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Top 30 Asia Insurers: A volatile year

Asia

2018 was a volatile year for Asian insurers with the majority of them posting declines in gross written premium or sluggish growth. Christie Lee, senior director of analytics for Asia-Pacific at AM Best, explains the challenges they are facing.

Christie Lee AM Best
Christie Lee, senior director of analytics for Asia-Pacific, AM Best

The list of the Top 30 Asia Pacific non-life insurers is largely similar to last year’s rankings, however, their report cards could not be more different. Although the top 30 non-life insurance companies on the list operate in a diverse range of markets, the majority of them have posted declines in gross written premium, or sluggish growth against a stronger US dollar in 2018. Excluding the impact of foreign exchange rate, all but the Japanese and two Indian companies recorded positive growth over the year.

Although the characteristics of these markets vary notably, the insurers’ performances in each market carry at least one of two key themes: a dependency on investment returns, and/or a significant exposure to natural catastrophe risks.

Nonetheless, with its fast developing economies, increasing affluence and a large protection gap, Asia Pacific continues to be seen as a potential pot of gold for the insurance industry. In its recent Sigma report, Swiss Re has forecast that insurance markets in all of Asia Pacific will count for 42% of global insurance premiums by 2029. Despite challenges faced on the global trade front, China’s non-life market is expected to expand by 9% during 2019/2020.

While issues such as severe price competition persist in emerging markets as insurers strive to capture growth opportunities, AM Best notes the concerted efforts undertaken by insurers and regulators to mitigate these challenges in recent years. Over time, as the emerging markets continue to grow in maturity, insurance companies are expected to place increasing emphasis on pricing discipline and ensuring adequate risk-adjusted capitalisation.

Chinese companies

The same eight Chinese non-life insurers returned to this year’s Top 30 ranking, with PICC Property and Casualty clinching the top spot again. With the exclusion of China Export & Credit Insurance Corp, the Chinese insurers listed among the Top 30 recorded a 5.6% growth in GWP in US dollar terms. Barring the impact from foreign exchange, the premiums – denominated in Chinese yuan – of these insurers grew by 11.6%, very close to the industry 12% GWP growth for 2018.

Unlike the previous years, the factor driving the growth of China’s insurance market has increasingly been shifting from motor to non-motor classes of business, attributed in large part to the decrease in new car sales and intensified market competition since the liberalisation of the motor insurance segment. In addition, with a low insurance penetration rate and strong government support, the agriculture, health, liability and credit and surety business lines have recorded robust growth, which has helped steer overall market development.

Despite a solid market performance, half of the Chinese insurers in the Top 30 list recorded a fall in net profit. This is largely due to the fact that the Chinese insurance industry is characterised by thin underwriting profit margins and a high dependency on investment returns to support overall earnings.

While the overall combined ratio of bigger players have remained below 100%, AM Best has observed diverging trends in the loss and expense ratios, wherein loss ratios have been decreasing and expense ratios are on the rise. Aside from underwriting pressure, Chinese non-life insurers faced a tumultuous 2018 on several fronts including global trade tensions, as well as a volatile domestic capital market which led to disappointing investment returns.

It is noteworthy that among the eight Chinese companies on the list, Ping An recorded significant growth of 8.4% and 14.5% in US dollar and Chinese yuan terms respectively; the insurer placed second in this year’s list of Top 30, and has surpassed the two largest Japanese non-life insurers. Hong Kong insurer China Taiping also climbed from the 21st spot to 19th this year, having posted significant growth of 14.7%. Although the company is domiciled in Hong Kong, the majority of its business is generated by its mainland subsidiary.

Japanese companies

This year’s Top 30 ranking also includes five Japanese companies; Tokio Marine, MS & AD, and Sompo have maintained their places within the top five. Like other leading insurance groups in Asia, the three Japanese mega non-life insurance groups continued to benefit from strong competitive market positions in their core markets, and each account for more than 25% of the total domestic market. Following several multibillion-dollar acquisitions over recent years, each insurer has amassed sizable overseas portfolio.

Fiscal year 2018 was an especially active year of natural catatastrophe events for Japan; the insurance industry grappled with significant losses resulting from earthquakes in Osaka and Hokkaido, heavy rains in July, as well as typhoons Jebi and Trami, among others. Although the financial impact of the Osaka and Hokkaido earthquakes was limited on private insurance companies, non-earthquake events –such as Typhoon Jebi, a Category 3 equivalent hurricane that struck major urban areas like Kobe and Osaka – greatly increased the insurers’ net loss ratios. Japanese insurers were also exposed to natural catatastrophes abroad, including the hurricanes in North America, as well as the Californian wildfires; as such, their adjusted profits continued to remain under pressure during fiscal year 2018.

Nonetheless, an exclusion of the catastrophe events’ impact would reveal that most of the Japanese insurers ranked among the Top 30 have reported higher levels of adjusted net profits than before, with performance metrics which surpassed their initial plans. Evidently the business fundamentals of the Japanese insurers remain strong, as they make notable progress in their business transformations to raise profitability, capital efficiency, and sustainability over the long term.

Looking ahead, we believe there remain major headwinds which Japanese non-life insurers will face, including the consumption tax rate hike (effective 1 October 2019), as well as the heightened geopolitical risks, particularly with regard to global trade tensions and the associated side-effects on their underwriting and investment operations. Nonetheless, we are confident that the Japanese major insurers’ robust capital strength and business resilience will help them navigate these challenging market conditions.

