In October 2023, China Insurance Security Fund Co., Ltd. (CISFC) released the 2023 Risk Assessment Report on China Insurance Industry (hereinafter referred to as the “Report”) in Beijing. The Report points out that in 2022, the Chinese insurance industry firmly implemented the decisions and plans of the CPC Central Committee and the State Council, actively dealt with the impact of factors that exceeded expectations under regulators’ correct leadership, kept to the financial and insurance development path with Chinese characteristics, adhered to the people-centric development philosophy, and ensured that no systemic risks arise. Meanwhile, the Report notes that China’s economic recovery foundation is still weak, the triple pressure of shrinking demand, supply shocks and weakening expectations is still huge, the external environment is turbulent, and their impact on the Chinese economy has deepened. The insurance industry is in the critical period for transition when old risks are not cleared and new risks are accumulating. To achieve high-quality development, the insurance industry still needs to overcome a lot of difficulties and challenges.
The Report has four parts, namely, economic and financial environment, state of operation of the industry, industry risk assessment, and expert observations. On the basis of reviewing the internal and external environments of the Chinese insurance industry in 2022, the Report has comprehensively described the operation status of the industry and mainly analyzed the risks and problems currently faced by the industry.
I. Operation Status
In 2022, the operation of the insurance industry was stable. The asset size grew steadily. The total assets of the insurance industry recorded RMB27.15 trillion, an increase of 9.08% over the beginning of the year. The scale of insurance business posted a positive growth. Original insurance premium income reached RMB4,695,718 million, up 4.58% year on year. Solvency maintained within an appropriate range. The average comprehensive solvency margin ratio of the 181 insurance companies included by the Solvency Regulatory Committee for review registered 196%.
In terms of property insurance, as the industry segment continued to deepen reform and innovation, the growth of property insurance premiums picked up. In 2022, original property insurance premium income recorded RMB1,486,654 million, up 8.70% year on year. The property insurance type structure was further optimized. The proportion of non-auto insurance premiums rose for the seventh year straight. With risk protection efforts continuously strengthened, insured amount increased by 14.71% year on year. Operating results improved significantly, recording net operating cash inflows and a year-on-year increase in net profit. Solvency margin ratio maintained within appropriate range.
In terms of life insurance, as the industry segment continued to deepen transformation and upgrading, original life insurance premium income grew steadily and protection-type business developed stably. In terms of premium income, original life insurance premium income posted RMB3,209,063 million, up 2.78% year on year. In terms of insurance type, ordinary life insurance grew steadily, while the scale of participating insurance decreased. In terms of channel, the agent channel shrank somewhat but the bancassurance channel sustained growth. The profitability of the segment was divergent, but its solvency margin ratio maintained within appropriate range.
In terms of funds utilization, the scale of funds utilization maintained stable growth and the asset allocation structure was stable and still focused on long-term bonds. Affected by the heightened volatility in the equity market and low interest rates, the return on insurance funds utilization declined periodically. The quality and efficiency of insurance funds support to the real economy improved. Insurance funds were actively used to serve national strategies and participate in the development of major projects.
II. Risk Assessment
The main risks and challenges faced by the Chinese insurance industry since 2022 can be summarized as the following six points:
There are both existing problems and new risks on the investment side. First, the equity market became more volatile and return on investment decreased year on year. In 2022, the Shanghai Stock Exchange Composite Index, the CSI 300 and the ChiNext Index fell by 15.13%, 21.63% and 29.37% respectively. Affected by that, the financial return and overall return of stock investment with insurance funds declined sharply, recording new lows in recent years. In terms of long-term equity investment, as insurance institutions engaged in equity investment relatively late, they lack experience and sound management mechanisms for project screening, asset operation and exit arrangement. They face great challenges in subsequent management after equity management. Meanwhile, the long-term equity investment assets of the industry currently are at high risk of impairment. Second, debt extension has become a normal practice and credit risk control pressure persists. In 2022, default risk was slowly released in the Chinese bond market, but both the number and the amount of extended bonds increased substantially from the previous year, so the possibility of material default in future is still high. The real estate industry remained the main area where bond default and extension occurred in 2022. Part of the credit bonds and non-standard products invested by insurance funds involves strongly cyclical industries such as real estate and city investment. Subsequently, attention should be still paid to changes in quality of relevant assets. Third, asset allocation has become harder and asset-liability matching needs to be strengthened. Against the backdrop of economic slowdown, low interest rates for a long period of time and increasingly severer shortage of structured assets, it’s difficult to find desirable assets that match the term structure of insurance products and whose costs match benefit.
