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Chinese insurance companies are withdrawing from the auto loan insurance business after widespread debt defaults and fraud led to mounting pay-outs.

All major property insurers have reportedly stopped selling policies that cover the risks of auto buyers failing to repay their auto loans to the bank, either in some major cities or nationwide.

"We have stopped sales (nationwide),'' said a spokesman from PICC Property and Casualty Co, the country's largest auto insurer. "It's a move taken in keeping with the market conditions.''

Insiders say the insurance companies were giving up a market that they jumped into some seven years ago believing it had enormous growth potential because compensation payments have risen to unbearable levels.

Pay-outs exceeded premiums by as much as 35.6 per cent during the first quarter of this year in Guangzhou, capital of South China's Guangdong Province.

"A major reason is that insurance companies don't have a sound risk control mechanism, especially for moral hazards,'' said Tuo Guozhu, a professor with the Beijing-based Capital University of Economics and Business.

Insurance fraud has been rampant over the past few years, he said, with some cases involving automobiles worth as much as 100 million yuan (US$12 million).

And many individual auto buyers, in an era when new models of cars are brought to the market frequently, are refusing to repay bank loans but simply chose to give up their old cars, which depreciate rapidly in use, to the bank.

"A social credit system, especially one governing personal credit, is a long way from being built up,'' Tuo said.

The decision by insurers to withdraw en masse has worried auto sellers, who say that as much as 30-50 per cent of their sales are financed by bank loans.

Auto insurance accounts for more than 60 per cent of all property insurance premiums in China. Intensifying competition among insurers, following a premium rate liberalization that started at the beginning of this year, has already brought rates close to the point between profit and loss, analysts have said.

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