Rising claims mean insurers operating in Chinas compulsory motor insurance market face further significant underwriting losses over the next couple of years, Fitch Ratings said yesterday.
Tightly regulated pricing and the potential for further competition will also contribute to the losses, which the ratings agency expects to lead to a modest decline in overall motor insurance underwriting margins.
For the CMIM sector as a whole the loss ratio - the total amount of claims paid out divided by the total amount of premiums collected - is likely to be consistently above 80% in the short term, after reaching 82.3% in 2010 and 81.9% in 2011. In particular Fitch highlighted the higher medical expenses and rising repair costs insurers had to pay out.
Despite this, Fitch said it did not expect Chinese insurers to reduce their exposure to the CMIM market.
'The overall underwriting results of most major insurers' motor books are still profitable and because every driver must have a CMIM policy insurers feel they need to be in the CMIM business in order to cross-sell profitable commercial policies,' it explained.
Competition in the market is likely to increase further this year after the decision to open it up to foreign insurers in May.
'Regardless of poor underwriting results, we believe CMIM will be attractive to foreign insurers because it will allow them to strengthen their market presence in China without working with local insurers, and to build up their distribution outlets,' Fitch said.
'One of the most important benefits for foreign insurers of the opening up of the CMIM market is that foreign companies will be able to attract a new customer base and bundle other insurance products when they provide mandatory car insurance coverage.'