The life insurance segment is still in the critical stage for transition. First, the segment faces challenges in both channel and value. In terms of channel, the segment actively explored agent channel transition, but the transition period is long and the business needs further improvement. As the development of the agent channel hit bottlenecks, the bank of mail distribution channel became the focus of competition again. The rise in commission rates further drove up the cost of debt. In terms of value, affected by the decline in premiums of high-value-rate products and other factors, some companies saw their new business value decrease year by year. Second, margin loss risk continued to accumulate. In recent years, as long-term interest rates are on a declining trend and the return on the asset side of the life insurance segment declined faster than the pace of reduction of cost on the debt side, margin has narrowed year by year. In particular, the volatility in the capital market in 2022 caused big impact on the return on equity assets. It is thus necessary to pay more attention to margin loss risk. Third, insurance policy cancellation should be given more attention. Affected by a combination of factors such as insurance companies’ product design, selling behaviors and market demand, etc., the surrender value of the life insurance segment increased significantly and the surrender rates of some companies rose substantially. Facing high surrender rates, companies were under liquidity pressure and their reputational risk rose.
Continuous attention should be paid to the insurance risk in the property insurance segment. First, the auto insurance market is divergent and the short-term boom is unlikely to sustain. In 2022, the auto insurance segment recorded an underwriting profit, mainly due to external factors such as reduced travel of residents during the pandemic and decrease in auto insurance claim payments. However, premium concentration continued to increase. The market share of small and medium-sized companies shrank, profit was continuously concentrated in head companies, and most small and medium-sized companies suffered losses. Second, the liability insurance segment posted an underwriting loss. Emerging market segments had prominent risks. On the one hand, due to fierce market competition, liability insurance rates declined year by year and premiums were insufficient, thus affecting operating results. On the other hand, the indemnity for personal injury, which is linked to per capita disposable income of the previous year, increased year by year, driving up the cost of claims payment year by year. In addition, the liability insurance underwriting scale of some emerging segments grew rapidly. However, due to little claims data accumulation, lack of professional knowledge of relevant areas, poor business quality as a result of adverse selection and high claims payment, the operating results were less than satisfactory. Third, the profitability of guarantee insurance was inadequate and the claims payment rose significantly. Affected by the resurgence of the pandemic, small and medium-sized companies faced greater operating pressure and saw decreases in income. With inadequate repayment willingness and capability, the delinquency rate increased significantly. Therefore, guarantee insurance, which mainly provides credit support to micro, small and medium-sized companies, saw rises in accident frequency and combined ratio.
Insurance companies are under great capital replenishment pressure. Capital replenishment mainly includes endogenous capital replenishment and exogenous capital supply. In recent years, as insurance companies have inadequate profitability and external capital supply is restricted, capital replenishment has become more difficult. In 2022, the decline in return on investment of insurance companies and the enforcement of the Rules on Regulation of Solvency of Insurance Companies (II) (hereinafter referred to as the “Rules II”) presented new challenges to capital replenishment. First, the complex investment environment restricted insurance companies’ ability to make endogenous capital replenishment through investment. Against the backdrop of the in-depth adjustment of the equity market and the narrowing of the bond market, the return on insurance funds utilization declined dramatically, resulting in a decrease in net assets. Second, the Rules II stressed capital quality, so insurance companies became more prudent in capital recognition. After the Rules II was enforced, some companies’ solvency margin ratios declined, increasing capital replenishment pressure.
