Members of the Association of South East Asian Nations (ASEAN) have implemented the ASEAN Economic Community (AEC), which is intended to remove or reduce barriers and restrictions between member states to allow for the development of a single market of approximately 625 mln people.
A key aspect of this liberalization are the steps to liberalize access to markets for financial services, including insurance, by 2020. Most of the key ASEAN economies have agreed to implement a range of measures to allow access to their insurance markets by insurers and investors from other ASEAN member states.
If these measures are properly and fully implemented, it should result in a multinational and regional market for and more efficient distribution and delivery of insurance and reinsurance products through economies of scale and the competition from more efficient and advanced insurers and reinsurers. It is hoped that this will result in enhanced risk assessment and pricing, reduced underinsurance and improved claims handling and resolution.
In a region where the complexity and value of insured risks continues to increase exponentially, these improvements are both necessary and beneficial to consumers, insurers and reinsurers.
There are some concerns that increased access to markets in other ASEAN member states by larger, better resourced, more efficient and/or more experienced insurers and reinsurers may have a detrimental effect on some insurers. This may partly explain why not all ASEAN member states have agreed to participate and why each state has been permitted to determine which aspects of this liberalization it will implement.
Thailand has elected not to participate in this liberalization of access to insurance markets. A key issue is whether recent moves to allow greater foreign investment will result in a more competitive and stronger Thai insurance market, able to both expand into other ASEAN markets and to compete with ASEAN rivals eventually entering the Thai market. If ASEAN rivals are able to achieve economies of scale and expand regionally in an ASEAN insurance market before Thai insurers do so, Thai insurers may be at a competitive disadvantage and may not be able to offer the same products and/or pricing as may be available in other ASEAN markets.
Thailand faces a choice between protecting its insurance sector and the need for its insurers to remain competitive with rival ASEAN insurers.
For foreign investors, in the absence of further liberalization, the issue would then be whether there are sufficient benefits in the domestic Thai insurance market to invest in a Thai insurer. Recent transactions suggest that some foreign investors see such benefits.
LIBERALIZATION OF THE INSURANCE SECTOR IN THAILAND – TWO STEPS FORWARD….?
From February 2016, the requirement to obtain the approval of the Thai Ministry of Commerce (MOC) through a foreign business license (FBL) for investments of 50 or more percent of a Thai insurer has been removed. This requirement was part of a law designed to protect Thai industries and businesses from foreign owned competitors.
Whilst this may appear to represent progress, foreign investment is still subject to approval and conditions imposed by the regulator, the Office of the Insurance Commission (the OIC).
The changes appear to be recognition that the Thai insurance sector can be adequately regulated by the OIC. In approving foreign investment of 50 or more percent, the OIC continues to exercise considerable power.
Foreign investors can acquire less than 25% of the total voting shares without regulatory approval by the OIC.
The OIC has authority to approve foreign investment of between 25% and 49% of total voting shares, where the target Thai insurer has:
- a capital adequacy ratio which meets the OIC's specifications; or
- a business plan which demonstrates to the OIC how the management of the business to will be improved to increase efficiency and the competitiveness of the Thai insurer.
OIC approval is required where more than 25% of the Board are foreigners and the maximum Board representation is less than 50%. This approval can be challenging and complex. The risk that Board representation will not be proportional to shareholding increases the risk profile of investments and can be a distinct disincentive to foreign investors, particularly where the investors are foreign insurers or reinsurers, already subject to prudential supervision in their home jurisdiction.
Considerations for foreign investors
Recent transactions suggest that some foreign investors take a broader and longer-term view of the opportunities in the Thai insurance market and are prepared to forgo Board and management representation commensurate to their investment in return for the opportunity to participate in the Thai insurance market.
Key issues for foreign investors include:
- Safeguarding their investment;
- The level of Board representation;
- The extent to which the foreign investors can influence the decisions of the Board and management of the insurer;
- The likely position of the OIC on approving the investment and Board representation;
- The role and influence of other shareholders;
- The extent to which the foreign investor can implement changes to increase competitiveness, efficiency, technical expertise and improve distribution costs and networks;
- Whether the acquisition will enable the Thai insurer to access more flexible and cost-efficient reinsurance;
- Whether the acquisition will enable the Thai insurer to offer a greater range of lines and products at more competitive price levels;
- The level of risk exposure, particularly to large, complex and long tail claims.
Hand to mouth: reinsuring risks
Many insurance markets in ASEAN are dependent on reinsurance and typically reinsure a significant portion of their risks offshore. An increasingly significant issue is access to reinsurance and the cost and nature of reinsurance cover, particularly for natural catastrophes and large and/or complex risks.
Current reinsurance market conditions are largely favorable to insurers and recent experience with natural catastrophes have created a sense of confidence that reinsurers will generally respond to claims and support ceding insurers.
Nevertheless, in a competitive and price-sensitive insurance market, an increasingly significant issue will be the availability, extent and cost of reinsurance. For insurers with access to reinsurance through a parent or shareholder reinsurer, their ability to offer more cost effective, flexible and responsive reinsurance may provide a competitive advantage over those insurers who rely solely on the competitive reinsurance market to obtain the most favorable reinsurance terms.
If such insurers are able to fully exploit their shareholder and other relationships to provide more competitive insurance products than their competitors, who do not have the benefit of such relationships, pressure to liberalize access to insurance markets may increase and the impetus for such changes may be the domestic insurers, who are the intended beneficiaries of protectionist restrictions on foreign access and investment.
A change in market conditions and a reduction in the availability of reinsurance at favorable rates and on favorable terms may serve to accelerate this trend.
What is next for the Thai insurance market?
The OIC is continuing to review applicable legislation and this may result in further liberalization of foreign investment in the insurance sector.
One of the amendments under consideration is believed to be to allow investments up to 49% of total voting shares and up to 49% of Board seats without OIC approval. Whilst, if implemented, this would amount to progress, a significant factor may be the total permitted foreign shareholding by a single shareholder without OIC approval.
Any further liberalization must be viewed in both regional and global contexts. The extent of actual implementation of the AEC liberalization measures by Thailand's regional rivals will play a critical role. If AEC liberalization results in a regional insurance market with lower distribution costs, more responsive and focused insurance and reinsurance products and insurers leveraging national and regional operations, Thai insurers may face significant challenges in meeting this competition within ASEAN and when Thailand eventually allows increased foreign participation in its insurance markets.
For some investors, increased but not full access as contemplated by the ACE liberalization relative to the opportunities offered by the Thai market may still make Thailand a more attractive investment destination.
Alan is a partner in the Bangkok office of Watson Farley & Williams, with a focus on insurance and reinsurance. He regularly advises Thai and international brokers, insurers and reinsurers on legal issues, including coverage, liability exposure and claims handling and resolution. Alan also acts for parties looking to invest in the Thai insurance market, including due diligence, setting up insurers and brokers and related regulatory issues.