Insurance

Consolidation on the horizon

Mergers and acquisitions in the Thai insurance industry are on the horizon due to more rigid capital requirements under new insurance laws.

In face of more intense competition, insurers are stepping up their efforts to ensure that the services they provide to clients are fast and reliable.

Chai Sophonpanich, chairman and president of SET-listed Bangkok Insurance, one of the country's leading general insurers, said the Thai insurance industry was expected to starting seeing M&A movement in 2008, but activity would really pick up in 2009 after local insurers have gone through a wait-and-see period.

"Whether M&As among Thai firms happen depends largely on how seriously the new independent insurance governing body takes the enforcement of the new capital requirements under the new acts," said Mr Chai.

The Office of the Insurance Commission (OIC), under its old name the Department of Insurance, has proposed introducing a risk-based capital assessment as a way of improving the industry's financial strength.

Companies registered after 1997 are required to have paid-up capital of 500 million baht for life business and 300 million baht for non-life firms.

Risk-based capital measures the minimum amount of capital that an insurance company needs to support its overall business, considering the size and degree of risk involved.

The risk-based capital measures are due to start tentatively running early next year, but the OIC itself has never clearly stated when the new capital requirement measures would officially come into force.

According to Mr Chai, the capital requirements for the insurance industry should be lifted to 500 million baht for non-life and 800 million baht for life business to reflect the changing business environment.

However, if the regulator really followed Mr Chai's proposal, dozens of existing insurers, particularly poorly capitalised players, would definitely fall prey to consolidation or liquidation.

According to a recent report by the US ratings agency Standard & Poor's, capitalisation levels notably for the non-life sector have actually declined over the past five years.

The ratio of shareholders' funds to net premium income stood at 89% at the end of 2006, compared with 110% in 2001. Excluding revaluation reserves for assets, which are booked as part of shareholders' funds, the ratio was only 74% in 2006. Solvency ratios are expected to fall over the medium term as the market grows and funding sources remain limited.

Without fully disclosed information, Standard & Poor's estimated that some insurers have marginally sufficient capital, using a risk-based capital analysis. This is due to the sector's higher investment risks and lower risk-management sophistication.

The risk-based capital regime is likely to shake up the industry, the US rating firm warned, with weaker players being eliminated or consolidated due to market fragmentation and limited funding channels.

To boost the sector's capital strength, the insurance regulator intends to raise the investment ceiling for foreign companies holding stakes in Thai insurers to 49% from 25% over the medium term.

However, S&P says Thailand's non-life insurance sector has a stable underwriting performance as the country has limited exposure to catastrophic risk. The tsunami that hit southern Thailand in December 2004 had only a slight impact on the industry because many properties were uninsured. The overall non-life market reported a combined ratio (on an earned premiums basis) of about 97% between 2002 and 2006.

The loss ratio has stood at 56%-59% in the past five years, which highlights the market's stability. This is partly attributable to the industry's tariff system, in which most insurance premium rates follow set rates or a minimum set by the regulator and insurance associations.

Voluntary motor class is the sector's main underperformer in terms of underwriting results. It has had a combined ratio of between 106% and 109% in the past five years, highlighting the stiff competition. Its disappointing performance, however, was offset by other major business lines such as fire, marine and personal accident, which reported underwriting profits over the same period.

Investment profits, which generated yields of about 3.4% in 2006 and an average of 4.0% over the past five years, contributed to the sector's profitability. Return on revenue was satisfactory at a three-year average of 7% in 2006.

According to a recent report of Thai Reinsurance, Thailand's general insurance is expected to grow 5.91% in 2007 to an estimated 100.70 billion baht from 95.09 billion baht in 2006.
The growth is expected to fall in a range of 5.9% to 8.5% in 2008 to between 106.60 billion and 109.26 billion baht, propelled by improved confidence in the country's economic and political prospects following the Dec 23 general election.

According to Thai Reinsurance, industry growth in 2008 will be largely driven by the miscellaneous segment, which is expected to grow by between 10.1% and 11.3% to 32.72 billion to 33.11 billion baht from an estimated 29.75 billion in 2007, a 9% rise from 2006. However, the industry's key contributor remains motor insurance, which accounts for about 60% of total premiums.

Next year, the motor insurance business is projected to grow by between 4.7% and 8.1% to between 62.8 billion and 64.84 billion baht, from an estimated 59.99 billion baht in 2007, a rise of 5.7% from 2006, as consumer confidence improves and carmakers step up marketing campaigns.

