Thai Insurers - Subdued Investment Rerurns

Thai life insurers' capitalization may face greater strain from investments in riskier assets as they have increased their holdings of higher-yielding assets to counter a prolonged period of subdued investment returns.

However, it expects their capital adequacy ratio to stay steady after the adoption of a new capital regime later this year, supported by a reasonably strong capital position with a relatively large low-risk investment portfolio and timely adjustment of business strategy.

The agency expects domestic life insurers to gradually ramp up their risky asset investments to offset a decline in investment returns on government bonds.

Various insurers have also developed real estate projects such as office buildings and health-related facilities to generate more favorable and stable income flows. As well, the industry has also moved its investments into corporate bonds and higher-yielding instruments.

Corporate debentures accounted for 22% of the total investment assets of the country's life insurers at the end of the third quarter of 2019, according to the Office of Insurance Commission. Over 10% of their portfolios were in stocks and real estate trust units. Other investible assets probably include foreign securities, policy loans and direct investments in real estate properties.

Domestic life insurers is expected to set aside stronger capital thanks to stricter factor-based market risk charges in the second phase of the country's risk-based capital [RBC] framework.

The risk charges for equity investments in accredited stock exchanges may rise to a range of 16-50% from 16-20% in the first phase, the firm said. Risk parameters for property investments will rise to between 9% and 19% from a range of 4-16%, while the charge for commodity investments will increase to 50% from 15%.

Interest rate risk will also be assessed at a more granular stress level with greater detail. The changes remain in line with the results of a market impact test in 2017, which highlighted market risk as having the largest impact on the industry's capital adequacy ratio.

Local life insurance industry's capitalisation will not deteriorate significantly, even though insurers with larger risky-asset holdings will be prone to a thinner capital position under the more stringent new capital rules. Rising asset risks should be partly limited by having the main portion of the industry's invested assets in high-quality, fixed income securities.

The local life insurance industry has consistently maintained more than 80% of its total investments in government and corporate bonds since 2015. The industry's capital adequacy ratio of 387% under the current RBC framework at the end of the third quarter of 2019 is well above the regulatory minimum of 140%.

Prudent business strategies should allow insurers to better optimise their risk-return positions without sacrificing a solid capitalisation level. For instance, a reduced reliance on high-guarantee benefit savings-type insurance policies as well as calibration of sales compensation and operating expenses will relieve the profit pressure on companies' investment activities.

Cautiously expanding long-term assets such as property will also help insurers improve their asset-liability mismatch profile, curbing their interest rate risk charges and alleviating capital pressure from the stricter capital framework.