Moody’s: China’s P/C Insurers to Benefit from Shanghai Free Trade Zone

October 7, 2013

The new Shanghai free trade zone should benefit property/casualty insurers, particularly those in marine/cargo and liability insurance, according to Moody’s Credit Outlook.

On Sept. 29, the date that Shanghai’s municipal government’s launched its free trade zone, the China Insurance Regulatory Commission (CIRC) also formally announced eight policy initiatives that will be applicable in the free trade zone. The initiatives include developing marine/cargo insurance, liability insurance and health insurance in the zone.

Moody’s said these initiatives are credit positive for property/casualty insurers “because they will open up new business opportunities and help them diversify away from their strong concentration in motor policies.”

Moody’s said two Shanghai companies stand to benefit the most: China Pacific Property Insurance Co. Ltd. (CPPIC, financial strength A1 stable) and Dazhong Insurance Co. Ltd. (unrated). Both have received approvals to open branches in the free trade zone, according to Moody’s.

“We see the biggest opportunities in marine/cargo insurance and liability insurance,” Moody’s said in its latest credit update. “The free trade zone, which covers four port and airport areas in Shanghai, will offer favorable treatment for shipping companies, including higher limits on foreign ownership and preferential tax rates. These will increase the volume of cargo and trade going through the free trade zone, thereby raising related demand for cargo and liability insurance.”

Moody’s said that growth in these two lines of business will help diversify product portfolios and improve profitability for P/C insurers in China that currently depend on motor insurance for more than 70 percent of their premium volume and have seen profitability in this line is decline because of competition and rising claims costs.

The CIRC’s separate announcement that it will allow foreign insurers to sell health insurance in the free trade zone without a domestic partner is also credit positive, Moody’s said.

While describing the free trade initiatives are positive, Moody’s cautioned against expectations for any dramatic change in the overall insurance regulatory scheme in China.

“Deregulation in the insurance sector has historically been gradual and conducted within the confines of restrictions, such as requiring insurers to maintain a specified local solvency margin ratio before allowing them to engage in new business or investment channels. From a credit perspective, this cautious approach to reform helps to insulate China’s insurers from abrupt shocks related to sudden and wide-ranging changes in their operating environment,” the ratings agency wrote.

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