The Office of the Insurance Commission (OIC) is poised to allow insurance companies to invest in non-investment grade bonds to seek higher investment returns amid a struggling economy, says a market source who requested anonymity.
The amendment to the regulation is expected to be considered during the OIC's board meeting this week.
At present, insurance companies are required to invest in only investment-grade bonds that receive a credit rating of 'BBB' or higher from Moody's and Standard & Poor's (S&P).
"Insurance companies are required to sell their bonds if the credit rating of those bonds is downgraded to below BBB, which is considered non-investment grade," the source said.
The current regulations also apply to bond mutual funds.
If the credit rating of some bonds in the funds are downgraded, insurance companies must sell their portion in those bond mutual funds as well.
Institutional investor sell-offs can drive the prices of these funds down as they are the major shareholders.
Following the latest amendment, the source said insurance companies will not be forced to sell bonds or bond mutual funds that are rated as non-investment grade assets.
Investment in non-investment grade bonds will be recategorised as risk investment, the same category as private equities.
Total risk investment must not exceed 5% of insurance companies' total investment assets.
For bond mutual funds, the total value of non-investment grade bonds must not exceed 10% of the net asset value.
The source said this amendment should help increase the competitiveness of Thai insurers because it provides a variety of investment opportunities that are suitable to their customers' risk profiles and obligations.
This amendment is also a response to the current economic conditions and the global investment environment, in which interest rates have remained low.
Tommy Pichet Jiaramaneetaweesin, president of the Society of Actuaries of Thailand and Actuarial Business Solutions, said insurance companies with a high capital base and high capital adequacy ratio (CAR) (exceeding 240%) will benefit from the revision as they can invest their capital for higher returns.
"CAR normally declines when an insurance company invests in high-risk assets, but it is worth the investment if it can offer higher returns," he said.
The prices of non-investment grade bonds in the secondary bond market could increase after the amendment, Mr Tommy said.