The penalties imposed by the CIRC on P&C insurers which commit violations would improve the industry's underwriting discipline and operating efficiency, says Moody's Investors Service Hong Kong.
On 23 February, the CIRC announced regulatory penalties on four large property & casualty (P&C) insurers, namely PICC Property and Casualty, Ping An Property & Casualty Insurance, China Pacific Property Insurance (CPPIC) and Taiping General Insurance. These penalties include fines and a three-month ban on taking up new non-mandatory (commercial) motor business in some regions.
The four P&C insurers are barred from underwriting new commercial motor business for three months in Sichuan (PICC P&C, Ping An P&C and Taiping P&C), Fujian (CPPIC) and Ningbo (Ping An P&C).
Furthermore, the penalty made some executives personally liable, and subject them to fines of CNY40,000 (US$6,300) to CNY100,000 each.
The CIRC cited several violations of insurance rules for imposing the penalties. These violations include the use of premium rebates and actuarial adjustments to increase ceding commissions from reinsurers, with an objective to lower reported expense ratios of motor line business.
According to the regulator, the violations occurred during September 2016 and July 2017, and lowered the insurers’ expense ratio on their motor business by 3.7-9.7 percentage points among the penalised branches.
This decision is credit positive to the Chinese P&C insurance industry because it shows that the CIRC is tightening its monitoring and further promoting underwriting discipline of the industry, says Ms Stella Ng, AVP-Analyst, Financial Institutions Group, at Moody's.
She says that the penalties send a strong signal that the regulator is holding management accountable for misbehaviour and poor underwriting practice of the branches. “We expect that the CIRC will continue to tighten its supervision of the sector,” she added.
Since 2017, the CIRC has deepened its drive to address irregularities in the insurance industry, following the second stage of pricing liberalisation on commercial motor insurance in June 2017. The regulator initially focused on scrutinising acquisition expenses to preempt excessive competition, but the latest penalties suggest that it has stepped up its surveillance to the industry’s compliance standards and risk management. This tighter scrutiny will improve the industry's underwriting discipline, competitive behaviour and operating efficiency.
Nonetheless, for the four insurers, the financial impact of the three-month new business suspension in commercial motor insurance is manageable. Based on their 2016 financials, Moody's estimates that the motor premiums the insurers received in the regions subject to the penalties accounted for only about 2%-7% of their total direct premiums in 2017.