A Collision in the Motor Insurance Industry

Transcription

1 ADVISORY A Collision in the Motor Insurance Industry How the combined effects of CMI price de-tariffication and CTPL liberalisation will change the industry over the next five years kpmg.com/cn

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3 A Collision in the Motor Insurance Industry 3 Rapid premium growth in recent years, but growth rate is slowing down Low insurance penetration, huge market potential remains Significant market concentration with very limited foreign insurer penetration With improving industry profitability, market competition has recently intensified More diversified distribution channels are being developed Solvency remains a key issue for many insurers What the China motor insurance market looks like today Accompanying its unprecedented economic development, China is rapidly becoming one of the world s largest non-life insurance markets. The industry has experienced a ten-year average annual compounded growth rate of 22 percent, with total premiums in 2011 of RMB 477 billion (USD 76 billion). However, insurance penetration remains low, particularly in less developed central and western provinces. The non-life insurance market is dominated by motor (over 70 percent of the total premium). Compulsory third-party liability Insurance (CTPL) was introduced in July It is designed to provide minimum liability coverage and to generate breakeven financial results for the industry. Commercial motor insurance (CMI) is voluntary and offers increased liability limits, passenger liability coverage and motor damage/ theft coverage. The current motor insurance premium has been tariffed since CTPL rates are largely uniform across the country. The size/use of vehicle are the key factors determining the premium along with a surcharge/discount factor based on traffic violation and accident history. For CMI, there are three sets of premium rating structures and policy clauses (A, B, and C) for companies to choose. Although the three sets of rates and rules look different, they are almost the same in terms of insurance coverage and pricing. Coinciding with the explosive car ownership growth and the implementation of CTPL, motor insurance premiums on average grew by 25% per year over the last five years. Affected by the phasing out of the post- global financial crisis government vehicle purchase incentive programs and new vehicle licensing restrictions imposed by certain municipalities (e.g., Beijing), 2011 new vehicle sale growth declined substantially (to 2.5 percent per annum). The slower growth, partially mitigated by higher average premium from higher luxury car sales and more people buying higher coverage, resulted in a lower but still respectable motor insurance premium growth of 15 percent in Early results of 2012 have indicated a continuation of solid premium growth. Ping An recorded 19 percent growth in Q1 over the same period last year, while CPIC grew about 9 percent. The market remains highly concentrated. The top three insurers (PICC, Ping An, CPIC) wrote two-thirds of the premium in 2011, and the top ten companies made up 86% of the market. Hindered by regulatory restrictions on branch expansion and regulation barring foreign-owned insurers from writing CTPL, the 21 foreign insurers authorised to do business in China only have 1 percent of the non-life market share (0.5 percent for motor insurance) as of Despite the rosy story on premium volume growth, motor insurance was not profitable for the industry before However, in 2011 the top three companies all made record underwriting profits and we believe the motor market generated a positive underwriting result overall. Nonetheless, more intensified competition in recent months may jeopardise the industry profitability in The aggressive growth strategy taken by some companies prompted China Insurance Regulatory Commission (CIRC) to publish a new regulation in April 2012, prohibiting certain market practices, including paying higher commission but classifying the payments as general expenses, excessive discounting of rates, and conducting telephone sales through third-party agents.

4 4 A Collision in the Motor Insurance Industry On the distribution side, sales through agents (direct or independent) remains the dominant channel. However, more and more insurers are exploring alternative distribution methods including direct marketing, telesales, and internet sales. Companies who have successfully managed the transition to these new channels are standing to reap the rewards in terms of above market growth and driving a more efficient model due to lower acquisition cost. For example, Ping An grew its non-life premium in Q by 19 percent from the same period a year ago and the percentage of sales by telephone or cross-selling through sister organisations increased to 42 percent. CIRC recently announced plans to overhaul China s insurance distribution system, which also encourages the development of alternative distribution channels. Solvency remains an issue for certain companies due to fast premium growth and lack of historical profits. Multiple subordinated debt offerings, share issuance, or capital injections in the past two years have alleviated short-term concerns for some companies but many Chinese insurers will remain capital-hungry in the mid-term. Summary of recent regulatory changes During the first half of 2012, two potentially water-shed insurance regulations were published by CIRC and the State Council (cabinet of China). CIRC also announced a number of other new regulations requiring improvement on insurers claims handling, reserving, and data quality. CIRC s Liberalisation of CMI pricing In March, CIRC published a much anticipated regulation (Strengthening the management of CMI rates and insurance policy clauses). Aside from a few new mandatory consumer-friendly policy clauses, 1 the regulation effectively provides large well run insurers with more pricing latitude for CMI. Companies who meet the following qualification criteria can adopt new CMI rates based on their own experience data: 1 For instances, a new rule that aims to eliminate the controversial industry practice of insuring vehicle at new car value but paying claims at actual cash value; and a rule prohibiting the practice of refusing to pay claims when the insured is not at fault in an accident by relinquishing subrogation rights. These changes are expected to reduce insurers premium income and affect their current claim process, but should also improve customer experience and the insurance industry s image over time.

