Thai General Insurance Association (TGIA) Study on the impact of ASEAN Market Liberalisation on the Non- Life Insurances in Thailand 27 March 2015
Agenda 1. AEC 2015: The Journey to a Single Insurance Market 2. Regulatory Changes and Liberalisation Effects 3. Capability of Thai Non-life insurers 4. Opportunity assessment of the AEC countries 5. Roadmap 1
1 AEC 2015: The Journey to a Single Insurance Market
ASEAN Economic Community (AEC) development ASEAN Economic Community Goals A single market and production base Competitive economic region Equitable economic development Integration into the global economy AEC Blueprint (2008-2015) Liberalisation and facilitation of free flow of: Goods Services Capital Investment Skilled labor Development of 12 priority integration sectors Strengthening food security and cooperation under agriculture sector Laying the foundation for : Competition policy Consumer protection Intellectual property rights Infrastructure development Development of energy and mineral cooperation Development of SMEs Implementation of Initiative for ASEAN Integration Entry into force of Free Trade Agreements Top 5 priority services sectors including: 1. Air transport, 2. e-asean, 3. Healthcare, 4. Tourism and 5. Logistic services For financial services sector, member countries will have to progressively liberalise, but will not take effect by 2015 to all members. 3
What will the AEC during 2015-20 look like? Still far from being a single market 1. Good progress for Goods, but slow progress for Services in particularly financial service sector i.e. Bank and Insurance There is still a lot of sensitivity around services to ensure development and maintenance of socioeconomic stability 2. Priority actions on Services Liberalisation No restrictions on service delivery via cross-border trade and consumption abroad Gradual expansion of the foreign equity participation to not less than 70 percent Progressive removal of other limitations on market access via commercial presence 3. Barriers on implementation Passive instead of Active approach with respect to Article 20: Consultation and Consensus; Article 21: Implementation on a formula for flexible participation Lack of central body/agency who is able to enforce and control Against domestic laws and regulations 4
Global trend towards Liberalisation of the insurance market There is a global trend towards the liberalisation the insurance markets as shown by the commitments under World Trade Organization (WTO) agreements which are similar to the AEC objectives. Insurance sub-sectors* WTO agreements AEC Blueprint Between 1995-97, ASEAN were under negotiation in Insurance subsectors 2008-2015 2020 Four modes of supply Note * Life insurance services Non-life insurance services Reinsurance and Retrocession Insurance intermediation Services auxiliary to insurance 5
Lessons from Liberalisation of Insurance markets in EU and Japan Area of Impact EU Japan Legislation Three major directives to establish SIM (1995) 1 st Council Directive (1973) Freedom of establishment 2 nd Council Directive (1988) Freedom of services 3 rd Council Directive (1994) Freedom of single license & control Insurance Business Law (1996) Consumer Contract Law Law of Sales of Financial Products Person Information Protection Law Financial Instruments and Exchange Law Distribution Evolving distribution channels from traditional agents and brokers across the EU markets Market penetration through direct insurance via telesales and internet Introduction of the brokerage sys. Liberalization of general insurance agency sys. Introduction of sys for small-amount and short-term insurance business Deregulation of Market Entry Policyholder Protection Allowing single license from origin state to underwrite insurances in all state members Abolishing direct regulatory control over insurance polices and prior approval of forms and rates IMD (2002/92) e.g. Disclosure of remuneration by intermediaries Motor Insurance Directive (2009/103/EC) e.g. all vehicles covered by compulsory 3 rd party insurance; abolishment border checks on motor insurance Mutual entry into life and general business by subsidiaries Emerging of Bancassurance through mutual entry beyond firewalls i.e. Bank Insurance company Non-tariff premium ratings for automobile insurance policy Policyholders Protection Fund for non-life insurers Early Warning Measure Non-life Policyholders Protection Corporation of Japan Revision of the safety new sys. Merger & Consolidation Decreasing numbers of non-life insurance companies within 17 EU more than 20% over a decade from 2001 2010. Occurrence of merger operations i.e. Aioi, NIPPONKOA, Nissay Dowa General, Mitsui Sumitomo Insurance, Sompo Japan, Millea Holdings, Meiji Yasuda General 6
2 Regulatory Changes and Liberalisation Effects
The Future of Insurance Industry under Market Liberalisation 8
Common trends in regulatory development We highlight the following trends... With greater foreign involvement, regulators from the emerging markets seek for adoption of International practices to establish effective insurance supervision in order to promote convergence towards a globally consistent supervisory framework. We observe the following commons items on regulators agendas: 1. Increase of capital to strengthen solvency margin which is linked to risk exposure 2. Greater focus on Board and Senior Management relating to compliance and risk assessments 3. Increasing focus on business conduct and consumer protection 9
The continuum of risk based capital frameworks Country Singapore Malaysia Solvency Regulation Formulaic risk based Formulaic risk based Thailand Indonesia Brunei Philippines Vietnam Cambodia Laos PDR Myanmar Formulaic risk based Formulaic risk based Formulaic Formulaic Formulaic Formulaic Formulaic Formulaic 10
