Bangkok-based Muang Thai Life Assurance is eyeing further investments overseas and in alternative assets, but is awaiting industry deregulation before it can proceed, AsianInvestor has learned.

The wait may not be too long, as local insurers are in talks with the Office of the Insurance Commission (OIC) about expanding investment options, said Sutee Mokkhavesa, senior executive vice president of risk and strategy at Muang Thai Life.

Of the firm's $10 billion in assets under management, more than 80% is in domestic fixed income – mainly sovereign bonds – and the rest in equities and real estate. It has nearly 10% in offshore markets at present, including equities and fixed income.

Thai insurance firms can only invest up to 15% of their invested assets oversea, and cannot buy alternative assets such as hedge funds or private equity either onshore or offshore. They can, however, allocate to domestic infrastructure and real estate. 

This is in contrast to the situation for certain other Asian markets, such as China, where insurers have been increasing their allocation to alternatives

Domestic insurers have been calling for an industry liberalisation for some time, and the OIC is seriously considering it now because of the prolonged low-interest-rate environment, Sutee told AsianInvestor“The industry has urged the OIC to deregulate so that we can better diversify the portfolio since the Thai fixed income market lacks sufficient breadth and depth,” he noted.

Insurers face several challenges, foremost being the low yields available from sovereign debt.  Thai insurers allocate about 80% of their assets to domestic fixed income, with most (some 70% of total AUM) in government bonds. This has become problematic since last year, because while local government have a zero credit risk charge in respect of capital reserves their bonds yields are very low and they only offer relatively short durations, which do not match insurers’ long-term liabilities.

The lack of duration is the other major issue. Only recently did the government come up with a 50-year bond, added Sutee. “We need a lot of longer-duration bonds,” he said. As the interest rate drops, our liability shoots up faster than our assets.”

He pointed to recent initiatives by Thailand’s Securities and Exchange Commission, which is working towards allowing Thai high-net-worth individuals to invest in alternative assets and offshore markets.

“It’s rather counter-intuitive that HNWIs can invest in these asset classes, but institutions cannot,” noted Sutee. “We are sophisticated investors; our firm has over 30 investment professionals. If we are to be governed by the risk-based capital regime, then it should imply that if you have sufficient capital to take on investment risk, you should be allowed to proceed.”

Muang Thai Life would initially invest in alternatives through external asset managers, as it does for offshore equities, said Sutee.

Thai insurers are preparing for the implementation of risk-based capital 2 (RBC 2), which will be more comprehensive, more consistent and more onerous than RBC 1. RBC 2 will update the calibration on the current risk charges and will also include operational risk within the calculation for Total Capital Required.

Sutee said Muang Thai Life would revise its strategic allocation to reflect the new RBC 2 requirements. 

“The changes in the risk charges of RBC 2 will likely change the risk-adjusted return on required capital for many asset classes. Only when the full quantitative impact study [QIS] for RBC 2 has been completed will we know the optimal asset mix,” he noted. The QIS will assess the potential impact of the proposed changes on the industry. 

The Thai regulator is likely to wait until the Monetary Authority of Singapore has implemented RBC 2  before implementing similar requirements in Thailand, he added. MAS's target implementation date is January 1, 2017.