A growing chorus of Thai insurers are bracing for the impact of a tougher risk-based capital framework but as long as bond yields stay low it is unlikely to significantly dampen demand for risk assets such as listed company shares, thinks one leading player.

Indirect property investments could yet get a boost though.

“[RBC2] will change the rules of the game ... [and] is not friendly for risk assets,” Sukkawat Prasurtying, chief investment officer of AIA Thailand, told delegates at AsianInvestor’s Thailand Global Investment Forum in Bangkok earlier this month. "In the past, we needed to set aside 16% as a risk-capital charge for equities but [under the new regime] we will need to set aside between 25% and 35%."

The higher capital charge for equities is intended to compel insurance companies in Thailand to set aside more capital as a buffer against potential market volatility.

But Sukkawat joins executives from other Thai insurance groups such as FWD Thailand, Krungthai Axa Life and Muang Thai Life in expressing concern about the looming higher capital levies and the subsequent need to eye alternative investments.

An RBC framework was initially introduced for insurers in Thailand in September 2011. Draft proposals for RBC2 were then released in April 2016 by the Office of Insurance Commission and market tests were conducted over the next 18 months to see how insurers would fare under the new regime.

RBC2 is expected to undergo a final review before year-end, when it is expected to be approved by the OIC, and the new regime could come into force by the second quarter of 2019, thinks Sukkawat. Currently, none of the capital risk charges have been finalised.

Apart from equities,bond instruments also face slightly higher charges. “Credit risk capital charges are expected to go up to between 0% and 13.8% from 0% to 12% now,” Thanasit Utamephethai, associate director for Apac insurance at Fitch Ratings, told AsianInvestor. 

He noted that the persistently low-yield environment had driven several insurers to add more risky assets to their portfolios in recent years, such as higher-yielding corporate bonds and equities. 

THE REIT STUFF

Based purely on the risk charges that apply, Fitch expects insurers to make more investments in real estate infrastructure trusts and infrastructure funds because these are less risky than equity investments, a note issued by Fitch at the start of this year noted.

Real estate investment trusts (Reits), in particular, could be preferred over direct property investments, noted Clement Bonnet, principal and consulting actuary at Milliman, an actuarial consultancy.  

“While the capital charge on real estate investment trusts will remain the same at 16% under both regimes [RBC1 and RBC2], the risk-capital charge on direct property investments will climb from 16% to 19%, with potential additional requirements from the regulator,” he told AsianInvestor.

Milliman believes the new framework is likely to increase capital strains on life insurers with large asset/liability gaps as well as those with a material portion of their investments in property and equities.

Notwithstanding higher capital charges, Sarangsri Limparangsri, head of equity and alternative investments atThai Life Insurance, expects the insurer to continue investing in relatively riskier assets, he said at the AsianInvestor event.

That's a sentiment shared by AIA's Sukkawat: "We expect the challenging low-yield environment to be with us for a while. Insurers will face competition as consumers compare our products with other products. We need to price for competitive returns to attract customers."