Thailand's Office of Insurance Commission (OIC) expects to implement the second phase of an enhanced risk-based capital (RBC) framework for life insurers in the kingdom in 2019. The changes include the introduction of an operational risk charge and revisions to existing risk parameters. The regulator conducted two rounds of market testing in 2016 and 2017 to assess the impact of the proposed new regime on local life insurers.
The market impact test in 2017 found that the life industry's CAR was 342% under the proposed RBC regime using a 95% confidence level for the risk-based capital calculation, which will likely be the level implemented in 2019. This level of CAR is little different from the CAR assessed under the existing RBC framework. However, the test in 2017 found that there would be significant pressure on the industry's CAR if stricter standards are applied. Fitch and other market participants expect the confidence levels to be raised to 97.5% or 99.5% in the future.
The testing in 2017 also found that higher risk charge parameters associated with market risk would have the largest impact on the industry's CAR if the new regime were implemented. The proposed revisions include an increase in equity risk charge to 25%-35% (16% under the existing framework) to compel insurance companies to set aside more capital as buffer against potential market volatility.
Individual insurers with more risky investment positions than the industry average, with all other things being equal, would end up with weaker solvency positions than those suggested by the market impact tests once the new capital framework is implemented.
The persistently low-yield environment has driven several insurers to add more risky assets, such as higher yielding corporate bonds and equities to their portfolios. In addition, life insurers could increase their holdings in alternative investments, such as real-estate investment trusts (REIT), infrastructure funds, syndicated and collateralised loans, or off-shore investments. Based purely on risk charges that apply, Fitch expects insurers to make more investments in REIT and infrastructure funds because these are less risky than equity investments.
However, the agency expects local insurers to tread cautiously as they balance the prospect of better investment returns against the additional capital requirements of the forthcoming RBC framework. This is particularly so if yields remain low while the regulator seeks to improve supervision of the local insurance industry towards international standards, including refining risk charges and increasing capital requirements.