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China marine insurance prospects look good: AM Best rating agency

US-BASED rating agency AM Best has said in a special report that China's marine insurance industry, which has experienced a strong upswing in the last decade, has slowed as the country's economic problems, as well as subdued trade activities and increased competition, has challenged premium growth.

However, it added that China's insurance industry is looking to the country's ambitious foreign economic development initiative to spur new premium sources, the company said.

The report, entitled, "China Marine Insurance Withstands Challenging Operating Environment," notes that although cargo and hull accounted for just 1.3 per cent and 0.7 per cent, respectively, of China's total property/casualty gross premium in 2014, it was the largest cargo insurance market and the second-largest hull insurance market in the world.

The economic development initiative in China, known as 'One Belt One Road', seeks to promote economic cooperation with Asia, Europe, Oceania and East Africa, encompassing over 60 countries.

According to the report, most of these economic partners' insurance penetration rate is under one per cent, and so they are being targeted as a potential new source of premium income in the China insurance market, especially in the marine line.

The rating agency believes that Chinese insurance companies should look to come up with some innovative marine insurance products customised for these types of clients; however, those companies also should expand their knowledge of these countries to ensure prudent underwriting and adequate rates.

The government is also supporting the development of Shanghai as the marine insurance hub of China, by providing tax benefit incentives on marine cargo, air cargo, marine hull and marine liabilities.

This encourages large marine insurers to centralise their marine business in the city, although the tax savings for smaller insurers might be insufficient to cover the start-up costs for a centralised underwriting team in Shanghai.

These government policies are expected to improve the quality of the China marine insurance industry up to well-recognised international market levels, but it is too early to determine the effectiveness of these policies on the marine insurance industry.

Cargo gross premium in 2014 was CNY9.54 billion (US$1.44 billion), a 7.3 per cent decrease from 2013, due to intense competition, subdued trading activity related to China's economic slowdown and acute price reductions on import commodities.

2014 marked the first year since the global financial crisis with negative premium growth for cargo. Hull gross premium in 2014 was CNY5.48 billion, a 1.8 per cent increase from 2013.

However, the hull market's loss ratio has been trending upward in recent years related to a combination of poor loss experience and premium rate reductions.

AM Best thinks the government policies could be catalysts for the transformation of the marine insurance industry for new premium sources, but maintains the belief that positive operating performance and long-term sustainable growth require adequate pricing, prudent underwriting practices, appropriate coverage terms and sufficient risk management.