The opening to foreign insurers of China’s third-party motor market is likely to put pressure on Chinese companies and force premiums down, according to a report by ratings agency Moody’s.

But Moody’s expects the development to be positive in the long term, because it will remove a constraint on foreign insurers and lead to innovation.

The Chinese Government has prevented foreign insurers from offering third-party motor coverage and also regulates premiums.

Moody’s says third-party motor is loss-making as a stand-alone business but is usually sold as part of a larger motor insurance package that includes “the more lucrative voluntary property coverage”.

Foreign insurers’ inability to provide the motor cover puts them at a significant disadvantage to local competitors.

“As motor premiums accounted for 74.4% of China’s property and casualty insurance premiums in 2010, an inability by foreign insurers to gain a foothold in this important market undermines their efforts to promote broader brand recognition and cross-selling opportunities,” the report says.

“We believe this lack of access explains why foreign insurers’ collective market share has been consistently below 1.2% after a decade of doing business in China and explains why some insurers have exited the market.”

Moody’s warns that although foreign companies will pick up more business, domestic insurers will maintain their market share lead for the next three to five years because of their advantage in scale, brand recognition and distribution.