Fitch Ratings: Thai Life Insurers Face Challenges from Lower Returns

Stocks and Financial Services Press Releases Thursday January 30, 2020 10:56
Bangkok--30 Jan--Fitch Ratings

Thai life insurers' capitalisation 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, Fitch Ratings says. However, we expect their capital-adequacy ratio to stay steady after the adoption of a new capital regime later in 2020, 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 developed real-estate projects such as office buildings and health-related facilities to generate more favourable and stable income flows. The industry has also moved its investments into corporate bonds and higher yielding instruments. Life insurers' corporate debentures accounted for about 22% of total investment assets by end-3Q19 with over 10% in stock and real-estate trust units, according to Thailand's Office of Insurance Commission. Other investible assets probably include foreign securities, policy loans, and direct investments in real-estate properties.

We expect domestic life insurers to set aside stronger capital due 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 16%-50% from 16%-20% in the first phase. Property investments' risk parameters will rise to 9%-19% from 4%-16% while that of commodity 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 for the next capital framework.

Fitch thinks the local life insurance industry's capitalisation will not deteriorate significantly, even though the 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. Thailand's 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 end-3Q19 remained much higher than the regulatory minimum of 140%.

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

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