Guotai Haitong: The two-tier regulatory framework of "notice + guidelines" for property insurance expense management has been implemented; maintain "Overweight" rating on the industry.

Guotai Haitong released a research report stating that on November 13, the National Financial Regulatory Administration issued the "Notice on Strengthening the Management of Expense Allocation by Property Insurance Companies" (hereinafter referred to as the "Notice"), comprehensively standardizing expense management requirements for property insurance companies; the China Association of Actuaries issued the "Guidelines for Expense Allocation by Property Insurance Companies" (hereinafter referred to as the "Expense Allocation Guidelines"), effective January 1, 2027. The "Notice" and the "Expense Allocation Guidelines" guide the property insurance industry toward refined expense management; maintain "Overweight" rating. The two-tier regulatory framework establishes full-chain standards for "collection/classification/allocation," unifies expense definitions and data granularity, and is expected to enable leading property insurance companies to sustain underwriting profitability above the industry average under a quality-and-efficiency-oriented operating approach. Guotai Haitong's main views are as follows: The purpose of introducing regulatory rules for property insurance expense management is expected to be to solidify the accounting foundation and guide the industry toward high-quality development. Previously, the industry had problems such as extensive expense collection, miscellaneous shared expenses, and highly subjective allocation methods, which weakened the authenticity and accuracy of accounting information and disrupted market order. The implementation of the "regulatory notice + industry guidelines" two-tier framework guides the establishment of full-chain expense management standards covering "collection/classification/allocation," solidifies the foundation for accounting of operating results, product pricing, and "report-and-act compliance" management, and promotes healthy and orderly industry development. The "Notice" clarifies the principles and requirements for expense allocation and management by property insurance companies; the "Expense Allocation Guidelines" comprehensively standardize the operational details of expense collection/classification/allocation. (1) In terms of expense collection, the "Notice" requires insurance companies to clarify collection standards based on business scenarios at the point where expenses are incurred. The "Expense Allocation Guidelines" classify collection methods into dedicated expenses (which can be directly attributed to an institution/department/insurance category/product) and shared expenses (which cannot be directly attributed and require further allocation according to relevant principles), guiding an increase in the proportion of dedicated expenses and a reduction in the proportion of shared expenses; expenses traceable to policies, such as commissions, should be directly collected based on policy information. (2) In terms of expense classification, the "Notice" requires implementation in cost accounting, pricing, and assessment. The "Expense Allocation Guidelines" classify expenses by cost behavior into fixed/variable expenses and by business segment into underwriting expenses, indirect claims expenses, and administrative expenses. (3) In terms of expense allocation, the "Notice" requires determining reasonable allocation methods and keeping them stable. The "Expense Allocation Guidelines" require the allocation dimension to reach at least the insurance category level; further refinement to products or clauses must be mapped back to insurance categories; expense allocation methods include the working-hours ratio method, activity driver method, allocation factor method, etc., which may be used alone or in combination; allocation may be done in one step to insurance category/product, or in multiple steps (from operations management to business departments to insurance category/product). (4) In terms of sales expense management, head offices and provincial-level branch institutions that do not directly conduct sales activities shall not retain sales expenses; those conducting sales activities shall collect and account for sales expenses at branch institutions below the provincial level that issue policies for insurance contracts; those without physical branch institutions below the provincial level may collect and account for them at the provincial-level branch institution itself. Enhance the comparability and transparency of financial information of property insurance companies, and guide the operating orientation from pursuing scale to improving profitability. The unification of expense rules, data granularity, and reporting requirements under these rules is conducive to improving expense authenticity and cost transparency, while also driving property insurance companies' cost management from passive and extensive to proactive and refined, guiding competition back to core elements such as product quality, risk identification capability, and service quality, which is conducive to improving underwriting profitability. Risk warnings: policy progress falling short of expectations; decline in long-end interest rates; volatility in the equity market.