Solvency II and IAIS standards Solvency II: a three pillar approach involving all aspects of the business Three-pillar approach solo and group Pillar 1 Pillar 2 Pillar 3 Quantitative capital requirements Market-consistent valuation Own funds Economic risk based capital requirements Minimum (MCR) Qualitative supervisory review Internal control and risk management Required functions Own risk and solvency assessment (ORSA) Market discipline Transparency Disclosure Solvency and financial condition report (SFCR) Solvency (SCR) Supervisory review Capital add-ons Market-consistent valuation Validation of internal models New focus for supervisors Maximum level of harmonisation Use test More pressure from capital markets More pressure from rating agencies 11
Solvency II Risk Management frameworks The ORSA defined: The entirety of processes and procedures... to identify, assess, monitor, manage and report the short and long term risks if faces or may face and to determine the own funds necessary to ensure that the undertaking's overall solvency needs are met at all times" 12
OIC response to the AEC Blueprint The Office of Insurance Commission (OIC) is currently in the process of finalising its 3rd Insurance Development Plan covering the strategic objectives for the period from 2015 through to 2020. The strategic direction of the plan is: 1. Enhance the overall industry standard and enforce corporate governance Raise the qualifications to operate as an insurer such as increasing the minimum capital levels, more stringent fit and proper qualifications and increased foreign ownership participation. Enhancing corporate governance and transparency of disclosure. 2. Improving insurers efficiency and promoting a competitive environment Enable the industry to operate more competitively which would involve, amongst other things, allowing the introduction of innovative products and de-tariffication. 3. Establishing a new image for the insurance industry through providing awareness and attracting talent Improve the public profile of the industry so that the benefits of insurance are better understood as well as attract better talent. 13
3 Capability of Thai Non-life insurers
Our approach to the capability assessment Study of statistics Desktop research using internal/external sources Trend and key ratio analysis disaggregated by insurance group and insurance segments Industry survey Questionnaire base survey which focus on 7 key success factors Distributed to TGIA members in mid-2013 22 companies participated KPMG experience/insights Draw on KPMG audit and advisory experience to confirm the accuracy of survey response and completion the rest of targeted operating model (TOM) Formation of independent conclusion 15
Grouping of Thai Non-life insurers For the purpose of our analysis we have grouped Thai insurers into 5 categories to reflect common characteristics in order to provide a more meaningful interpretation of the results. Group 1. Bank subsidiaries (7) Criteria All subsidiaries of banks that operate in Thailand, regardless of size, due to having advantages over distribution 2. Foreign owned/partnered insurers (22) 3. Large domestic insurers (2) Insurance companies that are entirely or partially owned (with significant influence) by foreign insurers (regardless of size) due to having access to technical expertise not available in the local market Insurance companies that are mainly owned or controlled by Thai and had direct premium volume greater than Baht 5 billion in 2012 4. Medium-sized domestic insurers(10) Insurance companies that are mainly owned or controlled by Thai and had direct premium volume between Baht 1-5 billion in 2012 5. Small-sized domestic insurers (13) Insurance companies that are mainly owned or controlled by Thai and had direct premium volume below Baht 1 billion in 2012 * Not included inactive companies (3), very small health insurer (5) and Road Accident Victim Protection 16
Characteristics of the Thai market: Products Thai non-life insurers capability has been built around motor insurance segment based on business volume and high retention Long-established sales support network, brand awareness, market coverage and proactive claims management are the main strength of leading insurers Other retail lines of business, particularly PA, are growing through alternative channels, but requires expertise in product development and carefully monitoring The industry relies on foreign reinsurers to provide technical support and underwriting capacity for commercial risks Source: OIC s statistics (2008 - July 2013) 17
Characteristics of the Thai market: Distribution Bancassurance is the major contributor to homeowner insurance, assuming all fire coverage for commercial business is included in IAR segment. Telemarketing is gaining popularity to the expansion of personal line segment though the use of technology (data mining capability) Percentage of policies sold (%) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Distribution Channels 2012 2013 2012 2013 2012 2013 2012 2013 2012 2013 Fire Marine Automobile IAR PA Line of Business Tele-Mktg Bank Broker Agent Source: Thai Re s statistics (2012 & 2013) 18
Characteristics of the Thai market: Profitability Average loss ratio for motor segment indicates that there is a requirement for tight expense control and claims management Commercial business is more profitable, however technical resources and capital is required to retain locally and support overseas expansion of Thai business Ratio (%) 40% Net loss ratio - Fire Ratio (%) 100% Net loss ratio - Misc 30% 20% 80% 60% 40% 10% 20% 0% 2007 2008 2009 2010 Net loss ratio - Motor Ratio (%) 70% 60% 50% 40% 30% 20% 10% 0% 2007 2008 2009 2010 2011 Source: OIC s statistics (2007 2011) 0% Ratio (%) 40% 30% 20% 10% 0% 2007 2008 2009 2010 Net loss ratio - Marine 2007 2008 2009 2010 Bank sub Foreign Large Medium Small 19
