Learning Center
Plans & pricing Sign in
Sign Out

Thai insurance market


Thai insurance market

More Info
									             DECEMBER 2003


                                   Thai insurance market
                 Inside:           In the second edition of our new quarterly series of Focus:
                                   Insurance & Reinsurance – Asia, Lawyer Sean Cooper provides
      Foreign insurers             an overview of the legal framework applicable to insurance in
                                   Thailand and sets out the issues facing foreign insurers planning
                                   to operate in Thailand’s insurance market.
      The nature of the            Since the Asian economic crisis in 1997, Thailand’s insurance industry has undergone
                                   significant change. Before 1997, the industry was largely closed, with only limited
                                   investment by foreign insurers. In response to the financial crisis, Thailand’s insurance
                                   regulators actively encouraged investment by foreign insurers who offered much needed
             Regulatory            capital and increased technical expertise. Because of a need for consolidation and the
            environment            weak financial position of a number of Thai insurers, opportunities still exist for foreign
                                   investors. As Thailand emerges from the financial crisis, the insurance industry is
                                   experiencing significant growth. The trend is expected to continue as public awareness
    Insurance licences
                                   of the need for insurance increases.

     Barriers to market            An industry overview
          development              Thailand’s general insurance industry grew dramatically during the early to mid-1990s.
                                   Owing to strong growth rates in the industry, especially in the motor vehicle insurance
                                   business, which averaged 25 per cent between 1992 and 1996, the number of general
        Your publication:          insurers increased as new participants sought to profit from the boom.

  If you would prefer to receive   After six years of double digit underwriting profits, the Asian economic crisis reversed
  our publications in electronic   the industry’s fortunes with two years of underwriting losses in 1998 and 1999. The
           format, please email:   dramatic impact of the crisis hastened reform of the previously closed industry. As part of     the financial bail-out offered by the World Bank and other multilateral agencies, Thailand
                                   was required to engage in extensive financial sector reform, including meeting its
                                   commitments to the World Trade Organisation to liberalise the insurance sector.

    VISIT OUR WEB SITE             Since the turmoil of the crisis, the industry has staged a recovery with premium levels
TO READ ALL FOCUS EDITIONS         growing each year since 2000, despite the impact of the events of 11 September,
                                   2001. By last year, premium levels had regained those reached before the crisis and
                                   now continue to grow steadily on the back of continued economic growth, proposed

