OIC tries to help insurers offset poor bond yields

OIC tries to help insurers offset poor bond yields

The Office of the Insurance Commission (OIC) wants to ease the liability adequacy test (LAT) calculation for life insurance companies to alleviate the impact from falling bond yields on businesses.

A final conclusion is expected in the third quarter, said Nusara Banyatpiyaphod, president of the Thai Life Assurance Association (TLAA).

Life insurers will also explore other options, including revising the guaranteed return rate for policyholders and focusing more on unit-linked products to mitigate the impacts, she said.

The persistent low-yield environment has pressured insurers to seek higher-yielding investments to match the guaranteed return rate, while a 25-basis-point cut in the policy rate by the Bank of Thailand in August led to yields for long-term bonds dropping and an inverted bond yield, a condition in which the two-year bond yield is higher than the 10-year yield.

Long-dated bonds typically dominate the largest slice of insurers' investment portfolios.

Given the fall in long-term bonds, life insurers are required to set aside additional capital to comply with the second phase of the risk-based capital framework and the new international financial reporting standards.

OIC secretary-general Suthiphon Thaveechaiyagarn said the office and the TLAA have jointly set up a working panel to amend the calculation formula for the LAT and are closely watching the inverted yield curve phenomenon.

"The formula adjustment is based on external factors, and interest conditions will help protect insurers from liquidity squeeze problems," he said.

According to the current LAT, insurers are required to record a gap between liabilities calculated based on LAT and provisions as expenses in the event that the former exceeds the latter. The purpose of the LAT is to verify the adequacy of provisioning for life insurance.

Apart from the LAT's formulation adjustment, Mr Suthiphon said the life insurance sector needs to improve in other areas such as business model adjustment, product improvements to focus more on life and health coverage, and adoption of technology and innovations to support business operations.

"Foreign life insurance companies survive amid the low-interest rate environment," he said. "I think Thai life companies have the potential to adapt and survive as well."

Pichet Jiaramaneetaweesin, president of the Society of Actuaries of Thailand, estimated that if long-dated bond yields dip by one percentage point, the Thai life insurance sector could plunge to a loss of 150-200 billion baht in order to comply with the new financial reporting standards.

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