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China Liability Insurance Market Trend Report May, 2019 I re liabitleExecutive summary The liability insurance market in China is currently small with total premiums 2018 of RMB 59.1 billion (5.03% of total non-life premiums) and with low penetration at 0.066% of gross domestic product (GDP) compared with over 0.2% globally, but growth has accelerated in recent years. Between 2010 and 2018 the average annual growth has been 18.4%. Key growth drivers include changes in regulation and in the legal system, government schemes using liability insurance to manage social disputes, product innovation and technological advancements. Market structures are changing due to further implementation of government schemes and innovative products. The proportion of passenger carrier liability (PCL) on overall liability premiums has reduced to 11.37%, but it is still the main source of large losses within all of liability. Although employer liability is not profitable, competition is still strong within this segment as it is one of the easiest businesses to acquire. The new Made in China 2025 Strategy will increase business potential for product related insurance in the near future. The risk landscape for domestic financial line products is changing due to increasing risk awareness and the introduction of the Science and Technology Innovation Board (the Chinese version of the NASDAQ). In order to use liability insurance as a risk management tool, the government has released policies and regulations to different industries to accelerate the development of liability insurance. The safety production liability (SPL) product is replacing traditional employer liability products on a wider scale. Regulation on mandatory coverage of gradual pollution in EIL is currently making slow progress, but this is expected to accelerate soon. For well-established schemes such as medical malpractice, school liability and travel agency liability, the government is expecting the insurance industry to write them on a low-profit to non-profit basis. Appointed as representatives of industry associations, brokers always play an important role in government schemes. Product innovation is another key enabler to further develop liability insurance in China. Established products from mature markets, including cyber insurance and intellectual property insurance, are gradually being introduced in China, but in general products for such risks are still at a very early stage. However, changing legal regimes and increasing losses will draw the industrys attention further towards such products. Litigation Property Preservation Liability has proven to be a successful product enabling market growth, which resulted in further innovation efforts to develop new litigation process-related products. Increasing sales of new energy vehicles is driving the need for new extended warranty insurance type cover. The fast development of E-commerce is also changing insurers business model (e.g. online insurance distribution) as well as creating many new liability insurance products such as return shipping expense insurance, delivery service liability, etc. The automation used in many industries and emergent new sub-industries such as drones and 3-D printing will also lead to an increase in demand for liability insurance. Data science will further enhance analysis and modelling capabilities in liability, enabling increased pricing accuracy and product innovation. The Chinese liability insurance market is currently small but its growth has accelerated. Growth of liability in China market has accelerated in recent years. Traditional business is seeing stable growth with the market structure changing. The government encourages the use of liability insurance to manage social disputes. Product innovation is expected to bring more business. Technological advancement is impacting liability insurance in a number of ways. 1China Casualty Desk Liability market trend report Market overview I. Market overview In 2018, the Chinese market liability premium were RMB 59.1 billion, an increase of 30.9% from 2017, accounting for 5.03% of total market non-life premium. Chinese market liability premium grew by 18.4% per annum between 2010 and 2018, and growth has accelerated in recent years. By way of comparison, China P some speciality line products such as IDI, First Set and Flight Delay are also defined as liability products. General liability Employer liability Product liability Financial line Other liability Public liability Internship liability Employer liability Product liability D the governments idea of break even within this government scheme could not be achieved in practice. Anti-selection and inadequacy of premium lead to a high loss ratio within the employer liability segment. Other liability includes several non-traditional liability products such as extended warranty, flight delay, and 1st party IP insurance with high loss ratios. 1. The PCL estimated premium in 2018 was around RMB 6.7 billion. Source:Market data collected and consolidated by Swiss Re. 2. 2015 premium of RMB 2.3 billion from by Zhonghui broker; 2016 premium of RMB 2.8 billion from market news. With an estimation that mean yoy growth slows down to an average 10%; 2018 premium estimation was around RMB 3.4 billion. 3. First pilot equipment/set insurance (First Set) is a government scheme insurance porudct. The coverage is combination of product guarantee and product liability. 