South Korean companies

South Korea’s non-life insurance market, the seventh largest globally, is largely dominated by domestic players. Similar to last year’s ranking, the eight South Korean non-life insurers which have been included in this year’s Top 30 companies together account for more than 90% of South Korean non-life GWP; among them, Samsung Fire & Marine is ranked highest at the 8th position.

Collectively, the GWP of these companies declined by 2.3% year-on-year in US dollar terms, but registered a growth of 2.1% in local currency terms. This gap was due to the Korean won’s depreciation against the US dollar last year. Growth of the South Korean insurance market has been relatively muted in recent years owing to stagnation in the long term and motor insurance lines, which represent 70% and 20% of the market respectively. One reason for the sluggish growth of the long-term business is the ongoing shift in product mix from savings to protection-type products so as to secure longer term profitability. Meanwhile, growth of the motor insurance line had also slowed since 2017 when insurers cut premium rates as they attempted to gain larger market shares.

After much effort to raise underwriting profitability in both long-term and motor insurance, companies have been coping with pressure on their bottom lines since 2018, mainly because of a negative underwriting cycle for auto insurance, and rising acquisition costs from greater market competition. During 2018, total net profit of the eight insurers decreased by 24% year-on-year in US dollar terms and 20% in local currency terms; small-to-mid sized insurers saw steeper declines compared to their larger peers.

For the most part, profits of South Korean non-life insurers are driven by the investment yield generated through the large volume of long-term insurance premiums. Although the prolonged low-interest rate environment – deemed mostly unfavourable – increased hedging costs for overseas investments, the somewhat stable investment income streams continued to contribute a solid base for insurers’ bottom lines. 

While an acceleration of growth is unlikely over the near term, there is room for bottom line improvement given the recent hike in motor rates, pending new regulations on sales commission, as well as companies’ various efforts to tighten underwriting and reduce costs.

Australian companies

Four Australian-domiciled insurers – QBE, IAG, Suncorp and Allianz Australia – returned to this year’s Top 30 ranking, all of which were also featured last year. In 2018, all four companies reported positive profits. Profits of the general insurance sector in Australia were negatively impacted by several natural catatastrophe events including the Sydney hailstorm and Townsville flood events during 2018. This, coupled with a strengthening of claims reserves in the long tail classes of business, had driven the loss ratio up.

Australia’s general insurance sector is dominated by two large players – IAG and Suncorp. In 2018, the general insurance market expanded by 6%, largely as a result of premium rate increases in the short tail business; the commercial sector, which represents approximately 32% of the total GWP, posted an 11% growth.

QBE recorded a more favourable after-tax profit in 2018 compared to 2017, as a result of reduced incidence of natural catatastrophes across its global markets outside Australia. Meanwhile, the large insurers continued to put a strong focus on expense management, and all four Australian companies in the Top 30 reported improved or stable expense ratios, compared to the previous financial year.

The four insurers also posted more robust investment returns in 2018 than in 2017; the increased investment income in Australia during the year was mainly due to unrealised gains in fixed income investments thanks to falling bond yields. However, unlike their Chinese counterparts, investments are not a significant driver of overall earnings for the Australian insurers.

Regulators in Australia continue to scrutinise insurance conduct in relation to add-on insurance, financial advice and customer value creation. Earlier this year, the Royal Commission released its final report on misconduct, which covered key recommendations in those areas. We expect insurers in Australia to act on the recommendations and address any concern they may have internally that could expose them to potential regulatory risk going forward.

Indian companies

India’s representation in the Top 30 ranking remained similar to last year, with the country’s three largest state-owned general insurers – New India, United India, and National Insurance – making the cut. Although the non-life insurance market in India grew by 17% to 1.5trn rupees ($22bn) during fiscal year 2018, currency fluctuations against the US dollar have impacted the growth figures of the three Indian Top 30 companies. Foreign exchange effects aside, the solid growth momentum in the non-life insurance sector was in line with expectations, supported by double digit growth in motor, health, and crop insurance.

Altogether, New India, United India and National Insurance accounted for about 40% of the total market as at fiscal year-end 2018. However, the growth of private sector insurers have picked up notably in recent years, and it should not come as a surprise to see a private sector insurer placing among the Top 30 in the not-too-distant future.

AM Best expects the robust growth of the insurance market as observed over recent years to continue over the medium term. Significant growth potential for the non-life sector remains as the Indian economy expands, and as insurance awareness rises among businesses and individuals. To narrow the protection gap and raise insurance penetration, the Government of India has launched several insurance initiatives, including the crop insurance scheme, Pradhan Mantri Fasal Bima Yojana in 2016, and more recently the National Health Protection Scheme, Ayushman Bharat Yojana in 2018.

However, the fortuitous convergence of high business growth, poor underwriting results, significant catastrophe losses, and significant reserve strengthening, have caught up with a number of state-owned insurers, leading to deterioration in their risk-adjusted capitalisations and thin regulatory solvency margins.

Key pressures remain within the largest business lines of motor, health and agriculture. In particular, the motor third-party liability insurance, a tariffed line, has historically been loss making owing to inadequate pricing, unlimited loss liability, and the absence of time bars for claims.

While the recent Motor Vehicles (Amendment) Act 2019 could alter the risk profile of motor third-party liability insurance, application of the law has
been inconsistent as opposition from a number of state governments and advocacy groups have led to deferred enforcement of the Act and/or reduction of penalties in a number of states.

Operating results are highly dependent on investment returns, which have thus far generated favourable results. Until underwriting results show consistent profits, Indian insurers’ operating performances will continue to be subject to the risk of deterioration should investment market conditions worsen.

 
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