Economic Update

Published 31 Mar 2017

Reforms lifting foreign ownership ceilings may prompt a wave of overseas investment in Thailand’s insurance sector, though the industry’s highly competitive environment could also see smaller operators come under pressure.

Opening doors

On January 18 the Ministry of Finance (MoF) published amendments to regulations governing foreign participation in the Thai insurance sector, further opening the industry to overseas investment.

Under the new regulations, foreign companies may control 100% of the shares of a domestic insurance firm, up from the previous ownership cap of 49%, while non-Thai citizens can now comprise more than half of a company’s board of directors.

However, overseas businesses looking to take advantage of these extended ownership rights will still need to seek approval from the MoF, whose final decision will be determined by strict fiscal criteria.

Under these requirements, companies looking to acquire a domestic insurer must either be an insurance firm or a business that is clearly connected with the industry. In addition, the company must have been operating in the insurance sector for a minimum of 10 years, be financially stable and have been awarded a credit score of at least “A” by an internationally recognised ratings agency.

Any foreign company seeking MoF approval to enter the local market must also be able to demonstrate it has a sound business operation and technology transfer plans for the development of its insurance business in Thailand, as well as the financial capacity to support and grow its Thai-based operations.

If approved, a foreign operator must be able to maintain available capital of BT1bn ($28.3m) if it is a non-life insurance provider and at least BT4bn ($113.4m) if it underwrites life insurance policies.

Possible divestment

Foreign appetite for Thai insurance assets could be whetted by the planned sell off of underwriting operations by local lender Siam Commercial Bank (SCB).

In late January Thailand’s third-largest bank announced it was seeking a buyer for its life insurance arm, having previously sought to sell off a 49% stake in its insurance unit last year.

According to media reports, a number of international insurers are considering making a bid, including Hong Kong-based AIA Group, Canada’s Manulife Financial and Prudential from the US.

Currently, SCB Life is ranked fourth in the domestic life insurance market, with estimates putting the company’s book value at around $3bn, though it has yet to be announced whether all or only part of the firm’s shares will be put up for sale.

Room to grow

Insurance penetration in Thailand remains relatively low at 7.84%, according to data from the Office of Insurance Commission (OIC). This is well below rates found in move advanced regional economies such as Hong Kong and Japan, which have rates of around 15% and 12%, respectively, according to the latest figures from global reinsurer Swiss Re.

However, rising disposable incomes – which increased by 73% between 2005 and 2014 to BT12.8trn ($345.8bn), according to the Office of the National Economic and Social Development Board – suggest there is potential for growth.

Solid sales have already been recorded in the life insurance segment, with premium totals reaching BT568bn ($16.1bn) in 2016, up 5.7% on the previous year, when 6.8% growth was posted, according to the Thai Life Assurance Association – the state regulator for the life insurance segment.

Changes on the horizon

While the opening up of the sector to full foreign ownership could boost sales in both the life and non-life subsectors, it may also put pressure on domestic operators, with the potential for mergers and acquisitions increasing as larger companies move to expand market share at the expense of smaller rivals.

The life insurance segment in particular could prove challenging for smaller insurance outfits looking to expand operations, with the seven largest life insurance companies currently holding 80% of the market.

“While this competitive edge can offer advantages to end users, the rivalry and pressure to keep policy prices low can erode margins for smaller, less well capitalised insurers,” Suthiphon Thaveechaiyagarn, secretary-general of the OIC, told OBG. “However, this could change with the advent of financial technology, which could level the playing field for smaller companies. For example, small companies can create new distribution channels via smartphone applications to reach customers directly without paying any commission.”

Such tools will shorten the distance between clients and insurers, and help drive stable growth in the industry, while also reducing costs and easing pressure on smaller operators in what is set to become a much larger and even more competitive market, according to Suthiphon.