China Insurance Report Q1 2009

With economic growth slowing more sharply than anticipated in Q308, we have been forced to revise down our 2008 and 2009 growth forecasts, from 10.1% and 9.7% respectively, to 9.6% and 8.8%.

However, we continue to highlight the risk that despite the best efforts of authorities, economic growth may slow significantly going forward, and that a much-feared 'hard-landing' scenario is not out of the question.

Since China does not publish GDP data by expenditure on a quarterly basis it is very difficult to determine what exactly is driving slower economic growth. With global growth continuing to slow amid the ongoing financial market turmoil the obvious source of slower growth would be net exports.

However, official efforts to support the slowing export sector in China, combined with falling commodity prices that have helped to slow surging import growth, have seen record-breaking trade surpluses recorded in each of the past two months. While Q308 still saw a 1.6% year-on-year (y-o-y) narrowing of the trade surplus, this was significantly smaller than the 10.9% and 11.7% narrowing witnessed respectively in the first two quarters. This suggests that although a weaker external performance continues to drag on economic expansion, it is perhaps not the main driver of slowing growth.

However, combined with the fact that secondary industry (i.e. manufacturing) growth slowed for a fifth quarter in a row in Q308, to 10.5% y-o-y from 11.3% in Q208, the deceleration in industrial output growth perhaps tells us the most about the cause behind China's slowing economy. Indeed, this ties in well with the weakening outlook for the export sector, since the majority of Chinese shipments are manufactured goods. Although exports have held up well thus far, the weakening of industrial activity underscores the fact that demand for Chinese exports is softening as consumers continue to tighten their belts across the globe.

Since the last quarter, we have made two major changes to the data in this report. First, we have - to the greatest extent possible - incorporated hard figures that have been made available by the regulator(s) and trade association(s) in each country. In some cases, therefore, we have begun to include numbers that pertain to the development of the insurance sector through the early stages of the global financial crisis.

Second, we have extended our forecasts out to 2013. In all cases, we have reviewed the key growth drivers - non-life penetration and life density - which we had incorporated in our forecasts.

The Global Financial Crisis is likely to affect the various segments of the global insurance industry in different ways. In many countries - especially in Europe - the coming recession points to softness in the non-life segment. In many cases, the numbers of policies may fall: there should be downwards pressure on premiums. By contrast, the main problem for the life segment - in almost all countries - is the extreme volatility of financial markets. Over the longer term, though, the fortunes of life insurance will recover - thanks to the secular growth of organised savings in most countries. China, where the larger insurance companies continue to achieve double-digit growth in premium income, is a good example of this. Some particular niches should also do well in the current environment, such as legal liability insurance.

In the Asia Pacific, we profile 23 companies. These are AEGON, AIG, Allianz, Aviva, AXA, Cardif, Fortis, Generali, Groupama, HDI-Gerling, HSBC Insurance, ING Group, Liberty Mutual, Manulife, MetLife, Prudential Financial, Prudential, QBE, RSA, Sun Life Financial, The Hartford, Principal Financial Group and Zurich Financial Services.

We estimate that, over the course of 2008, total premiums in the China rose by 25% to CNY778,873mn.

Non-life premiums rose by 26% to CNY302,058mn, while life premiums rose by 24% to CNY476,815mn.

Between now and the end of the forecast period, we expect that annual non-life premiums will grow by CNY245,790mn, while annual life premiums should increase by CNY226,044mn. Growth in non-life premiums should be driven by the general growth in nominal GDP plus a rise in non-life penetration from the current level of 1.01% to 1.20%. Growth in life premiums should be driven by the change in the overall population and a rise in life density from US$44.20 to US$100.00 per capita.

BMI's Insurance Business Environment Rating is 62.3.