The growth rate for the fire business was also expected to improve slightly because of the government's stimulus measures to boost the sluggish property sector, as well as declining interest rates. The fire insurance business should grow in a range of 0.4% to 3% to between 7.18 billion and 7.42 billion baht in 2008 from an estimated 7.16 billion this year, down 0.2% from 2006.

The marine cargo segment is projected to improve as well, given that the baht is unlikely to gain further against the dollar and international trade is expanding. The value of marine cargo coverage is expected to increase 0.9% to 1.8% to between 3.83 billion and 3.87 billion baht, up from an estimated 3.80 billion this year but down 1.8% from 2006.

For the life business side, S&P's says competition may squeeze out smaller players with unsustainable niche market positions as financial strength varies widely within the sector.
In addition, the regulatory environment is focused on policyholder protection and financial strength.

Foreign participation in the life insurance industry is strong, with joint ventures and branch operations controlling most of the market.

According to S&P's, the outlook for Thailand's life insurance sector is stable, reflecting the industry's strong growth potential. It is backed by adequate overall earnings and capital, as well as improvements in expertise and sophistication through foreign investment.

Although the Thai regulator has proposed reforms to enhance the market's governance and financial strength, the sector is still constrained by a shallow investment market, regulatory investment restrictions and lengthy product approval procedures. The intense competition in this highly concentrated market has left some companies with persisting negative spreads and a high expense base.

After recording slowing growth for five consecutive years (2002-2006) - decelerating from 24.8% in 2001 to only 4.6% in 2006 - the life insurance industry has accelerated in 2007 thanks to a sharp decline in fixed deposit rates among financial institutions. Earlier in 2007, the rate stood at around 2% against the peak of more than 5% in 2006.

It could be said that bancassurance - in which banks serve as sales agents - has contributed greatly to the rapid growth of the life insurance industry. The accountability and trustworthiness of banks with bancassurance aids in expanding the industry's customer base. Typically, consumers show greater trust in banks as insurance sales agents than in other agents. The market share of premiums via bancassurance risen since commercial banks received permission to operate insurance businesses in 2002. Marketing strategies were launched in earnest since 2004. Of the total premiums earned by the industry, direct premiums via bancassurance increased from 5.7% in 2004 to 10.8% in 2006. Looking ahead, the market share of bancassurance is expected to rise to a range of 13.0-15.0% in 2007-2008, according to Kasikorn Research Center.

Meanwhile, the market share of premiums via sales agents is expected to drop from 89.8% in 2004 to 82.8% in 2006. In 2007-08, that share may fall to 77-80%, the research house predicted.

On the downside, the life insurance industry was affected by numerous negative factors during the latter half of 2007. These included record high oil prices, which are likely to deal a severe blow to GDP growth, as well as inflation and waning consumer confidence in the year to come. Worse, a bullish trend in fixed deposit rates that has resumed since the end of the third quarter of 2007 will also deal a blow to the industry.

The hikes in fixed deposit rates are a response to the Bank of Thailand's savings bonds issued at the end of August. Furthermore, the forthcoming issue of Financial Institutions Development Fund (FIDF) savings bonds in late November is seen as another catalyst for earlier-than-expected increases in deposit rates at commercial banks. This was seen from the launch of fixed-deposit products with interest rates of 2.0-3.5% per year in the final quarter of 2007.
Under these circumstances, other forms of savings, especially life insurance - a long-term savings product - are likely to be hindered. Currently, interest rates on insurance policies range between 3.0-4.0%.

However, KResearch projects that the second-half 2007 performance of life insurance companies is still unlikely to fully reveal the negative trends. But the situation may result in weaker growth in direct written premiums over the entire year to around 10.0-14.0% growth at the end of 2006, accounting for around 192-199 billion baht, compared to the first half the year when growth hit 15.6%.

As for KResearch's projection for 2008, the growth of direct insurance premiums will decelerate to around 5-6% compared to 2007, and have a value of around 202-210 billion baht.
Thailand's life insurance industry has the chance to keep growing during this period of economic recovery, but the growth may seem less striking.

The exception to this would be if something special were to happen, such as the government granting permission to increase tax deductions on insurance premiums over the present ceiling of 50,000 baht per person per year.

KResearch holds the view that the growth rate in direct insurance premiums earned from bancassurance would likely continue leading growth in the life insurance business.