5 A Collision in the Motor Insurance Industry 5 At least three years of CMI experience, Complete corporate governance structure and effective internal control data <100 percent combined ratio in each of the last two years >150 percent solvency ratio in each of the last two years >300k motor vehicle experience data Specialised CMI product development team, effective business processes, and data system Other requirements set by the CIRC Based on these criteria and the latest financial information available, six companies are expected to qualify for adopting their own CMI rates. These companies are Ping An, CPIC, Sunshine, Anbang, Alltrust, and Huatai, which in total have a non-life market share of 37 percent in PICC, the largest non-life writer, did not qualify because its 2010 year-end solvency ratio was only 115 percent (subsequently this increased to 184 percent as at the end of 2011, and therefore PICC may also be included). In this regulation, CIRC also requested the Insurance Association of China (IAC) to compile industry motor insurance loss ratios, motor vehicle depreciation statistics, and vehicle loss cost data. Companies that do not meet the aforementioned criteria may adopt the industry loss cost along with own expense assumptions to make CMI premium rates, as long as the expense ratio embedded in such premium does not exceed 35 percent. The State Council of China s Opening of CTPL market to foreign-owned insurers Following a February 2012 joint statement by China and the United States announcing China s intention to open its CTPL market to foreign-owned insurers, the State Council revised the CTPL regulation in early May to allow foreign companies to underwrite CTPL insurance. As mentioned earlier, the inability to write CTPL due to regulatory restrictions has been a major stumbling block for foreign insurers to grow their non-life business in China, because they have had to persuade consumers and insurance distributors to buy voluntary CMI cover and CTPL from different providers. Foreign insurers applauded the government s decision to finally open up the CTPL market to foreign competition. Many foreign insurers have applied for CIRC s approval to start writing CTPL business. Other recent regulatory developments In addition, CIRC recently published new regulations that aim to enhance nonlife insurers motor insurance claim services, internal controls and data quality for reserving, as well as procedures on reserve retrospective analysis. It also announced plans to revamp China s insurance solvency regulation to be more aligned with current international standards in the next three to five years and to overhaul the insurance distribution framework over the next five years.

6 6 A Collision in the Motor Insurance Industry Surveyed companies Survey of insurers In order to understand insurers perspective on recent motor insurance reforms, we have conducted an industry survey. These companies include both domestic and foreign-owned insurers, as well as companies who are qualified to adopt CMI rates based on their own data. Our questions covered the following areas: Foreign-owned 42% Top 10 domestic 33% Potential impact from the recent liberalisation of CMI pricing The readiness of insurers to adopt their own CMI rates Potential impact from the opening of CTPL market to foreign insurers Impact of CMI pricing regulation change on the China motor insurance market in the next 2-3 years No. of companies No impact Minor impact Moderate impact Significant impact Have you started the preparation of internal CMI pricing tools No. of companies Not started Non-top 10 domestic 25% Early development In preparation Intention and action by foreign insurers to enter the CTPL market Expected impact on non-life insurance growth and profitability The vast majority of our surveyed companies believe that the liberalisation of CMI pricing will have significant or moderate impact on the motor insurance market over the next few years. The new CIRC regulation has effectively provided large domestic insurers with another tool to potentially grow their market share through better risk segmentation and lower prices. Small insurers will have to follow industry loss cost/market trends in setting their final premium rates, which could put them at competitive disadvantage. However, smaller insurers will also have flexibility to adjust prices, using the expense loading, to segment the market and target specific risks. The extent of the impact will very much depend on the speed reforms are implemented. We understand CIRC are planning a three phased implementation approach as a way of managing a gradual transition process. Many survey respondents believe the reform on CMI pricing will benefit the China motor insurance market in the long run. Because it will force insurers to pursue growth and profitability by better leveraging customer data rather than certain irregular market practices (such as paying higher than prescribed commissions and excessive discounting). A good example is that many domestic insurers are already putting more emphasis on their actuarial and product development teams. We asked the companies whether they have started the preparation of internal CMI pricing tools and whether they will be ready to roll-out their own rates in 2012 if allowed by CIRC. It is interesting to learn that the level of advancement in pricing research and implementation planning varies greatly among the surveyed companies. A few companies (some small in size) have put considerable efforts in developing internal models for motor insurance pricing/underwriting purposes, while some companies have done little. For those companies who have started internal pricing work, most are still in early research and development stages. Only a very small percentage of the surveyed companies believe that they can begin using their own CMI rates within the next six months if approved by CIRC. The tools used by companies to develop more sophisticated pricing models also vary significantly, from statistical analysis software like SAS, SPSS, and R to Excel spreadsheets. The surveyed companies are keen to see the publication of industry benchmark loss cost/ loss ratio data by IAC, which is expected to occur by the end of 2012, before moving forward with their own CMI pricing plans.