                tax incentives and a government drive for complete           The general insurance sector is characterised by a
                coverage by compulsory motor insurance.                      large number of small- to mid-size insurers with over
                                                                             half of the 77 general insurers holding less than 1 per
                Foreign insurers                                             cent market share. This has resulted in overcrowding
                participation                                                and intense competition.
                While the influx of foreign investment in the industry        There will be continuing pressure towards
                was encouraged after the economic crisis, foreign            consolidation of small to mid-size general insurers
                insurers remain subject to both geographic and equity        as the Department of Insurance seeks to reduce the
                participation restrictions within the Thai market.           numbers of players in the industry. This is expected
                Foreign insurers may operate either as a foreign             to occur in part because of proposed amendments
                branch office or as a joint venture partner in a Thai         raising the minimum paid-up capital requirement of
                insurance company. Holders of a foreign branch               general insurers from THB30 million at present to
                office licence are restricted to operating from a single      THB300 million. It is currently estimated by industry
                location in Thailand. Foreign investment in a Thai           sources that more than half of Thailand’s general
                insurance company is limited, at present, to 25 per          insurers hold less than THB300 million in capital
                cent of shares.                                              funds. These measures, while tough for small insurers,
                                                                             should ultimately prove beneficial for the overall
                    Since the Asian economic crisis                          strength of the industry by improving capitalisation and
                                                                             strengthening the overall structure of the sector.
                    in 1997, Thailand’s insurance
                    industry has undergone                                       Because of a need for
                    significant change.                                           consolidation and the weak
                Despite these restrictions, foreign insurers currently           financial position of a number
                play a significant role in the market. This is most               of Thai insurers, opportunities
                prominent in the life insurance sector, where it is              still exist for foreign investors.
                estimated that 15 of the 26 life insurance companies
                have joint venture partners and the sole foreign branch      Due to a lack of reinsurance expertise on the part of
                licensee. American International Assurance is the            many Thai insurers, there is a significant reliance upon
                market leader, with more than a 50 per cent market           international insurers and an outflow of reinsurance
                share. High loss ratios in the years since 1997 have         premiums from Thailand. At present, there is only one
                meant that foreign investment in the general insurance       pure reinsurance company operating in Thailand.
                sector has not been as pronounced. There are
                currently five foreign branch licencees, with some 27 of      Legislative and regulatory
                the 78 general insurers having joint venture partners.       environment
                                                                             Thailand’s general insurance and life insurance
                While foreign insurers are limited by law to holding
                                                                             sectors are governed by separate legislation, namely
                a 25 per cent stake in Thai insurance companies,
                                                                             the Insurance Against Loss Act 1992 and the Life
                foreign investors have been able to obtain effective
                                                                             Insurance Act 1992. The legislative structure is similar
                control through management agreements or complex
                                                                             for both types of insurance business. This legislation
                shareholding structures. It is expected that the 25 per
                                                                             deals with both the contractual relationship between
                cent shareholding limit will be increased over time,
                                                                             insurer and consumer and the regulation of the
                initially to 49 per cent for a period of ten years, before
                                                                             insurance industry.
                the market is fully opened prior to a WTO deadline
                of 2020.                                                     The insurance sector is regulated by the Department
                                                                             of Insurance, under the control of Thailand’s Ministry
                The nature of the market                                     of Commerce. This body is charged with reviewing
                With the influx of foreign investment into the sector,        the financial standing of insurers operating within the
                Thailand’s insurance industry has begun to mature,           Thai market, in particular their compliance with capital
                with a wider range of products being offered and             requirements. In addition to the proposed increases
                improvements in basic infrastructure.                        in capital funds discussed above, the Department
has moved in the past few years to introduce new            future due to the need for further consolidation within
monitoring systems similar to those employed by             the insurance industry.
Thailand’s Securities and Exchange Commission to
                                                            While unable currently to apply for foreign branch
scrutinise listed companies. These steps impose more
                                                            licences, foreign insurers can still seek to enter the
stringent reporting requirements and greater public
                                                            Thai market through an investment in one of the
disclosure obligations on company executives in
                                                            numerous Thai insurers. As referred to above, the limit
respect of information about the financial performance
                                                            on foreign investment is presently set at 25 per cent;
of insurers.
                                                            however, that figure is expected to be raised to 49 per
The Department also plays an important role in              cent in the near future. In addition to this restriction on
the development of the industry as a whole, as it           foreign investment, 75 per cent of the directors of Thai
directly controls both the number of insurers, the          insurers must be Thai nationals.
type of product and policy wordings that insurers
may offer to consumers and the premiums that                Barriers to market
insurers may charge. The use of non-approved policy         development
documentation can result in policyholders having            In addition to the need for industry consolidation,
the option to terminate the policy with a full refund of    several issues continue to restrict development of the
premiums, or to benefit under the policy as written          industry as a whole, including:
or amended by the requirements of the Department
of Insurance. These tight controls mean that the            • limited public awareness of the need for insurance;
introduction of new insurance products — such as            • excessive dependence within the general insurance
unit-linked life insurance, which has been the subject        sector on motor vehicle insurance, which presently
of much discussion within the industry recently after         accounts for more than 40 per cent of premiums
the Department of Insurance and the Securities                written;
and Exchange Commission finalised regulations on             • limited corporate governance, risk management and
the investment of premiums for the direct benefit of           internal control systems, particularly among smaller
policyholders — can be a protracted process.                  insurers;
                                                            • inadequate service levels in the areas of insurance
Insurance licences
                                                              agency conduct and claims management;
Two classes of person are permitted to hold licences
                                                            • regulatory difficulties affecting the developments
to engage in the provision of insurance in either
                                                              of new channels of distribution (such as
the general insurance or the life insurance sectors,
                                                            • the need for improved skills on the part of Thai
• Thai companies incorporated for the purpose of              insurance staff through increased training; and
  engaging in the relevant insurance business; and          • insufficient investment in IT systems.
• foreign insurers who may apply for a foreign branch
  office licence.
                                                                While the changes made since
The holder of an insurance licence or a foreign branch          the Asian financial crisis have
licence in either the general insurance or life insurance       been significant, there is still
sector may not conduct business within the other                financial weakness in parts of
                                                                the insurance sector.
The specific requirements for persons wishing to apply
                                                            The Department has recognised the need to address
for new licences are set out in Notifications issued by
                                                            these issues and has developed a strategic plan aimed
the Ministry of Commerce as and when it wishes to
                                                            at strengthening the position of Thai insurers, before
increase the number of existing licences. In practice,
                                                            the admission of further foreign competition. The key
new sets of conditions are issued for each round
                                                            features of the plan to be implemented between 2001
of licence applications. No application for a licence
                                                            and 2006 include:
may be made until a Notification has been issued.
At present, the official position of the Department of       1 The achievement of steady growth in a competitive
Insurance is that no licences will be issued in the near      insurance industry by:

