Moody's Investors Service says the outlook on China's life insurance industry is stable, as insurers preserve their profitability and capitalization levels in the face of expected subdued premium growth in the next 12-18 months.
On the other hand, the industry is approaching an inflection point in its development that should result in a healthier profile over the longer term if insurers can successfully manage the changes.
"For now, the sector is experiencing the constraints from its previous focus on short-term and savings-type products, as well as a significant reliance on the bancassurance channel," says Sally Yim, a Moody's Vice President and Senior Credit Officer.
Yim was speaking on Moody's just-released, China Life Insurance Outlook.
Moody's macroeconomic assumptions -- growth rates of 7.5%-8.5% in 2013 and 7.0%-8% in 2014 -- point to continued growth in household real incomes, which in turn will boost the demand for insurance products.
However, Moody's expects the growth rate of China's life insurance premiums to remain in the low- to mid-single digits on an annualized basis for the next 12-18 months, reflecting a continuation of the weak 4.5% achieved in 2012.
This expected low growth is because 1) insurers will continue to struggle with a narrower bancassurance platform; (2) wealth management products sold through banks continue to offer an attractive alternative to savings-type insurance products; and (3) competition will increase, as more Chinese banks capitalize on their distribution strengths to start their own insurance operations.
The regulatory environment in China is also moving towards a risk-based, Solvency II-like regime, with broader liberalization in investments and products.
Although these changes aim to bring the industry to a more mature stage of development, some of the liberalization measures could pose risks to the sector.
Over the next 12-18 months, insurers will need to devote more resources towards enhancing their product capabilities and distribution structures to address the lull in premium growth and to tap the potential of the domestic market. These include moving away from low-margin, savings-type offerings and focus on protection-type products, and strengthening their agency force to support their product transition.
Although growth in the domestic economy and a stable monetary policy over next 12-18 months will continue to support the financial performance of life insurers, Moody's believes that the credit fundamentals of the industry will be affected by how insurers manage the risks and opportunities during this transition period.
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