Thailand’s life insurers want to move more into alternatives, equities and foreign assets, but they are worried about charges that will be levied—most notably for stocks—under looming new risk-based capital (RBC) rules. 

Local insurance firms, such as FWD Thailand, Krungthai Axa Life and Muang Thai Life, are eyeing new types of investments amid the prevailing low-yield environment (with Thailand’s benchmark interest rate at a near-record low of 1.5%, where it has been since 2015).

But they are holding off on big changes to their allocations until they have certainty on the charges for certain assets, which will affect how much capital they must hold.

The industry’s watchdog, the Office of Insurance Commission (OIC), is expected to finalise its second generation of RBC rules, known as RBC 2, in early 2018. They will then gradually come into effect over several years. This comes after the OIC last year completed its Qualitative Impact Analysis 2 (QIS 2) to assess the impact of certain risk charges on insurers’ portfolios at different confidence levels (see table below). 

Waiting game

Parin Pattaparol, chief investment officer of Krungthai Axa Life, told AsianInvestor: “The OIC has not communicated its decision on these [risk charge] issues yet or provided feedback on the QIS 2 results.

“We can’t plan allocations until we know the answer,” he noted. “That’s why we are keeping our allocations fairly steady, though we are increasing our exposure to equities.”

The proposed risk charges for listed equities (both local and foreign) are insurers’ key area of concern, but others include the potential levy for local real estate investment trusts (Reits). The Thai Life Insurance Association (TLAA) raised such issues in proposals it submitted to the OIC in mid-2017, noted industry participants.

Thai insurers are generally looking to increase their stock holdings, despite the planned rise in the capital charge for listed equities from 16% to 25% or 35%, and even higher for certain markets (see table). But their approaches vary, seemingly testament to the uncertainty over the incoming rules.

RBC 2 RISK CHARGES TESTED UNDER QIS 2 
(At confidence levels 95%, 97.5% and 99.5%)
Equity type 95% 97.5% 99.5%
Thai listed stocks 25% 30% 35%
Stocks in developed markets designated* by the Thai Securities and Exchange Commission (SEC) 25% 30% 35%
Stocks in markets not designated by Thai SEC 35% 40% 45%
Infrastructure funds, Reits and property funds filed to SEC and investing in Thailand 16% 18% 20%
Others (such as private equity) 50% 60% 70%
 
*Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Luxembourg, Netherlands, New Zealand, Norway, Portugual, Singapore, South Korea, Spain, Sweden, Switzerland, UK, US.

Equity charge concerns

Hong Kong-based insurer FWD’s Thai business will start investing in offshore equities in 2018, initially via exchange-traded funds (ETFs) and using the MSCI All World benchmark.

But FWD is worried that equities might be prohibitively costly.

“As a firm we are very supportive of RBC regimes—we think they create the right behaviour among market participants,” said Paul Carrett, Hong Kong-based group CIO at FWD. “But we don’t want to see a [risk charge] number that’s too high, because that stops us making investments we should be making.”

Indeed, it could cause insurers to cut their exposure to local equities, noted Peamphanyapa Phanyapavee, executive vice president of investment at FWD Thailand.

Krungthai Axa Life's Parin echoed this sentiment. “The equity risk charge is a concern for us—it is set to rise from 16% to 25% to 35%, depending on the confidence level,” he said. “That’s a lot higher than the charge for infrastructure funds and Reits, which will remain at 16% at the 95% confidence level.”

Parin also argued that the charge for local Reits should be lower. Based on Krungthai Axa’s analysis, he said, the beta of local Reits is 0.5, assuming the beta risk of the local SET index is 1. That means the risk charge for local Reits should be 12.5%, not 16%, given that the equity risk charge at the 95% confidence level is 25%, he noted.

What’s more, added Parin, infrastructure funds should not be classed in the same ‘bucket’ as Reits and property funds, because infrastructure is an important issue for Thailand. “So the risk charge should be lower than the charge for property and Reits, because infrastructure is low-risk and has a steady income stream.”

Another issue Parin raised concerns the MSCI equity benchmarks. The OIC has proposed a list of indexes—including the Thai stock index and various others—that will attract a lower equity risk charge of 25% (see table). However, the list does not include MSCI benchmarks, he said, “but we feel it should include the MSCI All World index”.

Eyeing segregated mandates

Concerns over charges for holding stocks have led one local insurer—one of the 10 biggest local players—to consider issuing separate offshore equity mandates. It does not think it is worth investing in foreign stocks at present because of the planned increase in the risk charge, said an executive familiar with the firm, who asked not to be named.

The company previously invested in foreign equity ETFs, but these vehicles are treated as unit trusts and so do not have diversification benefits under RBC 2, making them less capital-efficient, the unnamed executive told AsianInvestor. Instead, she added, the insurer is considering buying overseas equities via separate accounts run by offshore managers, which may be treated more favourably.

For its part, Muang Thai Life, the second biggest local insurer by assets, intends to review its strategic allocation once the rules are finalised, including assessing how much more to put into stocks and higher-yielding bonds. 

Hence international fund houses are keeping a closer watch on potential business to emerge from Thailand's insurance industry.

An extended, in-depth feature about how Thai insurers are rethinking their asset allocations appears in the December/January issue of AsianInvestor magazine.

In addition, AsianInvestor will be hosting its fifth Insurance Investment Forum in Hong Kong on March 1. For more details, contact Terry Rayner via email or on +852 3175 1963.