The gross written premium of the Chinese non-life insurance segment increased to CNY720.3bn ($117.3bn) in 2014 from CNY389.6bn ($57.5bn) in 2010, at a compound annual growth rate (CAGR) of 16.6%.

Motor insurance reforms should improve underwriting efficiency

Motor insurance dominates the non-life industry, accounting for over three quarters of China’s non-life gross written premiums. New vehicle registrations China are growing briskly and reached 24.6 million.

Growth in 2016 is expected to be strong too, especially in light of the government’s decision to temporarily halve the sales tax on automobiles until December 2016.

In China, motor premium rates were previously determined based on a single factor: the vehicle’s purchase price. In March 2015, however, CIRC introduced administration reform for motor insurance on a pilot basis in six cities, which was extended to 18 cities by the end of 2015; it is expected to become a nationwide policy by the end of 2016.

These reforms give motor insurers policy pricing autonomy based on the vehicle’s risk exposure. Insurers can now adjust premium prices, making premiums higher for more risk-exposed vehicles and reducing premiums for less risky vehicles.

By taking these factors into account, it will now be possible the premium can be reduced to 40% of the first year premium paid.

While this reform may depress premium figures, the gains from greater efficiency of underwriting should more than outweigh the negative effects of lower than expected premium growth on profitability.

Fiscal and credit stimulus to benefit commercial insurers

The aforementioned slowdown in China’s growth rate in recent years has led to fiscal and credit stimulus that has boosted construction activity in the economy. Taking off-budget spending into account, the fiscal deficit is now 10% of GDP and local governments are commissioning growth inducing projects that include increasing the issuance of bonds to fund construction.

While the sustainability and long term impacts of these policies are questionable, this environment is very conducive to commercial insurers who may have suffered generally as investment slowed down and factories closed due to falling commodity and metal prices.

There now will be an opportunity to exploit this construction growth and secure policies that will increase premiums. However, the extent of state involvement may mean political connections matter more in securing contracts than best competitive offering provided by insurers.