The pursuit of certainty

CHAI SOPHONPANICH

By CHAROEN KITTIKANYA

While almost three quarters of financial institutions were forced into liquidation during Thailand's 1997 economic crisis, the majority of local insurers escaped the crisis unscathed, except for the financially troubled firms Rattanakosin and Commercial Insurance.

The collapses of the two general insurers, however, had nothing to do with the impacts of the crisis, but stemmed from poor business management, unprofessional administration and misplaced ventures.

As a rule, Thailand's insurance businesses, especially life concerns that engage in long-term savings, are stringently regulated. Apart from policy reserves fully allocated to each policy an insurance company has written, the Life Insurance Act requires them to set aside at least 2% of the reserves as capital funds as a contingent financial buffer.

Capital funds are a portion of assets in excess of the insurer's liabilities, in accordance with the appraised values of both.

The act calls for life insurers' capital funds to be at least 2% of all reserves but not lower than 50 million baht.

Meanwhile, the Non-Life Insurance Act requires that general insurers maintain capital funds equivalent to 10% of their earned premiums, but not less than 30 million baht.

Over the past 10 years, the country's insurance market has come a long way, weathering the 1997 financial crisis and other global and regional difficulties, including global investment market volatility and Sars.

Performance and disclosure expectations from investors and regulators have led to improvements in reporting standards and improved transparency, skills, and technical expertise of market players.

The Thai life market is still dominated by a few players who are able to exploit their economies of scale and scope to remain profitable. Competition remains intense with many products marginally priced, and returns on savings products not covered by investment yields until recently. Long-term growth is expected to remain strong and success will hinge on the ability to offer innovative products with potential to penetrate the market through multiple distribution channels.

The Thai non-life market, meanwhile, is characterised predominantly by short-tail insurance (liabilities that are notified and settled quickly, for instance, motor vehicle insurance and domestic house contents insurance), good underwriting performance, and satisfactory liquidity, but challenges remain.

In this overcrowded market, smaller players without a strong niche or affiliation to support their position are struggling to survive. Market participants are suffering from the lack of economies of scale. At the same time, new regulatory requirements such as the proposed capital increases and risk-based capital requirements will add to their already high expenses. Consolidation is therefore likely to take place in this segment.

Tight credit in the face of the global financial crisis is also expected to bring more headaches to small and medium-scale players, who have to devise new ways to raise funds in compliance with the industry's rigid capital requirements.

The latest crisis triggered by the US financial crunch also shook the local industry in mid-2008, particularly following reports that American International Group Inc (AIG), the world's largest insurer, was hit by a wave of downgrades by credit-rating agencies who worried that the deteriorating housing market would further deteriorate the group's finances.

American International Assurance (AIA), Thailand's biggest life insurer and affiliate of the embattled US giant AIG, was flooded with frenzied calls from Thai customers uncertain about the long-term security of their insurance policies.

To calm down the panic among local policyholders, the insurance commissioner, relevant associations and leading executives of the affiliate firms of AIG operating in Thailand lined up to confirm the company's financial stability and the local industry's solid status.

"We're still vulnerable, but I'd say that in the current situation, compared with other regional countries, I think Thailand is in a good position,'' said Chai Sophonpanich, the chairman and president of Bangkok Insurance.

"The short-term impacts on our financial institutions are thus expected to remain marginal.''

However, he warns that over the next one to two years, the sector is likely to feel the pinch, as more customers of banks may no longer be able to repay their loans, or even interests, as they could not sell their goods.

"The financial status of local financial institutions is in a much better position than we experienced in 1997, as we have learned lots of lessons and gain much experience from it,'' he said.

Indeed, the lessons learned during the crisis 10 years ago have helped the country weather the current crisis. Most banks here have very little exposure to toxic collateralised debt obligations and other exotic financial instruments that have brought the downfall of many venerable western financial institutions.

But what affects Thais the most right now are exports, as the economy is mostly reliant on export and tourism incomes.

"The baht flotation 11 years ago had made it easy for us to export to the world market, as our product prices suddenly fell by 30-40%. The baht weakness had also driven the growth of Thai tourism and related businesses such restaurants, beverages and employment,'' he said.

"No longer. Today, exports are unlikely to be able to prop the battered economy because foreigners buy fewer goods. They are also expected to delay their travel plans because of cash shortfall. Most American and European consumers now prefer to hold cash for their financial stability out of fears of the unknown over the next two years.''

Worse, he added wryly: "We helped them save money when thousands of Thais had forced the closure of two Bangkok's airports,'' referring to the siege by anti-government demonstrators of Bangkok's gateways early in December 2008.

As long as exports suffer, Mr Chai notes that the insurance industry will inevitably be vulnerable. He projected non-life insurance growth of only 1.2% in 2009, the lowest rate in nine years against the estimated 4.5% for 2008.

Fire insurance, for instance, is unlikely to increase, as factories are expected to cut down on their inventories.

Against this backdrop, the prices of all goods are falling in line with lower raw-material costs. For example, the construction costs of new condominiums and apartments would be at least 15% lower in 2009 than in the previous six months. In the fourth quarter of 2008 and all of 2009, the sums insured are thus expected to fall accordingly.

Marine insurance could fall by 15% in terms of direct premiums, as the prices of export goods fall across the board, especially sugar and agricultural crops, resulting in lower sums insured and premium rates.

Busara Ungphakorn, director of the Thai Life Assurance Association, said growth in the life insurance industry was also expected to drop to between 6.5% and 7% in 2009 compared with 10% to 11% in 2008.

"But we are still confident of the prospects of life insurance. Tax incentives remain in place, while the Revenue Department has yet to come up with a final say on whether taxpayers will no longer be allowed in 2009 to use health and personal-accident premiums that are riders or additional contracts attached to life insurance policies for tax deductions,'' she said.

Earlier this year, the government doubled to 100,000 baht a year the amount of life insurance premiums deductible from taxable incomes. The goal was to increase domestic savings and stimulate the slowing economy.

Revenue authorities also have been relatively lenient in allowing taxpayers to include premiums paid for health and personal-accident riders with those of their main policies, although officials have signalled that this break could be ended soon.