P&C insurers in China are gradually shifting away from their dependency on motor insurance, however, the portfolio still continues to contribute the biggest share of non-life premium income for insurers.

The motor portfolio’s contribution has shown a steady decline over the years. In 2012 motor insurance commanded a market share of 72.44% which in 2022 has touched 55.22%. In 2021 it was 56.84%. It still leads the non-life pack for P&C insurers.

In the first quarter of 2023 the motor insurance portfolio registered premium income of CNY208.7bn ($30.2bn), growth of 6% year-on-year and accounted for 44.71% of first quarter’s total non-life premiums. This was a record low ratio.

Reforms initiated in 2020

China introduced comprehensive motor insurance reforms in September 2020. According to industry sources these have led to higher compulsory motor third-party liability insurance benefits, lower premiums and reduced the additional expense rate.

The average car insurance premium for consumers was CNY2,784 as of the end of June 2022, a sharp drop of 21% compared with before the implementation of comprehensive motor reform.

Some 87% of policyholders saw their motor insurance premiums decrease, reducing the aggregate premium volume by more than CNY250bn.

With the reforms, the level of protection has also significantly improved with the total liability limit on compulsory motor coverage hiked from CNY122,000 to CNY200,000 as a reform measure. In addition, insurers have widened the scope of coverage to provide protection against risks such as glass breakage and engine flooding.

At the time of the introduction of the reforms, the Chinese regulator, China Banking and Insurance Regulatory Commission (CBIRC) had indicated that motor insurance pricing restrictions would be gradually lifted by first setting the range of independent pricing coefficient at 0.65-1.35 and then completely liberalising pricing ‘at the right time’.

The overall aim of the reforms in the motor insurance portfolio is to promote differences in pricing and sharpen competitiveness through product innovation and service improvements.

Becoming more competitive

The CBIRC in January 2023 issued the Notice on Expanding the Floating Range of the Independent Pricing Coefficient of Commercial Auto Insurance. This move expands the motor insurance pricing autonomy of property insurers from 0.65–1.35 to 0.5–1.5. As such, more competition is expected in the motor insurance market.

Some industry insiders, however, said that there are not many vehicles involved at the two extremes of the floating range, so the industry structure will not change much. In the medium and long term, larger insurers are seen to have an edge under the motor insurance pricing reforms.

The CBIRC’s remit is to determine the implementation timeframe of the pricing revision based on motor insurance market conditions in its respective jurisdiction and after soliciting views from stakeholders. The implementation was set not to be later than 1 June 2023 in principle.

The CBIRC’s bureaux are to strengthen local supervision and guide insurance companies in setting reasonably the average pricing coefficient and the upper limit on handling fees in their respective markets. At the same time, the bureaux are to continue to monitor the motor insurance market and review the insurance rates to ensure the smooth and orderly operation of the motor insurance market.

Autonomy but strict supervision

All insurers are strictly to implement various regulatory requirements relating to motor insurance, do a good job in the filing of terms and rates, actively undertake social responsibilities, optimise and ensure the supply of motor insurance products, improve the service level of motor insurance underwriting and settlement and enhance the sense of gain of motor insurance consumers.

The Insurance Association of China, the China Association of Actuaries, and China Banking & Insurance Information Technology Management Co are to cooperate in deepening the reform of auto insurance in line with their own responsibilities.

The overall aim is to promote differences in pricing by motor insurance companies and sharpen their competitiveness through product innovation and service improvements.

Analysts say that with the widening of the floating range, motor insurance premiums can be reduced by up to 23% for good drivers and increased by up to 11% for drivers who represent higher risk. However, they also point out that property insurance companies would also consider actual costs and would not merely lower their premium rates. In addition, insurers consider their solvency positions that would be affected by premium growth.

Second round launched

The second round of commercial motor insurance pricing was launched in April 2023. The initial launch was done in regions like Beijing, Henan, Tianjin, Shaanxi and other markets where motor insurance operations are relatively good.

Other regions were to follow by the end of May 2023. All localities were to implement the revised pricing according to local conditions, and the implementation time is not later than 1 June 2023.

In the second round of pricing revisions, the floating range of independent pricing coefficients of commercial auto insurance are 0.65-1.35, wider than the current range of 0.5-1.5. The floating range for newenergy vehicles will not be adjusted for the time being.

Impact of price revisions

With the further relaxation of independent pricing coefficients, the comprehensive reform of auto insurance continues to evolve towards full marketisation. It is also expected to ease the difficulty of purchasing motor insurance for some high-risk cases businesses given that there will be more room for insurers to price according to risk.

The expansion in the range of independent pricing coefficients for auto insurance will intensify competition among motor insurers. It may have a short-term effect on motor insurance premiums, adding to the impact of the full recovery of vehicle travel this year following the lifting of COVID-related lockdowns late last year. It is expected that the motor insurance loss rate will increase this year.

The comprehensive motor insurance reforms are aimed at reducing premiums, increasing insurance coverage and improving quality.

Expert solution

A new report published by the automotive and mobility solutions arm of Swiss Re will also help put the insurers in a position to improve the competitiveness of their motor books, obtain higher market share and expand profit margins.

The new report Opportunities behind complexity – A data-driven risk assessment for China’s truck insurance, says that insurers are eager to transform from traditional reactive claim settlement to proactive risk management and screening enabled by effective technologies due to the poor loss experience in the commercial vehicle insurance segment.

_{Source: Author of the article:Anoop Khanna, Asia Insurance Review June 2023}

Asian Risks Management Services Limited (ARMS) is an international consultant advising clients on insurable risks. Independent from any insurance providers, ARMS acts to the best of our clients.