Enron : Large Thai life insurers overshadow smaller peers, says S&P

Our Banking Bureau
24 April 2003

Consequently, competition is extensive. This has resulted in many unprofitable operations, as the inherent high cost structure is far from matched by corresponding premium income.

According to S&P the main challenge for the industry will be for its marginalised participants to stay viable by achieving stable and sustainable growth in premium income, and thereby expand their minuscule market shares and control relatively high expenses, and then translate these into operating profitability.

There remains strong potential for growth in life insurance products in Thailand, given the still low penetration rate and the prevalent low interest rate environment. Notwithstanding these supporting factors, and apart from the overall high expense structure, the domestic life industry also faces the key challenge of overcoming the current challenging investment conditions, which has given rise to negative interest spreads between yields from investments and the guaranteed returns offered to policyholders on life insurance products.

Nonetheless, financial pressure on the industry stemming from these negative interest spreads is not yet overwhelming the sector as these spread are still relatively slim. Moreover, the only recent occurrence of this phenomenon means that the industry is still able to draw on resources built up during the years of positive spreads. To address the current challenge, the life industry has lowered the guaranteed rates of products twice, to 5 per cent and 4 per cent in 2002 and 2003, from 6 per cent, in line with the corresponding lower investment yields earned.

Despite strong growth performance in the life industry, the majority of Thai life insurers continue to operate unprofitably, as a result of their high expense structure, their lack of economies of scale, negative interest spreads, and small market share. In Thailand, the top two life insurers share about two-thirds of the total market, while the top five companies represent about 90 per cent of total premium income.

With such domination of the industry by a few, the gap between the haves and the have-nots will widen over time, as successful life companies tap and utilise their more superior resources of capital, systems, and expertise, as well as draw on economies of scale from their critical mass, states S&P.