Abstract
In 2015, the China Insurance Regulatory Commission initiated a liberalization reform in the automobile insurance industry to grant insurers more discretion in policy design, underwriting, and ratemaking. The deregulation intended to increase competition and choices for the consumer, yet there was little scientific evidence on how the insurance market responded to the reform. This article examines the effectiveness of this deregulation reform in China. Leveraging a large industry dataset of more than 7 million automobile insurance policies from 63 major automobile insurers operating in China, we study policyholders’ switching behavior among insurance providers. To better understand the heterogeneity in the impact of deregulation on market performance and consumer choice, we further analyze the switching pattern among different types of insurers according to the insurer's size, the company’s business structure, the jurisdiction’s market power, and the customer’s risk type. Overall, the empirical results suggest that the reform has met its original goal, leading to higher market competition, and more diversified consumer choices. We further confirm that the average premium dropped significantly after the reform for all three jurisdictions implementing the reform, yet the insurers’ pricing strategy was risk type dependent, i.e., the average premium for the high-risk customers increased, while the average premium for the low-risk customers decreased substantially.
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Notes
Honka (2014) estimated the average switching cost in the US automobile insurance industry to be about $40.
CIRC was combined with China Bank Regulatory Commission in 2018 and is now known as China Bank and Insurance Regulatory Commission (CBIRC).
The regulatory system for insurance industry in China was also switching to a risk-oriented solvency system with three pillars focusing on quantitative measure, qualitative measure, and market constraint starting in 2015.
As shown in our analysis later, the deregulation leads to more customers switching from the big insurers to smaller ones.
First, many individuals get access to health insurance using group policies provided by their employers. Thus, which insurer to choose is not entirely up to the individual. It is further found that for firms, the cost to switch health insurance plans remains high (Dafny 2010). Second, many health insurance plans, such as HMOs and PPOs, restrict services to a specific health provider network, which imposes additional costs and barriers for customers to switch plans. Third, specific groups, especially those with chronic disease and other preexisting conditions, face additional barriers to switching insurers (Hendriks et al. 2009; Van Rooijen et al. 2011).
World Insurance: The Great Pivot East Continues, Sigma Report, Swiss Re Institute, No. 3, 2019.
China Insurance Market Report 2019, Peking University Press.
The coverage of third-party liability is chosen by the insured, but the coverage of physical damage (collision) line is set to equal to the car’s actual cash value automatically.
The CIITMC became the China Banking and Insurance Information Technology Management Company (CBIITMC) after the merge of CIRC and CBRC into CBIRC.
As to the ratemaking, the CIRC regulates the maximum discount for the policyholder, setting at 30% for all insurers prior to the reform.
No such new policy was approved by the CIRC during our data period.
In the reform starting in June 2015, the CIRC specified the range of the insurer underwriting factor and the insurer sales channel factor to be both within [0.85, 1.15]. For example, the lowest risk policyholder that the insurer wants to attract could enjoy a 27.75% additional discount off the base premium (0.85 × 0.85 = 0.7225).
The maximum NCD discount is 30% off and the maximum discount that the insurer can grant to a policyholder prior to the reform is also 30% off.
This example is used to illustrate a crude calculation of premiums. Please note the base premium after the reform may be different from the previous case, so the 11.5% decrease may not be accurate.
To provide socioeconomic context for these premiums, the average disposable annual income in China in 2016 was 23,821 yuan, and the average annual consumption per capita was 17,111 yuan. We note it would not be reasonable to compare the average premium with the average disposable income directly because the underlying populations are not the same. A more accurate estimation can be derived as follows. There were 194 million automobiles in China, and there were 36 cars for every 100 households in 2016 (http://www.stats.gov.cn/tjsj/zxfb/201702/t20170228_1467424.html). If we assume the wealthiest 20% of the population own private cars, then the average premium of automobile insurance in 2016 accounts for approximately 4.4% of the average income for individuals in the top 20% of the income distribution. This percentage will increase to 8.2% if we assume people in the top 40% income distribution percentile are car owners.
We sampled 32 out of 36 jurisdictions in China, excluding Beijing, Shanghai, Shenzhen, and Ningbo, because their regulatory and data recording rules are different from all the other jurisdictions.
Specifically, we include the policy in our sample only if the length of the policy period is between 335 and 395 days, i.e., we allow at most 30 days deviation from the normal length of the policy.
There were 53 property/casualty insurance companies operating in the automobile insurance industry in China in 2013, according to the China Insurance Yearbook 2014. The other seven insurers not included in our sample underwrote very few businesses in 2013; thus, we did not obtain enough observations from the 5% random sampling process.
In particular, the eight time variables are Time0A, Time0B, Time0C, Time0D, Time1, Time2, Time3A, and Time3B. The detailed definitions are given in Table 1.
Another factor that may cause insurer switching is the insured moving to another territory where the original insurer is not operating. In our sample, 2.48% of policyholders moved to a different jurisdiction during the sampling period. It is a relatively small portion and the results excluding these observations are available upon request.
To date, there are three regulatory reforms in the automobile insurance market in China since 2015. The first reform took place from June 2015 to July 2016, and our paper focuses on the impact of the first reform. The price ranges allowed by the CIRC for IU factor and ISC factor are both [0.85, 1.15] for all jurisdictions in this reform. Later on, the second reform in July 2017 allowed pilot jurisdictions to further expand the price ranges to [0.70, 1.25]. The third reform in March 2018 allowed for price ranges to be [0.65, 1.15] for specific jurisdictions. We would expect the level of market competitiveness to further increase as deregulation continues.
We adopted the typical rule to categorize automobile insurance insurers in China. The large companies (the top three) all had a market share above 10%, and the medium-large companies (4th to 10th) all had a market share between 1 and 6%, and the remaining smaller companies (11th and below) all had market share less than 1% in 2014.
As shown in Bajtelsmit and Bouzouita (1998), a positive impact of market power on profitability is found in the private passenger automobile insurance in the US.
PICC, Ping An, and CPIC are the top three insurers in the market. The detailed regression results are available upon request.
The observations from these 41 companies account for 99.79% in our full sample. There were another 22 companies who either joined the market after 2014 or had missing data in the China Insurance Yearbook. We performed the same analysis on these companies. Due to constraints on space, we did not report it in the paper. The results are available upon request.
We did not use individual premium because the fluctuation would incorporate noise; by using the average premium on company, jurisdiction, time, and NCD level, we cancel out those noises and the average premium would be representative of the pricing strategy of local insurer at the time for the specific risk type customers when the reform took place.
We omit the ThreeYearNoClaim as the base group.
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Acknowledgements
This research is supported by the Research Seed Fund of the School of Economics in Peking University. We are grateful to Sheng-Chang Peng, Steven Pottier, and other participants at 2019 APRIA and ARIA annual conference for their valuable suggestions. All errors are our own.
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Appendix
Appendix
See Tables 13 , 14, 15, 16, 17, 18 , 19 , 20, 21 , and 22 .
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Zheng, W., Yao, Y., Shi, P. et al. Deregulation, competition, and consumer choice of insurer: Evidence from liberalization reform in China’s automobile insurance market. Geneva Risk Insur Rev 47, 158–200 (2022). https://doi.org/10.1057/s10713-021-00067-2
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DOI: https://doi.org/10.1057/s10713-021-00067-2