7 A Collision in the Motor Insurance Industry 7 Are you ready to roll-out own CMI rates within 6 months No. of companies Not ready No. of companies Ready Impact of opening CTPL to foreign insurer on the China motor insurance market in the next 2-3 years No impact Minor impact Moderate impact Significant impact Almost all of our survey respondents said the opening of CTPL to foreign insurers will not have significant impact to the competitive landscape of China motor insurance market in the short term (2-3 years). The current small market share, inadequate branch structure, limited distribution capability, and the inability to leverage their underwriting/pricing capability based on current regulations are the top reasons quoted by the surveyed companies. However, these answers assume limited or no change in the status quo. A different outcome may be possible for those foreign insurers that can combine the opening of CTPL and CMI price de-tarrification with the development of a direct distribution capability. Smaller domestic insurers are more concerned about foreign competition, as these well-capitalised and more sophisticated insurers entering the already crowded motor insurance market will inevitably intensify competition. The surveyed companies expect to see better service quality and more advanced operating models from foreign insurers. We have also learned that most of the surveyed foreign-owned insurers are committed to grow motor insurance business in China and have contacted CIRC with regard to the CTPL license approval process. When surveyed on the growth and profitability of the China motor insurance market in the near term, most companies believe the premium growth rate will be slower than the past five years, due to lacklustre new vehicle growth, but will still be maintained at a healthy level (10-20 percent per year). Many companies expect 2012 will remain profitable for the non-life insurance industry, while may become more challenging as a result of more intensified competition. Overall, smaller companies are more concerned about near-term growth and profitability as they are more susceptible to foreign competition and tend to be price followers. Some of the surveyed companies noted that although CMI pricing reform is in the spot light now, territorial variation of CTPL insurance rates should remain an area of focus by CIRC because the current rate structure (largely uniform rates across the country) does not reflect regional cost differences and therefore results in unfair subsidies between provinces. The new guidelines on motor insurance claim subrogation is also likely to affect the current claim process, which in turn will influence claim cost and pricing of motor insurance.

8 8 A Collision in the Motor Insurance Industry Impact from the reforms and what the market may look like in 2015 Figure 1 summarises our expectations for the evolution of China s motor insurance market over the next 3-5 years. It is our view that the first batch of six insurers who meet the current criteria to adopt their own CMI pricing, and to a less extent the rest of the market, will have the option to improve customer segmentation and risk selection, which in turn may drive better than industry average growth and profitability levels. However, using own CMI rates is not a guarantee for success. The turmoil the industry experienced in early 2000s due to undisciplined price competition and the under-achievement by some insurers abroad as a result of their overreliance on Figure 1 Pricing Premium Growth Profitability Competitive Landscape Distribution Regulation Current State CTPL rates are largely uniform across the country. Motor insurance terms and premium are tariffed On average, motor insurance premium grew by 25 percent per year over the last five years Underwriting motor insurance had not been profitable for the industry until The 2011 profit level has improved The market is highly concentrated. Top three insurers wrote two-thirds of the premium in 2011 Sales through agency force (direct or independent) is the dominant channel Solvency is an issue for certain companies Recent Regulation Changes Liberalisation of CMI pricing Opening of CTPL market to foreignowned insurers Other recent regulatory developments Next five Years Increased customer segmentation Risk selection based on experience More sophisticated pricing Product development tailored to customer needs Stable underwriting profits with CIRC closely monitoring developments Increased market share for foreign-owned insurers (particularly those that harness direct capability) Growth of direct capability, including telesales, direct marketing, and on-line sales Improved claims functions, more efficient and with less fraud, claim service will be viewed as a differentiating factor Improved data quality and internal controls for reserving Improved distribution model, with enhanced training, fairness, and professionalism Continued capital strain, particularly with the implementation of a new capital regime combined with slowing growth More competitive Market More professional and sophisticated insurers More choices for consumers

