China's non-life insurers face weaker margin

China's continued urbanization and rising household wealth will sustain the growth dynamics of its non-life insurers, but intense rivalry will further weaken the sector's underwriting margin in 2014, Fitch Ratings said in a new report on Friday.

The declining margin is unlikely to materially constrain insurers' capability to obtain capital infusion. The Sector Outlook for Chinese non-life insurance remains stable, the report showed.

An increase in acquisition expenses and an escalation in claims costs will weaken the underwriting margin of the automobile insurance business, the report said.

In view of the tightly regulated pricing system, it is unlikely that China's automobile insurers will dramatically reduce their underwriting deficits from compulsory third-party liability insurance.

In light of the falling underwriting margin, Fitch believes small insurance companies with limited operating scale and a less diversified book of business will post weaker than usual operating results in the coming year.

Major listed non-life insurers will still maintain positive growth in underwriting surplus, albeit at a slower pace, due to diverse revenue streams and a better spread of risk.

Ongoing business expansion, coupled with slower surplus growth, will continue to place a strain on insurers' capital adequacy, although many insurers have improved their solvency through fresh equity injection or subordinated debt issuance.

The premium leverage, measured by net written premium to shareholders' equity, of many Chinese non-life insurers remains high, reflecting the companies' thin capital buffer to absorb unprecedented underwriting shocks.

The stable sector outlook reflects Fitch's expectation that the market will experience a manageable downturn in underwriting margin, with no major impairment losses in invested assets.

But the outlook could be revised to negative if there is a material weakening in the underwriting results of both compulsory third-party liability vehicle insurance businesses.

Additionally, significant losses from catastrophic events and considerable impairment losses from adverse equity volatility also could lead to a negative adjustment in the sector outlook, according to the report.