4. In 2018, estimated premium for first set insurance was around RMB 3 billion; premium estimation for IDI was around RMB 0.8 billion. General liability: 32.3% Financial line: 8.8% Product liability: 11.3% Employer liability: 27.3% Other liability: 20.4% Figure 3 Liability premiums, 2018, by line of business, % (Financial year) Liability premiums and portfolio split On the primary market side, liability overall is still profitable but the margin is already very low. 4China Casualty Desk Liability market trend report Market overview Source: Market data collected and consolidated by Swiss Re. Note: after reinsurance. Combined loss ratio includes IBNR movement and ULAE. Across all liability lines, product liability has the highest cession ratio with 52.74%, driven by high cession ratios 5 for first set insurance and for export product liability. The second highest cession ratio with 21.16% comes from financial lines, which is due to the relatively limited capacity and expertise in the market for these lines / products. All other liability sub-lines have cession ratios in the area of 15%. Source: Market data collected and consolidated by Swiss Re. Note: cession ratio includes both treaty and facultative. Facultative between insurers is also included. 5 The major players common retention ratio is 20% for first set and 40% for IDI. 46.4% 77.8% 43.3% 74.3% 59.7% 59.7% 42.6% 32.1% 19.1% 38.7% 47.2% 39.9% G E N E R A L L I A B I L I T Y 8 9 . 0 % F I N A N C I A L L I N E 1 0 9 . 9 % P R O D U C T L I A B I L I T Y 6 2 . 4 % E M P L O Y E R L I A B I L I T Y 113% O T H E R L I A B I L I T Y 1 0 6 . 9 % L I A B I L I T Y O V E R A L L 9 9 . 6 3 % Loss ratio Expense ratio 0% 10% 20% 30% 40% 50% 60% General liability Financial line Product liability Employer liability Other liability Liability Overall Cession ratio Figure 4 Liability combined ratio, 2018, by line of business, % (Financial year) Reinsurance cession ratio Figure 5 Reinsurance cession ratio, 2018, by line of business, % (Financial year) 5China Casualty Desk Liability market trend report Market trends II. Market trends Traditional business is seeing stable growth with market structure changing Passenger carrier liability (PCL) and employer liability (EL) together used to make up over half of the liability market. With the high growth of government-driven business and the introduction of some new products in 2018, the proportion of PCL within overall liability reduced to 11.37%, the share of EL (including safety production liability) reduced to 27.3%. The growth and popularity of high speed railways also reduced the market potential for road passenger carriers and the PCL business. However, road traffic accidents under PCL are still the main contributor of large losses to non-proportional treaties in recent years. Customised general liability products for specific industries are common in China market. Insurers like to use such specific products to gain more attention from industry regulators/associations and to leverage sub-markets. Successful practices could be transferred to government schemes. Employer liability in China is not mandatory and business demand comes primarily from large companies with high risk awareness or from undertakings in high-risk manufacturing industries; thus the average EL-insured has a higher risk potential than the average insured in other product areas. In addition, strong competition for the premium-large EL portfolio leads to market price inadequacy. These two reasons make EL one of the least profitable liability products in the market. Many players in the market have noticed the high loss ratio and are taking action to increase premium rates and reduce losses. However, since EL is one of the easiest businesses to acquire and market capacity is sufficient, insureds can always get coverage at low prices. Thus, the quality of traditional EL business is not expected to improve significantly over the next years. China has been the largest manufacturing country since 2010 and did account for around 40% of global industrial output in 2017. To counter the claim that Made-in- China represents low quality, the central government is putting more efforts into improving the average quality of Chinese products. In 2018, the State Administration for Market Regulation took over from several former regulatory bodies 6 to become the overall supervisory agency for the Chinese manufacturing industry. This concentration of supervisory power should strengthen the implementation of the Made in China 2025 Strategy, their main objective being to upgrade the Chinese industry to become an advanced manufacturing power. The US-China trade war is another factor that makes a manufacturing upgrade more urgent. Other industries, including the insurance industry, are also involved in the implementation of this strategy. First set and new material insurance products have been introduced to support the development of the advanced manufacturing industry. Those products are currently government-subsidised and have already taken a leading position within the product liability sector. Still, continued high growth is expected in these products over the next few years. 6 State Administration of Industry and Commerce, General Administration of Quality Supervision, Inspection and Quarantine, and the China Food court verdicts are scattered and not formatted for analysis, etc. However now, with data/text mining and machine learning capability, the industry is able to pool certain data from different resources, tag and categorise them for analysis and modelling. This will further increase both the accuracy of liability product pricing and the possibility for product innovation. More liability opportunities could be expected due to the advancement of technologies in many industries. Data science will enable analysis and modelling in liability. Managing Editor Laurel Hu Head of China Casualty Underwriting Author Rui Yang Casualty Underwriter Contributors Christoph Menn Senior Advisor Underwriting China Casualty Team We welcome your feedback. For any comments or questions, please contact: Laurel_H Rui_Y 12
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