Ratings agency AM Best says the Chinese insurance market is in a “state of transition”.

It says in a new report that risk management and discipline have improved following a period of rapid growth, with regulators releasing plans for solvency reform, less restrictive investment rules, the opening of compulsory motor insurance to foreign players and the partial liberalisation of commercial motor rates.

AM Best says the period of adjustment is required for the market to grow in a sustainable and healthy manner.

Issues likely to affect the Chinese insurance industry are similar to those of its global counterparts, with most concern around stricter regulation, rising competitive pressure in motor underwriting and volatile financial markets.

AM Best notes “decelerating profit is now a distinct possibility” for Chinese insurers.

It says regulatory requirements, business growth, competition and enhancements to operational, underwriting and distribution systems are driving demand for increased capital in the market. But, as elsewhere, uncertainty in the financial markets makes raising capital increasingly difficult.

The ratings agency concludes that, while premium growth has slowed in the non-life sector, the overall fundamentals “remain strong” based on the improving solvency ratios of the top three insurers over the past three years.