                 • enhancing systems used to monitor the financial               • improving the IT infrastructure within the Department
                   position of insurers;                                          to allow for efficient and effective monitoring of the
                 • promoting the merger of local insurers;                        industry; and

                 • amending regulations to limit restrictions on                • enhancing consumer protection mechanisms.
                   competition within the market;                               4 Development of the regulatory framework to
                 • emphasising the importance of good corporate                   meet the changing needs of the industry and the
                   governance through the development of Codes                    promotion of these developments both within the
                   of Best Practice in conjunction with the General               Department, the insurance industry and the wider
                   Insurance Association and Thai Life Insurance                  public.
                   Association; and                                             Conclusion
                 • raising service levels within the local industry to          Improvements in the regulation of the insurance
                   international standards.                                     industry and the skills base and service levels offered
                 2 Efforts to increase public awareness of the insurance        to the public by insurers should assist in further
                   industry and the benefits it can offer consumers by:          developing the recovering industry, although the pace
                 • creating a public relations office to promote the             at which these changes are implemented remains
                   concept of insurance to the public; and                      slow.

                 • strict enforcement of the compulsory motor                   While the changes made since the Asian financial
                   insurance scheme.                                            crisis have been significant, there is still financial
                 3 Improvements in the Department’s regulatory                  weakness in parts of the insurance sector. Further
                   functions to be achieved by:                                 consolidation must occur, particularly in the general
                 • transforming the Department into a fully independent         insurance market, before the full potential of the
                   regulatory authority and amending its organisational         industry can be realised. Opportunities for foreign
                   structure;                                                   insurers still exist, as further investment and technical
                                                                                expertise are required to strengthen the market. While
                 • revising the Department’s working practices to
                                                                                the number of policyholders in Thailand is currently low
                   improve both the efficiency and transparency of its
                                                                                in comparison with western countries, this represents
                                                                                great potential for continued growth in the coming
                 • strengthening regulatory and monitoring skills of
                                                                                years if the strategic goals identified by the Department
                   Department staff;
                                                                                can be met.

                     For further information, please contact:

                     Seamus Cornelius                          Simon McConnell                           Oscar Shub
                     Partner, Shanghai                         Partner, Melbourne                        Partner, Sydney
                     Ph: +86 21 6481 2828                      Ph: +61 3 9613 8543                       Ph: +61 2 9230 4305

                     Andrew Buchanan                           Jenny Thornton
      Sydney         Partner, Brisbane                         Partner, Perth
     Brisbane        Ph: +61 7 3334 3244                       Ph: +61 8 9488 3805
Port Moresby
 Hong Kong
     Bangkok     Have your details changed?
Phnom Penh       If your details have changed or you would like to subscribe or unsubscribe to
                 this publication or others, please go to
        8202     or contact Barbara Leis on +61 7 3334 3371 or email      

To top