INSURANCE

Walailak Keeratipipatpong

Only five years ago, consumers had fairly limited choices when it came to buying insurance policies, both in the number of companies and policy options.

INSURANCE Consumers can select from a wider range of products while insurers relish the prospect of widening their scope into other investment services

The financial crash of 1997 changed all that. The door to foreign insurance firms was prised open under free-market commitments to the World Trade Organisation, paving way for greater competition.

As well, many of Thailand's insurance companies needed new sources of funds to stay competitive and expand, making foreign partners an essential acquisition, if not always totally welcomed by those who preferred the old-style closed economy.

Although the domestic life insurance market suffered inevitably from the recession in 1997 and 1998, the industry subsequently made rapid improvement, particularly in an environment where leaving money on bank deposit rates and stock earnings were generally less attractive than the returns on insurance policies.

Indeed, the insurance market has turned around, posting substantial growth helped by investment from abroad.

Big names in the global insurance market _ Aetna, Allianz, AXA, ACE, New York Life, and Zurich _ have entered joint ventures with local insurance firms by taking 25% shareholdings, the maximum allowed by law. However, in many joint ventures, the shareholdings by foreign companies are higher than the law limits, through nominees, in hope of openly increasing their stakes if the government lifts the ceiling to 49%.

LESSONS FROM CRISIS

Vehicle insurance warning: A roadside poster for the Insurance Department warns motorists they must have third-party cover. The sign says vehicle owners who do not have insurance risk a fine of up to 10,000 baht.

The 1997 economic slump left a stain on Thailand's insurance industry when a non-life insurer, Rattanakosin Insurance, had to close down the following year. The insurer, which derived most of its profit from auto insurance, went bankrupt.

Like many insurers, Rattanakosin had expanded its auto insurance market quickly to obtain quick cash. However, it invested the premiums in unproductive ventures.

The fast growth of auto insurance in 1996, when the segment expanded by 17% with 40 billion baht in premium income taking a 67% share of the general insurance industry, was an attractive point for insurance firms. The compulsory auto insurance law, intended to bring all vehicles into the system, provided added impetus.

The expansion created more players and drove the industry into fierce competition and an inevitable price war. A number of auto insurers sold underpriced policies but paid high commissions above 18% of the collected amounts to sales agents. This weakened the companies' financial stability and the capital funds of many auto insurers are still said to be unhealthy.

The capital fund of a non-life insurance firm, as required by the law, must be at least 10% of written premium income from the previous year but not less than 30 million baht.

For the life business, the figure is higher at 20% of premiums collected the previous year but not less than 50 million baht.

An industry source estimates that fewer than 20 non-life insurers are financially sound and, as a result, need to find a new partner or merge.

Companies have also been advised to diversify their insurance portfolios, not specialise in one niche, such as car insurance.

However, economists at the Insurance Department said reseach between 1997 and 2001 revealed that the non-life sector, because of its high loss ratio, had not captured the attention of foreign investors.

In the period losses had averaged 58.67% of income, of which auto insurance (voluntary) was the worst performer at 74.39%, followed by health insurance at 69.93% and then marine, miscellaneous and fire.

RADICAL CHANGES

In the past five years, interest rates on bank deposits have dropped to 1.75- 2.75% from double figures. According to Sutti Rajitrangsan, the president of the Thai Life Assurance Association, earnings on deposit interest would be only 1.48-2.34% after tax, compared with 6% offered on life insurance policies.

The low deposit rates and competition from new insurance companies boosted life insurance premiums to 94.4 billion baht last year, from 56.7 billion in 1998.

BankThai Plc's research and planning office said the one-year deposit rate in 1998 stood at 4-4.25%, dipping to 3.5% in 2000 and 2.75% in 2001.

Slow growth in bank lending reduced the one-year deposit rate to 1.75-3% in the first quarter of this year. The office predicts the rate will remain steady at 2.75-3% for the rest of this year and 3-3.5% next year.

