OREANDA-NEWS. Chinese motor insurers' capability to improve their underwriting margin could be hampered by a commercial motor pricing deregulation trial, Fitch Ratings says in a new report. Fitch expects the growth dynamics of the non-life insurance sector in China to weaken in 2016 if the stagnant motor vehicle sales persist.

However, business derived through alternative distribution channels is likely to further expand as large or start-up insurers become more active in marketing their personal line products through telemarketing or internet portals.

Fitch expects the underwriting margin of mid- to small-sized motor insurers to remain weak in 2016 although the trial deregulation of commercial motor insurance pricing is unlikely to lead to a cut-throat price war. The inclusion of 12 new regions in the deregulation trial could further suppress insurers' capability to sustain or improve their margin in 2016.

The trial deregulation could moderately spur market competition although insurers with better pricing sophistication could have larger flexibility to align their commercial motor insurance prices with the risks they underwrite. Fitch also expects insurers to continue to incur underwriting loss in the compulsory third-party liability (CTPL) motor insurance line, given the tightly controlled pricing mechanism. The combined ratio for CTPL motor insurance line still amounted to 103.5% in 2014.

Fitch anticipates net premiums retained by direct insurers to persistently outpace their internal surplus growth although most insurers improved their capital strength, in terms of net premium leverage through fresh equity contribution over the past two years. While the new capital regime, China Risk Oriented Solvency System (C-ROSS), is unlikely to pose a strain on non-life insurers' solvency adequacy, Fitch expects the implementation could alter insurers' strategy in managing their investment, underwriting, growth, reinsurance as well as capital allocation.

The stable sector outlook reflects Fitch's expectation that the sector's underwriting margin is unlikely to further deteriorate and insurers' capability to fund business expansion will remain intact, despite slower market growth. The sector or rating outlook could be revised to negative if commercial motor pricing deregulation leads to an adverse development in the underwriting result of the motor class and if significant investment loss from capital market volatility occurs.

Fitch could change the sector or rating outlook to negative if net claims from major catastrophe perils materially damage insurers' capital position on an industry-wide basis. Fitch expects most Chinese insurers will continue to mitigate their catastrophe risk through adequate reinsurance protection.