Standard & Poor’s Ratings Services announced that it has assigned a stable outlook to the financial strength of Thailand’s general insurance sector, based on “the industry’s satisfactory financial profile, as evident from its five-year average combined ratio of 89 percent, and adequate overall operating profitability, which is partly attributed to tariffed rates on small and numerous small personal insured risks, as well as support from its net investment income.”
S&P’s noted that Thailand’s “general insurance industry is characterized by predominantly short-tail insurance business, a satisfactory liquidity position, and good quality investment assets by domestic standards.” However, the rating agency concluded that the country’s “nonlife sector as a whole remains overcrowded and overserviced by its numerous participants, and is likely to face consolidation as a result of new capital requirements by the industry regulator, the Insurance Department.”
The report indicated that, although Thailand benefits from minimal catastrophe risk, the Thai nonlife industry hosts more than 70 nonlife insurers, that has resulted in intense competition, particularly among the small to midsize general insurers. “More than one-half of general insurers each has less than 1 percent market share,” said S&P’s.
“During the 1990s, owing to strong growth rates in the industry, especially in the motor business, which averaged 25 percent between 1992 and 1996, the number of general insurers increased to take advantage of the boom,” it continued. “The Asian economic crisis, however, changed the fortunes of the industry, leading to two years of underwriting losses in 1998 and 1999 after six years of underwriting profits. Since the crisis, the general insurance sector has managed to stage a recovery, and in 2001, the industry’s underwriting performance rebounded into the black, on the back of strong growth of about 13 percent in its direct premium income. This growth outpaced the country’s economic expansion of 1.8 percent for the same year.”
S&P also noted that “While premium growth for the industry had been gradually recovering, the events of Sept. 11, 2001, had a profound impact on the industry. In a sector that was substantially reliant on foreign reinsurers, the fall-out of Sept. 11, 2001 resulted in shrinkage of reinsurance capacity, lower commissions, hardening rates, and tighter terms and conditions. Consequently, nonlife companies increasingly realized that it was essential to underwrite business for profitability rather than market share, irrespective of the level of risk or the adequacy of pricing.”
The rating agency foresees the Thai nonlife industry maintaining “stable low double-digit growth rate in gross premium income,” which will be driven mainly “by proposed tax incentives, continued economic growth, and the government’s drive for complete coverage for compulsory motor insurance.”
There will be continuing pressure towards consolidation in the industry, however, affecting small and midsize general insurers in particular, who “are expected to face significant challenges to their balance sheets and profitability due to their lack of economies of scale.” Thailand’s Insurance Department is seeking to “reduce the number of players within the industry,” S&P’s stated, and has proposed to raise the minimum paid-up capital to Thai baht (THB)300 million (US$7.1 million) from THB30 million, as well as to maintain a solvency margin of 20 percent of net premiums. These requirements, if adopted, would therefore apply mainly to smaller companies.
S&P’s also noted that due to the “prevalent difficult investment conditions, the ability to rely on net investment income to provide an overall operating profit for such general insurers has been vastly curtailed.” It said, “the regulator’s proposed measures, while tough, will prove beneficial for the overall financial strength of the industry, in terms of enhancing its capitalization and improving the inherent structure of the sector.”
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