Given the low returns on bank deposits, the research house said insurers saw a great opportunity to attract investors by launching a new type of policy _ a one-time deposit offering annual income from interest plus life coverage. Savings through the single-premium policies totalled one billion baht last year.

Customers also benefited from growing competition that fuelled important changes in the insurance industry. When 12 new insurance firms became fully operational in 1999 and 2000, a new era opened in which product design, the ability of sales agents and new marketing strategies are the main tools for success in the industry.

While the workforce in the banking sector declined significantly during the recession, the number of insurance sales agents increased rapidly by a yearly average of 20% in the past five years to 320,000 in 2001.

Not all bank staff entered the insurance market but those with financial expertise were acquired by joint-venture insurance firms which planned to expand their business scope.

Broadening their range of services, insurers have introduced financial advisers to prepare for the industry to provide unit-linked policies after the Securities Exchange Commission and the Insurance Department finalised the regulations allowing policyholders to invest their premiums in a range of options of varying risk.

Competition forces insurers to find niche markets and tailor products to meet particular target groups such as children, women and retirees in addition to coverage for illness.

ROLES OF FOREIGNERS

Of the 26 life insurers, 15 are foreign-Thai joint ventures, while 27 of the 78 non-life insurance firms have part of their equity held by foreign investors.

There has been a foreign presence in the general and property insurance market for decades as it is essential for local firms to have international networks including reinsurers abroad. Many insurers engaged in marine coverage have foreign partners, mostly subsidiaries of trading firms overseas.

In life insurance, American International Assurance, which has been established in the market for more than 50 years, claims a market share topping 50%.

Although new foreign joint ventures have a long way to go to catch up, they have made promising headway.

The total premium income of foreign-Thai joint ventures stood at 12.2 billion baht last year, 13% of the market, but increases to 62% if AIA's performance is included.

The level of foreign control worries Apirak Thaipattanakul, the managing director of Thai Life Insurance Co. Although Mr Apirak agrees that foreign entry has helped develop the market and consumers significantly, he is concerned that when the joint venture grow bigger, the foreign partners will take control. He wants effective measures to prevent foreign firms from transferring profits from local operations to parent firms offshore.

Against the backdrop, many Thai-owned companies have asked consumers to "buy-Thai", while at the same time the firms have bought technology to bring their operations up to par.

AUTHORITY RULES

Plans to lift the foreign shareholding limit to 49% have encountered delays amid opposition from some quarters.

Noravat Suwarn, a former director-general of the Insurance Department, said he was uneasy about Thailand's being asked eventually to open the market to full international competition.

However, Potjanee Thanavaranit, the incumbent director-general, said Thailand would open up the market step by step and the ability of local firms to compete would be taken into account. There was no obligation for Thailand to raise the limit but the department favoured doing so if consumers would benefit.

The industry has already been strengthened by changes to the Life and Non-Life Insurance Law, which increased the financial stability of insurers by setting a minimum capital fund of 300 million baht for each non-life firm and 500 million baht for each life insurer.

That was no problem for joint ventures because many of them have acquired licences from newly-established firms that had already met the requirement.

However, the financial status of a number of non-life firms is not strong and the department has encouraged them to merge, especially small operators. For example, Navakij Insurance Co is in the process of merging with two firms, Thai Commercial Insurance Co and International Assurance Co. Many more similar mergers are expected.

The Insurance Department believes that one of the benefits to emerge over the past five years is tighter enforcement of regulations on the industry. Insurers are required on a regular basis to report to the department on their investments. Auditing standards have been improved along with other aspects of corporate governance.

To prepare for future changes, the department and the Securities and Exchange Commission are working on ways to allow insurers to launch brokerage services, widening their business scope. The department is also working to stop firms poaching employees from each other, a problem that has grown rapidly amid increased competition and rewards for top staff.

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