In the current economic and investment cycle, growth has been the preferred investment style for many investors. And if you are on the lookout for stocks to add to your growth exposure, DBS believes that the Chinese insurance sector should be your target. Here are three reasons why China’s insurance sector is welcoming one of its best periods of growth ahead.
Low Market Penetration
Among industrialised countries, China has one of the lowest market penetration for insurance. China’s life insurance penetration rate is at only 2.3 percent of the entire Chinese population in 2016. When compared to developed countries whose penetration rate averaged 5.1 percent, the disparity implies that there is opportunity for almost 100 percent growth in the years ahead.
Demographics Shift And Consumer Awareness
There are a few structural changes in China that are acting as tailwinds for the sector. Firstly, there is rising demand for better healthcare and critical illness insurance as consumers become more aware and educated about insurance. Secondly, China’s demographic has been shifting to an aging population and insurance coverage on vital life remains low. China’s low insurance penetration, coupled with higher demand for better healthcare plan and aging population implies great premium growth.
Support From Regulatory Bodies To Drive Growth
Another tailwind for Chinese insurers is the launch of C-ROSS – China Risk Oriented Solvency System. C-ROSS aims at establishing a risk-oriented and internationally comparable solvency system and is currently incentivising insurers to sell more traditional life products by setting a lower capital requirement for life insurance products. China Insurance Regulatory Commission policy guidance also directs insurers’ to focus on launching more traditional life products. DBS highlights that this will drive China life insurers to speed up their underwriting portfolio adjustment towards protection-type products, ultimately leading to continuous value-of-new-business (VNB) and embedded value (EV) growth.
Bonus: Negative Duration Gap Of Insurers’ Portfolio
Chinese insurers have been holding a mismatched portfolio as there is a lack of domestic long duration investable assets. On average, insurers’ asset and liability duration stands at six and 13 years respectively. In particular, China Taiping and CPIC have the widest duration mismatch. With Chinese bond yields edging upwards, Chinese life insurers’ book value is set to rise, given the negative duration gap. The expected rise in China bond yields will also alleviate life insurer’s pressure on reserves.
Investors Takeaway: Which Insurers Should Investors Focus On?
China insurers’ share prices on average have risen 32 percent year-to-date. This is backed by a rise in interest rates and VNB growth. DBS believes that the upgrading cycle will continue into FY18 as insurers unveil continuous value enhancement initiatives and stronger earnings. DBS forecasts leading life insurers to record strong VNB compound annual growth rate of 30-32 percent in FY17-19F.
DBS recommends investors to focus on insurers with better product mix, strong VNB growth outlook and stable investment position. This group of insurers include China Taiping, CPIC, Ping An and China Life.
On the other hand, DBS advised investors to avoid property and casualty (P&C) insurers and reinsurers due to deteriorating outlook and competition. Stay tune for our next article where we will highlight the investment merits of China Life, China Taiping, CPIC and Ping An.