Thai life insurers face greater strain from lower returns

Written by Adam Cadle

30/01/2020

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 has said.

The ratings agency said however that it expects 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.

Domestic life insurers are expected 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-Q319 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, Fitch said.

Fitch added that it expects 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.

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