Fitch: Chinese non-life insurers to see operating margins slip

Chinese non-life insurers could see their operating margins constrained by capital market volatility and higher acquisition expenses, Fitch Ratings said in a new report on Wednesday.

However, any declines in operating margins are unlikely to be substantial, due to solid claims income and active regulatory supervision, as reflected in the stable outlook for the sector, the report said.

"Operating margins could be constrained by ongoing capital market volatility and underwriting deficits from compulsory third party motor liability insurance," said Terrence Wong, director of Fitch's insurance team.

"Escalating acquisition costs coupled with the regulator's proposal to partially liberalize commercial motor premium pricing could further weaken the sector's underwriting margin in the coming year," Wong added.

The report said the sector's outlook could also be affected by a sharp deterioration in operating performance due to higher underwriting deficits from motor pricing deregulation or by major natural disasters.

Premium growth for the Chinese non-life sector remained strong during the third quarter of 2012, expanding 15.1 percent on a yearly basis, despite slower economic performance.

The sustainability of double-digit growth depends highly motor vehicle sales as motor insurance still accounts for more than 70 percent of the overall non-life business.

Demand for non-motor insurance products, however, could be stronger than motor insurance products in the next one to two years due to low insurance penetration.

The premium leverage, as measured by net written premium to shareholders' equity, of many Chinese non-life insurers remains high as premium expansion continues to outpace internal surplus generation.