9 A Collision in the Motor Insurance Industry 9 statistical pricing models should serve as good lessons. We believe it is vital for insurers to adjust operating, distribution, and claims models while formulating their new pricing plans. Smaller or historically unprofitable domestic insurers are not yet qualified to use own CMI rates, which in theory should put them at competitive disadvantage. However, it does not mean that they must wait for the industry benchmark loss cost before putting together a solid competitive/market analysis framework which will help them understand competitor behaviour and protect their existing customer base. In our view, it is also possible that CIRC will allow smaller companies to adopt loss cost and rating relativities approved for large companies, in addition to IAC loss cost supplemented by own expense assumptions. The questions of which company s rates to adopt, how to incorporate their own expense components, and what data/ system enhancement are needed will take considerable amount of work to answer. More importantly, there are many other ways of improving performance by using intelligence gained from pricing research exercise rather than actually adopting a new pricing scheme. Foreign-owned insurers will finally be able to compete with domestic companies on a more level playing field. However, we do not expect a rapid increase of foreign companies market share. The limited distribution network will remain a major obstacle for foreign insurers until they can develop a direct proposition. The recent regulatory changes will likely have far-reaching impact on the China motor insurance market in the next five years. The de-tariffication of CMI will introduce price competition and more advanced underwriting, claim servicing, marketing practices to the motor insurance market. The opening-up of CTPL market will give foreign insurers a much better chance to grow motor insurance business and achieve necessary economies of scale. These reforms, along with other recent mandates from CIRC, should help gradually transform the growth-oriented domestic insurers into more complex entities with multiple levers for, and measures of, success.

10 10 A Collision in the Motor Insurance Industry We also believe that China motor insurance market will likely continue to grow over the next five years. China s vast population base and healthy fundamentals (low insurance penetration, strong economic growth, transformation to a property ownership society, increasing social acceptance of using legal actions to resolve conflicts, etc.) underpin our growth expectations. Under the close watch of CIRC, domestic insurers will be cautious implementing price reform in the motor insurance market. Lower expected investment return offers incentive to insurers to strive for reasonable underwriting profit. We expect to see more foreign insurers enter the China motor insurance market, albeit slowly and carefully. The growth in market share for more innovative companies will continue. Key areas for success Undoubtedly, China motor insurance market is entering a new stage of development. We note the following key areas for insurer s success over the next few years. Distribution Develop an efficient multi-channel distribution strategy leveraging new technology, direct capability to lower acquisition cost, and implement cross-sell strategies. Data analytics Improve data collection and analysis through investment in technology, analytical database development, and personnel with solid analytical skills, together with the application of data mining and predictive modelling in underwriting/pricing, claim management, and marketing. Pricing and risk segmentation Develop an approach which allows multiple refinements in rating structures such as intra-provincial territory rate relativities, more granular vehicle rate factors (e.g., model year, loss symbol), and driver or household level rating factors, combined with investment in the development of pricing strategies and competitive analysis framework. Product innovation Drive innovation in order to differentiate your products and services from the competition. Develop new products targeting certain consumer segments with unique features to help build your brand, offsetting impact from commoditisation of insurance products. Pursue higher margin niche markets, such as high-end or environmental-friendly vehicles.

11 A Collision in the Motor Insurance Industry 11 Customer retention Focus on customer retention. Renewed customers tend to have lower loss ratio and are usually less price sensitive. They also present more cross-selling opportunities and in turn will likely deliver higher life-time value for insurers. For companies heavily reliant on direct distribution channels, renewed customers also bring lower policy acquisition cost. Catastrophe management Reduce or manage geographic business concentration level to avoid or minimise impact of natural disasters. Incorporate catastrophe management in your business planning, reinsurance program structuring and other areas. Capital management Manage capital allocation based on a risk adjusted rate of return approach. Use of new technology Develop a complementary technology strategy to support the growth of your business, and align with rapidly changing consumer lifestyles and purchasing behaviour.

12 12 A Collision in the Motor Insurance Industry How KPMG can help KPMG China is a leading advisor to the insurance sector, with a team of insurance specialists with significant experience in: Operation improvement Maximizing the effectiveness of your distribution model Design and implementation of motor insurance pricing structures Business intelligence database development Data mining and predictive modelling Distribution strategy and implementation Enterprise risk management and economic capital Insurance product innovation Strategy Market analysis Partner selection and due diligence We are able to leverage the experience of our global practice for the benefit of local clients, sharing best practice and insights from around the world. We bring multi-functional teams, and can leverage the firm s breadth of experience, insights, methodologies, and expertise for research, analysis, and strategy development.

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14 14 A Collision in the Motor Insurance Industry Contact us Walkman Lee Head of Insurance China Tel: +86 (10) walkman.lee@kpmg.com Sam Evans Head of Insurance Hong Kong Tel: sam.evans@kpmg.com Mark Bain Head of Insurance Consulting China Tel: mark.bain@kpmg.com Douglas Lecocq Head of Actuarial Services Tel: douglas.lecocq@kpmg.com Bo Huang Senior Manager, Actuarial Services Tel: +86 (10) bo.huang@kpmg.com

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