RGA's Jason Zhang, Head of China Market, discusses factors that drive the growth of China's reinsurance sector with Asia Insurance Review.
As Asia’s largest and the world’s second largest reinsurance market, China’s (re)insurance industry is expected to grow in the next years, driven by factors such as the country's expanding economy, rising insurance penetration rates, and increasing demand for risk transfer solutions. Insurance savings products have been on the rise and a smooth transition into IFRS17 has been reported in the country.
In 2017, China became the world’s second largest life insurance market, following an extended period of rapid growth, largely driven by its strong economic development.
However, in 2021, total life insurance premiums saw their first negative growth in a decade and the industry has been going through a period of transition, according to RGA's Jason Zhang.
"Mirroring the broader economy, the China life insurance market is going into a phase of transformation from relying on growth by brute force in sheer size and scale to increasing quality," Mr Zhang said.
"While this transition has proven to be difficult and painful at times, it is necessary and constructive for the long-term health and growth prospects of the industry."
The positive aspect to China’s life and health reinsurance sector in 2023 was the fact that reinsurers remained as the main force behind the underlying protection market, which typically generates higher margins and value than saving products.
"Reinsurers continued to support and enable insurers to tackle the protection market with new product ideas and underwriting innovations."
However, 2023 was also a unique year where there was a confluence of issues and events that disrupted business activities in the protection market.
Some industry estimates project new protection sales in 2023 are running roughly at one-third of that in 2022, which in turn slows down reinsurance new business momentum as well.
Insurance saving product sales have been strong in recent years in the China market, led by traditional fixed-rate products such as the increasing-sum-assured whole-of-life product.
"With declining interest rates and the recent reduction in the statutory pricing interest rate, we see a marginal shift from traditional fixed-rate products towards par and universal life products."
Protection product sales have been under significant pressure over the past few years with various challenges in place.
Going forward, the two main areas of focus for reviving the protection market are:
"Reinsurance terms have remained largely stable in the past few years, with some notable changes, including the marginal hardening of CI risk pricing given the deterioration of underlying loss trend, while medical risk pricing has softened materially due to stable and favorable underlying experience."
Six years after China’s principle-based solvency regime C-ROSS was first put in place in 2016, the nation saw the roll-out of C-ROSS Phase II in 2022 and some further adjustments were implemented in September 2023.
"These timely adjustments represent ongoing progress of regulation towards maturity while addressing changes and emerging risks in the capital markets and the life insurance industry."
On one hand, principle-based solvency and accounting regimes have improved the transparency of the life insurance industry and provided incentives for quality growth as uneconomical and irrational competition is heavily penalized under such regimes.
On the other hand, economic solvency and accounting standards accentuate the structural challenge for the industry of a mismatch between the long-term nature of the underlying life insurance liability versus the current capital markets.
"Overall, the net impact is still positive for the industry eventually as the challenge is highlighted on the risk management radar screen rather than being submerged underwater like an iceberg dangerously waiting to sink ships."
"With the help of economic solvency and accounting frameworks, it is upon all the market participants, insurers, reinsurers, capital markets and regulators to collectively step up and answer to such challenges."
For the few publicly listed insurers in China, IFRS17 has been effective since January 1, 2023.
"We have observed a mostly smooth transition into IFRS17 for these large companies who possess adequate human and financial resources to cope with the transition. Given that most insurers will not switch to IFRS 17 until January 1, 2026, the industry continues to use traditional financial metrics for evaluating company performance."
The real impact of IFRS17 on the life industry is still to be seen.
It is not a bold forecast to say that China’s life and health reinsurance sector will perform better in 2024 than in 2023, given the multiple disruptions experienced this year.
However, 2024 is likely to be much more than just an average year for China’s life insurance and reinsurance markets.
"It will signify the start of a healthy transition towards its exciting long-term growth potential, even though the recovery itself could be slow at first."
At RGA, we are eager to engage with clients to better understand and tackle the industry’s most pressing challenges together. Contact us to discuss and to learn more about RGA's capabilities, resources, and solutions.
