The unsuccessful attempted takeover of American International Assurance (AIA) by the UK’s Prudential Insurance (Pru) in early 2010 focused investors’ attention on the important growth prospects in Asia’s life insurance industry. While this would have translated into a minor player overtaking a major one, unlikely given Pru’s negligible presence, it reveals the interest markets such as Thailand represent for life insurers. Indeed, the Thai life segment has been driving overall sector growth for the past decade on the back of bancassurance’s expansion and product innovation.
STRONG PLAYERS: Relatively unscathed by the severe floods of 2011, life underwriters saw a drop in sales only in flood-affected areas rather than a surge in claims. The low penetration level for life, which stood at 2.6%, largely insulated the industry from high losses. Growth for the segment fell to 10% in 2011 from 15% a year earlier, yet global reinsurer SwissRe expects 7% average annual growth over the next decade, close to double its forecast for non-life.
More concentrated than the non-life market, with 24 companies (and one reinsurer), the life segment has seen its share of movement in recent years as leading underwriters position themselves to take advantage of future growth. Premiums are more concentrated among the top 10 underwriters, all of whom generate in excess of BT2bn ($63.8m) in annual revenue and command a combined 94.5% share of the market; the top five accounted for 74% of the market in 2011. The two market leaders, AIA and Thai Life, are independent underwriters, while the other firms are affiliated with leading local banks – Muang Thai Life (KasikornBank), BLA (Bangkok Bank) and Siam Commercial Life (SCB). Twelve foreign groups compete directly on the Thai life segment, five of which are in the top 10 players.
BANCASSURANCE ROLE: While the nation’s 500, 000-strong agency force still plays a key role on both retail and corporate segments, the rapid growth of bancassurance has rapidly reshaped the market’s landscape. The historic heavyweight in the sector, AIA has seen a long decline in its market share, falling through the 50% mark to reach 30% in 2011. While this drop was in part due to an over-reliance on its agency force, the largest in Thailand at close to 100,000, AIA made several non-exclusive bancassurance deals in recent years while also counting on alternative channels such as telemarketing. The break-even point for many life policies is usually two to three years, so underwriters use telemarketing to generate cash flow on policies with shorter break-even periods like personal accident.
Capitalising on this opening in the market, banks have made a big push in the life segment: six of the top-10 underwriters are part of larger banking groups. SCB bought New York Life’s stake in their joint venture in 2011 for instance. New opportunities have also been emerging, with the Netherlands’ ING seeking to sell its life business alongside its stake in TMB Bank in early 2012. While some such as ING are seeking to exit the market, keen interest on the part of foreign insurers means competition is unlikely to subside. Samsung has moved to rejuvenate its first insurance business overseas (Siam Samsung Life Insurance), a joint venture of equal parts with Thanachart Bank and Thailand’s Saha Group, a large industrial conglomerate. While the life insurer lags as 19th largest, fresh investment proves the interest of foreign players.
The market may be too crowded, with the examples of neighbouring Malaysia and Singapore having an optimal number of 10 to 12 companies. But while any impetus for consolidation from the implementation of risk-based capital requirements (RBC) is yet to be seen, competition will increasingly focus on quality of service, product innovation and distribution strategies.
SHIFTING FROM GUARANTEED: While the pricing is less regulated in life than in non-life, the market as a whole has remained one of guaranteed products, in contrast to other markets in the region. While Indonesia now relies on investment-linked (unit-linked) products, whereby insurers pass on the investment risk to clients, Thai clients and distributors (both agents and brokers) expect underwriters to shoulder the burden of guaranteeing returns for life policies. This has only exacerbated the industry’s asset-to-liability mismatch (ALM), given the insufficient number of longer-maturity financial instruments. The lion’s share of life products (84.5%) are ordinary individual life policies, with group life accounting for much of the rest (11.3%). Meanwhile, industrial policies, at 2.67% of the market, present opportunities for niche players such as Ocean Life, which has cornered provincial markets in the north and north-east in industrial policies.
There have been some launches of non-guaranteed, universal and unit-linked products. AIA and Muang Thai Life introduced unit-linked products in 2009. Underwriters like Ayudhya Allianz CP Life sell non-guaranteed products through agencies and non-guaranteed savings products through telesales, but premium growth from these channels has lagged that of guaranteed life products through bank channels for instance.
BONDS’ ROLE: Given low bond yields and uneven returns from equities in recent years, underwriters have worked to convince either agents or clients of the benefits of risk-taking in an environment where the market offers 7-8% guaranteed returns on ordinary life policies. Another challenge has been the single licence for agents to act as financial planners. The Securities and Exchange Commission hopes to return to the old system of three separate licences, given the low pass rates (below 25%) for the single licence certification. This should allow for higher certification rates and therefore greater access, in provincial markets in particular.
Insurers do not expect unit-linked policies to have traction on the Thai market if they do not contain an element of guaranteed returns. These high guaranteed rates have forced underwriters to confront high ALMs, given bond yields of 3% to 4% on average. The spread of life policies over bond yields has contributed to the attractiveness of these policies for the Thai middle class. “As long as bond yields remain low in coming years life insurance products will offer more profitable opportunities for saving,” Donald Carden, the president and CEO of Siam Samsung Life Insurance, told OBG. “Underwriters have been selling a lot of single premium 10-year policies for instance.”
BRIDGING THE ALM: While lacklustre returns on the financial markets and the lifting of deposit guarantees for Thai banks in 2012 will contribute to the attractiveness of life policies as savings vehicles, many of the larger underwriters continue to be plagued by high ALMs. Although bond maturities have lengthened, with 30-to 99-year bonds being floated, supply has continued to lag demand from the insurance sector. Investments in property continue to compensate somewhat, with AIA launching another major development of more than $300m in 2011, for example, but the industry is looking for some relaxation of investment rules to allow for a closer fit. Ocean Life has also adopted a non-conventional asset allocation strategy, earmarking a higher portion of investments to property development and investments in mortgages.
The average duration of life insurance portfolios remains quite long in Thailand, at around 11 years; it stands at 16 years for AIA. While the RBC rules will eventually force a closer match, all underwriters have passed the regulator’s stress tests in 2011 at the existing weight of 120% for life. Should bond yields remain low, profits in the life segment will be under pressure. The OIC and central bank have announced plans to relax curbs on foreign asset allocation by insurance firms.
In the longer term, a shift to non-guaranteed policies should help bridge the ALM. Yet the lack of tax deductibility for unit-linked policies has contributed to their lagging behind the ballooning mutual fund industry in recent years. By contrast, tax deductions of up to BT200,000 ($6380) a year can be claimed on guaranteed policies, although only an estimated 10% of insured Thais claim the maximum amount.
Despite the fact that the Thai market has yet to make the shift towards investment-linked life insurance, its prospects as one of ASEAN’s most dynamic life markets remain strong. Competition is set to intensify among a number of (mostly bank-affiliated) life insurers and the world’s leading underwriters. Should bond yields remain low, life insurers will both benefit from demand for the higher returns offered by life products and suffer from the continued assets and liabilities mismatch.
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