Thai insurers need to be more aware of equity market risks as their regulator moves to tighten risk-based capital rules, although this will present asset managers with opportunities, an AsianInvestor forum heard. 

With non-life insurers in the country allocating up to 60% of assets to equities, a stock market crash would hurt them badly, stated Paul Melody, director of consultancy Towers Watson's life insurance practice. It comes as the Thai insurance regulator looks to tighten risk-based capital rules.

But Melody stressed at AsianInvestor's Insurance Investment Forum in Hong Kong that this would provide opportunities for asset managers, as insurers look for specialists to help invest their assets.

He suggested the biggest challenge was to convince Thai insurers that equity markets could fall after the strong performance of the domestic market in the years following the global financial crisis. The value of the benchmark SET index has increased by around 350% since hitting a low of 431.5 in 2009;  last Friday it closed at 1,615.89. 

"[Thai insurers] absolutely believe there is only one direction [the stock market] can go," Melody said. "[Non-life insurers] have said to me, ‘Why would we ever get rid of [equity holdings]? It’s never going to be a problem.'”

Melody highlighted turbulent rides the Thai stock market had suffered in recent decades, tumbling 70% in 1997 as the Asian financial crisis hit, followed by a 50% fall in the midst of the global financial crisis of 2008. 

He said that much of the problem stemmed from loose risk-based capital requirements that required just 16% of every dollar invested in equities by an insurer to be backed up by cash reserves. 

But in line with global trends, the Thai insurance watchdog, the Office of Insurance Commission (OIC), is now looking to implement phase two of its risk-based capital framework. The OIC has been conducting the final round of a consultation on a rule change since November last year. It is not clear when a decision will be made, but it is expected to be this year.

One OIC proposal would see insurers forced to prepare for a 1-in-200-year event, such as another global financial meltdown. This could see insurers in future needing to hold up to 50 cents of every dollar invested in stocks in cash reserves. 

“That is a bit of a different game. You then have to think about risk [and] reward,” said Melody, adding that Thailand’s volatile market could mean reserves might have to be as high as 60%. 

“If you are an insurance company, don’t kid yourself about the risk you’re running, because in the future it is going to be very clear when that kind of metric is implemented,” he added. 

Whole-life insurers which have been encouraged to acquire riskier equity assets would also need to hold more capital, Melody said.

But such insurers face the additional burden of long duration gaps of up to 10 years. Insurers currently average eight or nine years of assets against 20 years of liabilities, noted Melody. With global yields trending downwards, they will find it more difficult to meet their liabilities. 

Regardless of concerns, one positive to come out of this – at least for asset managers – were the opportunities that this can offer, Melody added. 

“[This is] a good thing for investment companies, because if insurers don’t have [their own investment companies], you should be talking to them if you’re not already… [Insurers in Thailand] are going to need a lot of help.”