Insurance companies’ governance capability needs to be further strengthened. An unstable equity structure, a high share pledge ratio, frequent changes or long-time vacancy of senior management members, etc. are unfavorable for the sustainability and effectiveness of the long-term strategy of a company and will directly affect the company’s stable operation and long-term development. According to the information statistics of insurance companies in the abstract of the solvency report in the fourth quarter of 2022, a total of 19 insurance companies had equity changes in 2022, a decrease of nine from the same period of 2021. At the end of 2022, over thirty percent of insurance companies had pledged or frozen shares, of which seven had more than 50% pledged or frozen shares and 16 had substantial shareholders who pledged more than 50% of their shares held in those companies. Moreover, shareholder relations were complex. Problems like shareholding entrustment and implicit shareholders still remained. A few companies still had illegal equity pending disposal. An unstable equity structure can directly lead to frequent changes and long-time vacancy of senior management members. Among the companies that had changes in equity structure in 2022, ten replaced their chairmen or general managers and six did not have a chairman or general manager.
Compliance management was inadequate. First, inauthentic data remained a highly frequent violation. In 2022, the penalty tickets for inauthentic data, fabricated reports and fictitious expenses in the insurance industry accounted for nearly half of all penalty tickets. Some companies provided inauthentic solvency data. Second, the recurring problem of sales misleading needs to be rectified. In 2022, of the complaints about life insurance companies received by regulators, complaints about sales disputes took up fifty percent. The repeated emergence of sales misleading is highly related to the complexity of the design of life insurance products and the previous scale-oriented intensive development model. Third, compliance management of primary-level institutions presented a weak link. Large insurance companies failed to adequately transmit risk control and compliance requirements to their branches because they have a complex branch structure, many levels and a long management chain. Small and medium-sized insurance companies lacked adequate internal control mechanisms and need to strengthen compliant operation in all respects. The insurance industry should establish the long-term value orientation, constantly enhance the concept of compliance, build a compliance management culture, and improve the effectiveness of internal control policies and regulations, to ensure the healthy and orderly development of the insurance industry.
III. Expert Observations
The experts of the expert committee for insurance industry risk assessment have written eight risk observation articles for the Report, presenting their research results of relevant segments.
In terms of asset management, the experts believe that due to the long-term attribute, stability and the requirements on return of insurance funds, bond investment has long maintained a high proportion in the insurance funds utilization balance and is a very important variety in insurance funds management & investment and risk control. The risk control tools and means for bond investment vary from risk to risk. The experts advise that when using insurance funds to make bond investment under multiple pressure, insurance companies should avoid obtaining high return by extending credit to lower-tier cities or abandoning liquidity, otherwise credit risk and liquidity risk will arise; and insurance companies should use investment strategies flexibly, fully manage duration risk, reasonably bear credit risk and liquidity risk, and maintain stable and long-term overall return of investment portfolios. Besides, in terms of internal control management of insurance assets management companies, the experts advise insurance assets management companies to strengthen internal control construction by enhancing the management’s internal control awareness and moral consciousness, refining internal control system, attaching importance to day-to-day training among employees, establishing an internal oversight system, etc., effectively prevent occupational fraud, improve operating efficiency and the reliability of financial statements, and promote sustainable and healthy development.
In terms of asset and liability management, the experts believe that the new accounting standards will raise the asset and liability management requirements for the life insurance industry. Since the beginning of 2023, listed insurance companies have switched to the new standards Insurance Contracts (IFRS17) and Financial Instruments (IFRS9). Compared to the old standards, the new accounting standards have increased the volatility of assets and liabilities for insurance companies and raised higher requirements on insurance companies’ asset and liability management. Insurance investment will be subject to the constraint condition of “pursuing absolute benefit and reducing volatility”. The experts advise insurance companies to reexamine their allocation of broad asset classes and selection of accounting items based on their liability characteristics and should seek a balance between pursuing business growth and maintaining balance sheet stability. As the new accounting standards have raised higher requirements on the quality of insurance products objectively, the experts advise insurance companies to review products, investment and assets and liability management strategies and pursue transition to high-quality growth.
