INSURANCENET.INFO

With the auto insurance market volume expanding and competition intensifying, the current uniform auto insurance rate of all the insurance companies is having more difficulty in showing the companies’ advantages in cost control. There has been incessant calling for the marketization of auto insurance rate in the industry. Recently, China Insurance Regulatory Commission issued the Notice on the Administration of Provisions and Rate of Commercial Insurance of Motor Vehicles (Comment-soliciting Draft), allowing qualified companies to develop their own commercial vehicle insurance provisions and rate. With that, the monotonous provisions and uniform rate may change.  

The direction of the change is to associate the rate with combined cost ratio and solvency, restraining insurance companies from carrying out malicious price war. The gradual marketization of auto insurance rate poses higher requirements for insurance companies in their operational cost control, backstage operation, and acturial management, and is conducive to the healthy development of the industry. For consumers, marketization would mean more choices. Through marketization, the price of current auto insurance products will be more reasonable. Besides, it will help insurance companies to improve their innovative ability to meet the diversified demands of consumers.

Shenzhen introduced a flexible commercial auto insurance rate in March, and recently, China Insurance Regulatory Commission issued the Notice on the Administration of Provisions and Rate of Commercial Insurance of Motor Vehicles (Comment-soliciting Draft) to insurance companies and the commission’s bureaus. This may mean the end of the national uniform commercial auto insurance rate that has been in practice for 5 years in the country.

Shenzhen’s pilot project shows that the execution of the flexible insurance rate program is to associate the rate with the risk of the vehicle. Vehicles of higher risk will have higher rate, and lower risk, lower rate. This will benefit the majority of car owners. According to statistics, as of the end of June, the premium of property insurance in Shenzhen was RMB 6.87 billion Yuan, with a payout of RMB 2.63 billion Yuan. It is told that the average premium of auto insurance in Shenzhen from March to May this year was RMB 4768.39 Yuan, a decrease of 4.64 percent compared with the same period of last year. The average individual vehicle premium was RMB 4554.87 Yuan, a year-on-year decrease of 6 percent, and the average premium of organization vehicles was RMB 5376.23 Yuan, a year-on-year decrease of 3.6 percent. It is told that, at this rate, the auto insurance rate reform can save car owners in Shenzhen about RMB 400 million Yuan of premium expense in 2011 alone.

Previously, the market was generally worried that premium would fall, combined cost ratio would increase, and profit of property insurance companies would shrink after the marketization of insurance rate. According to the actual operation results released by the Shenzhen Bureau of the Insurance Regulatory Commission, average premium fell by 4.64 percent after the flexible rate mechanism was adopted, but the combined payout ratio was stable and settlement of claims fell by 2.8 percent year on year. The fall in small-amount cases was particularly noticeable. The cost of settlement of claims decreased slightly and overall combined cost ratio stayed balanced. 

Several insurance industry researchers suggest that although the actual timetable of the marketization of the insurance rate is not definite, they all believe that the reform of the rate is an inevitable trend.

The feelings are mixed in organizations of different sizes

Many people from insurance companies believe that the issuance of the Insurance Regulatory Commission’s Notice does not really mean the marketization of insurance rate. Currently, necessary conditions, such as statistics, company operation and management standard, and actuarial talents reserve, are inadequate. Much effort is still needed for thorough marketization.

For insurance companies, the influence of the marketization reform of auto insurance rate varies. Some small- to medium-sized property insurance companies would face bigger pressure. In their perspective, the direction of the reform is to associate auto insurance rate with combined cost ratio (settlement of claims + insurance rate), therefore, insurance companies who have lower combined cost ratio will be more flexible in opening up insurance rate. According to common practice in the industry, it is easier for large insurance companies to maintain the combined ratio at a rather low level, thanks to the scale effect and advanced management, examples including CPIC and Ping An. But for small- to medium-sized companies, especially newly established ones, their initial expense is relatively large and their scale effect has not been realized, therefore, their combined cost ratio is much higher than large companies’. 

Therefore, small- to medium-sized property insurance companies have bigger pressure. Some companies propose that favored policies should be made for small- to medium-sized property insurance company concerning the auto insurance commission paid to agencies, namely, differentiated commission. This would help small- to medium-sized companies to maintain their shares in the auto insurance market. It is reported that relevant differentiation proposals are currently under study in Shanghai and other places, but they probably won’t be promulgated until after the marketization of auto insurance rate.

Some industrial experts also point out that currently insurance companies refer to the ABC Products (3 uniform provisions formulated by the Insurance Association of China and approved by the Insurance Regulatory Commission during the auto insurance market reform in 2007, which can be used as reference by insurance company according to their needs when they are developing products) in formulating their provisions and rate. There are already differences among the companies. After 20 years’ improvement, the current auto insurance provisions in practice include the basic requirements of consumers. There won’t be much room for insurance companies to device novel provisions. 

Many auto insurance employees from several small-sized and medium-sized insurance companies also hope that policies could be further loosened up. For example, the qualifications for companies to develop products independently could be more flexible, so that more small-sized and medium-sized insurance companies can take part in and compete with others more fairly.

However, some people believe that bigger companies do not necessarily benefit more from it. On one hand, according to the qualifications for insurance companies to be allowed to develop products independently in the Notice, larger companies are not necessarily more qualified in this respect; on the other hand, as the rate of large companies would have more market influence on the entire industry, regulatory authority would not allow them to reduce the rate too much. On the contrary, small- to medium-sized companies may have advantages in this regard if they have good control over their operational cost.  

Source: http://en.ce.cn