Platform insurers threaten China’s financial system

Raging turmoil at China’s platform insurers might be a huge win for their traditional rivals but it poses a threat to financial sector stability given the sheer size of the platform players' assets.

A recent crackdown by the insurance regulator on certain products and practices has led to a slowdown in insurance sector premium growth this year.

However, this has not been evenly felt and appears specifically targeted at what UBS analyst Jason Bedford refers to as “platform insurers” - insurers focused on higher return investment products more akin to wealth management products than protection products.

“A key driver of platform insurers has been their focus on high-yield universal products, which has led to a yield gap of between 50 to 80 basis points above traditional insurers' products,” he said.

Notably, he added, the big platform insurers like Anbang Insurance Group and Foresea Life contributed to 58 per cent of total insurance sector asset growth for the two years to 2016, with their market share doubling to 32 per cent largely due to aggressive product pricing. 

"But the impact of Beijing’s crackdown has been sharp and sudden with total written premium at platform insurers falling 22 per cent between January and May 2017." 

Quality and differentiation

Interestingly, premium growth for Anbang Life was down 99 per cent year-on-year in May.

“We believe efforts to rein in platform insurers will benefit traditional insurance companies like Ping An Life and China Life as the market refocuses on traditional, lower-yielding products," said Bedford.

"We believe this will help stabilise market share and reduce cost of liability for traditional insurers. In particular, it should help rationalise the competitive environment, as insurers turn more to competition on product quality and differentiation, rather than product yields."

Based on official data, the total market share of traditional insurers declined from 70 per cent in 2013 to 44 per cent in 2016. It has since recovered to 58 per cent as at May 2017.

"While the risk of big platform insurers to financial stability may be overstated - it is not unfounded," warned Bedford, noting that given the sheer scale of An Bang’s asset base, conservatively estimated to be Rmb2.5 trillion, is equivalent to 3.4 per cent of China’s GDP. 

The analyst suggested that despite the headline-grabbing billion-dollar investments into high-end real estate properties, like Waldorf Astoria, or large stake purchases in major banks like China Merchants Bank, these types of illiquid asset exposures only account for 11 per cent of the asset base of ABIG’s core insurance entities.

"The majority of their assets are invested in publicly traded securities, with limited evidence of an asset liability mismatch," he said.

"While we have concerns that the low penalty for early product redemption may be insufficient to deter a run on the company, based on the liquidity of their assets, an asset unwind would not necessarily be as painful a process as market watchers anticipate."

Bedford likes the listed Chinese life insurance sector based on unwinding reinvestment risk, the improving competition landscape and regulatory support for the protection business.

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