Risks high in life and non-life insurance: S&P

ANALYST'S VIEW

China and India are the two awakening giants in the Asia-Pacific region with their strong growth potential. Their low insurance-penetration rates and expanding economies also support the two countries' insurance industry credit profiles.

Interest from international players has increased enormously with the countries' transition from a closed system with state-owned monopolies to a more open system with private and foreign-owned entities over the past two decades.

This trend will continue over the long term. China is ahead of its counterpart in terms of regulatory reform and opening of insurance markets, although India has a much earlier history of establishing a legal and supervisory framework.

Two major Chinese state-owned insurers have listed offshore and onshore, while India's national insurers are still wholly government owned.

These factors support the positive outlook on China's insurance industry as the system is likely to benefit from being more open and shareholder focused. However, the two systems still have a number of legacy issues from the previous closed system such as weak capitalization.

The rapid growth and deregulation in the past decade have also brought in new industry risks in terms of increased competition, inadequately experienced managers, unknown risk exposure due to different risk aggregates, information risks, and mismatching of assets and liabilities.

Life insurance
The stable outlook on India's insurance sector also reflects strong potential growth, which is offset, however, by the weak capitalization of state-owned insurer, Life Insurance Corporation of India (LIC; which still dominates the market at over 80 per cent in terms of premiums, compared to China's largest insurer, China Life Insurance Co, at 45 per cent).

Most of the private life insurers are much better capitalized than LIC. Although the private sector in India has been thriving for the past five years, overall industry risks remain high.

Non-life insurance
The stable outlook on India's non-life insurance market reflects the satisfactory capitalization of state-owned companies, which have a combined market share of over 80 per cent in terms of premiums.

However, the sector has experienced poor underwriting performance, with losses over a number of years. India's insurers' profitability was supported by investment income and gains, which is not a healthy trend for the sector's long-term development and has hindered development of companies' underwriting risk control.

Underwriting performance of India's non-life insurance industry may not even improve quickly under a de-tariffed regime implemented in early 2007. Poor underwriting and relatively low levels of sophistication have produced a high industry-risk level for India.