In terms of health insurance business, the experts believe that commercial long-term care insurance has development potential. On the one hand, the demand for care insurance among disabled elderly people is increasing with the growth of the number with the deepening of aging, coupled with the rise in long-term care expenses and the lack of professional care service providers. On the other hand, currently, the protection of long-term care insurance is limited. The annual average per capita institution care and home care service coverage gap for the severely disabled is generally higher than the annual per capita household income, so care insurance is added to provide protection. The experts advise insurance companies to actively participate in long-term care insurance on the social insurance level, establish a positioning and find target customer groups and at the same time, conduct innovative design, cultivate a professional care team, refine the care market, and realize precision protection.
In terms of elderly care business, the experts believe that “falling into poverty because of illnesses” is one of the challenges of the aging society. Once they fall ill, elderly people are often faced with three predicaments. First, they do not have any commercial insurance and are unable to pay for the medical expenses uncovered by the social security medical insurance or long-term care expenses. Second, they have bought life insurance products but because the insured is alive, they cannot get death insurance benefits. Third, they have severe illnesses and lack financial resources, and they may face a financial crisis. The experts advise insurance companies to build “advance consumption” insurance by adding “advance payment of death benefits” to existing life insurance products and developing real-estate-pledged “advance consumption-type comprehensive insurance” to solve the problems of the aging society.
In terms of data governance risk, the experts think that in data governance, small and medium-sized insurance companies are faced with challenges like unformed management mechanisms, inadequate data standardization and automation, shortage of data governance talent, and effective countermeasures are urgently needed. The experts advise insurance companies to, first, strengthen the organizational support for data governance by establishing an interdisciplinary data governance committee, closely combine the data strategy with the business strategy and/or the IT strategy, and enhance the effectiveness of organization by the data governance committee to carry out data governance work; second, build an indicator system, unify standards, provide services for system development, data analysis, etc., and optimize operation decision-making capability; third, refine systematic functions and use data middle-offices, etc. to change manual statistical means to timed generation of fixed reports and self-service analysis at any time; and fourth, strengthen data security protection management, make an inventory of data assets, classify data assets by importance and sensitivity of data and personal information, and implement different protection management mechanisms.
In terms of property insurance risk reduction service, insurance, as the financial instrument that can effectively transfer most risks in modern society, is called the “stabilizer” of society and the “shock absorber” of the economy because it plays a positive role in the prevention and alleviation of major disasters and accidents and in post-disaster recovery and reconstruction. Since the beginning of 2023, signs of natural disasters and accidents have risen. The experts believe that the production safety situation is severe and the insurance industry needs to provide risk reduction service. When providing risk reduction service, in addition to meeting the expectations of the country and the people to the insurance industry, the property insurance segment should use the opportunity of studying and implementing the themed education of Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era to practice the holistic approach to national security, apply the new development philosophy to lead high-quality development, and make proper overall planning for institutional reform and risk resolution.
In terms of service cooperation with third-party institutions, the experts hold that strengthening business cooperation with third-party institutions has become an important means of insurance companies to reduce cost, enhance professionalism, improve customer experience or realize strategic goals. While obtaining benefits of cooperation, insurance companies also need to face potential risks from third-party institutions. The experts advise insurance companies to, first, assess relevant risks and form effective control by embedding assessment into relevant business procedures such as procurement supplier management and contract management; second, follow the “risk-based” classified management thinking, appoint a specific management entity for each risk type, and promote efficient collaboration among management entities to realize the goal of effective risk control of third-party institution risks.