggling for relevance. If call centers still remain today a tool for client outreach in the Chinese car insurance industry, targeted advertisement on social media and television is also developing. AXA’s Chinese joint venture’s campaign “good drivers save more” is a case study in successful marketing campaign in China, but not all insurers have the massive resources of the French group. For many smaller insurers in China, the key to growth resides in targeted marketing and the ability to adapt to the industry’s shift toward a consumer-centric business model.

What to expect from China’s car insurance industry

• Developing urban centers represent today the most growth potential for car insurance in China. As Shanghai, Beijing, Shenzhen, and Guangdong’s car sales are slowing down, insurers will have to focus on lower tier cities to maintain growth. 
• With the improvement of drivers’ awareness and infrastructure, China’s traffic accidents occurrence rate is on the decline which makes good prospects for insurers. 
• The Chinese government has proven that it would not hesitate to intervein in the Chinese car insurance economy if prices and policies would become too predatory. Therefore, underwriters must manage their premium income and business plan accordingly as legal reforms can severely cut on profitability. 
• The digitalization of the industry is underway, both in distribution channels and claim processing. Chinese insurers missing on the transition are risking being left behind in an extremely competitive market. 

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