China’s reinsurance sector is becoming increasingly difficult to operate in, and is expected to remain challenging, a global ratings agency has revealed.
The report by A.M. Best draws attention to several issues for reinsurers in China, with general reinsurers facing more obstacles than their life counterparts.
Intensifying competition and regulatory pressures are plaguing general reinsurers’ Chinese prospects, with many issues stemming from the introduction of the China Risk-Oriented Solvency System (C-ROSS).
A.M. Best added that the Chinese reinsurance sector is facing similar challenges to the rest of the world, having a “glut of reinsurance capacity” and “growing retention by the direct industry” which hinders reinsurers’ ability to grow premiums sustainably and place pressure on prices.
It added that profitability becomes a concern for both domestic and foreign-owned reinsurers as they are competing for business in a market with limited growth opportunities. The “oligopolistic structure of the direct market” gives cedants significant bargaining power, resulting in additional pricing pressure, as well as undermining terms and conditions.
With reinsurance business margins falling in China, firms are looking for opportunities in other markets that are part of Beijing’s Belt and Road Initiative and with captive insurers. Demand is also expected to pick up once the second phase of C-ROSS is implemented.
Competition from Hong Kong-based reinsurers presents a threat to their mainland counterparts, as Hong Kong regulators are already forming their version of C-ROSS, which could allow Hong Kong reinsurers to become onshore players in the mainland.
A talent shortage is also looming in the Chinese reinsurance market, which will contribute to the difficult operating environment. However, if the industry is able to attract new personnel not coming from a state-owned or reinsurance background, then it could make China’s traditionally conservative reinsurers become more competitive, said A.M. Best.
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