Characteristics of the Thai market: Expenses Medium/small-sized and foreign insurers incurred substantively higher cost of operations, compared to other insurance groups Large domestic insurers have the lowest operating expense ratio, the major benefit of reaching economy of scale Source: IPRB s statistics (2007-2011) 20
Characteristics of the Thai market: Capital Overall CAR under the current regime is above the 140 mark. Further deteriorations may come from a shortfall in recovering reinsurance assets arising from the floods 800 With the expiration of the flood relief in March 2014 and the possible increase in reinsurance provision, some insurers may need capital injections or consider exit options CAR Ratio 700 CAR ratio % 600 500 400 300 200 100 Bank subs Foreign Large Medium Small Industry Average - 3Q'11 4Q'11 1Q'12 2Q'12 3Q'12 4Q'12 1Q'13 2Q'13 Source: Thai Re s statistics (2012 & 2013) 21
Seven key success factors The following 7 key success factors were derived based on Target Operating Model (TOM) framework which reflect the dimensions required for insurers to operate efficiently and effective to meet the business objectives. Key success factor Measurement criteria 1. Financial strength CAR level indicates whether a company can fulfill its future obligation 2. People Having right mix of human resource with the right technical skill, avoiding reliance on small number of individuals in order to support growth 3. Actuarial capabilities Sufficiency of skillful actuarial team to conduct functions ranging from product pricing to evaluating potential bad risks, data at the right granular level is available 4. System Having a system that fully supports all areas of the business model will enable the business objectives to be met 5. Business network Extensive distribution channels and cross-border service help support future growth 6. Process Efficient business processes will enable a lean operations and help lower overhead cost while implementing leading-edge technology can help meet the need of modern customers and business partners 7. Analysis capability Capability and availability of data to conduct insightful analysis to support strategic decision making big data analysis 22
Capability gap analysis (Targeted operating model: TOM) Foreign Bank sub. Large Medium Small People High number of headcounts and man hours from inefficient process High turnover, aging workforce, not adaptive, difficult to attract new talents and functional expertise Limited turnover, mixed workforce, talented employee take charge of key areas, slowly adapt Some talented workforce, good functional capability, adaptive, analytical thinking is limited by system and process Experienced employee with strong functional expertise, proactive, insightful analysis, commentary and challenge Business performance orientation, highly adaptive and mobility Business partner Actuarial capability No pricing capability No basic actuarial skill in house, limited to own data, limited knowledge of markets outside Thailand Basic actuarial skill in house, to serve reporting needs, data and knowledge is limited to Thailand Mix of experienced and junior inhouse actuaries, drilling capability is limited due to data quality Domestic market data only, drill down capability, qualified pricing and reporting actuary Cross-border data, drill down capability, qualified pricing and reporting actuary Competitive product & pricing System Disparate systems architecture System limitation which cannot meet all business need, extensive use of EUC for reporting Sophisticated front end systems for different lines. Use of EUC, studying alternatives Mostly standardized systems, automatic interface. Management reports are extracted and formatted manually Fully integrated system with automatic interface capability. External and internal reports available on demand Integrated systems, real-time updates, external and internal reports generation at finger tips Integrated all across system Business network Stand-alone model Employed selling agents, branch operation, high operating cost Rely on agent/brokers, limited bargaining power against reinsurers Extensive domestic network/referrals, bargaining power over reinsurance negotiation Cross-border serviceability through business partners or shared resources One integrated insurance network from direct to reinsurance Cross-border service-ability Process High volume of manual processing Low volume, highly manual process, lack of control, more time spent on finding error and rework High volume of manual to overcome system limitation, duplicate controls, error somewhat occurred, High level of integration, cost control, headcount freeze, moderate cost, few delays exist Fully integrated operations with limited manual intervention, volume processing, contained cost Cross-border operations and real-time updates, volume processing, zero error, low cost Lean operation Analysis capability Low understanding of results Untimely, high level manual analysis of operational results due to system and data limitation More detailed manual analysis but time consuming process due to data validation of multiple sources Mix of system and manual preparation of business analysis. Drill down capability is limited System and data available to fully support generation of insightful analysis at a very granular level System able to produce insightful analysis from a single source of truth at great dept on a real time basis. Strong analysis and understanding results 23
Summary of key findings Operations (Profitability & Growth) Limited awareness of actuarial capabilities in supporting strategic planning and decision making Serious investment in IT infrastructure is urgently required to improve operational efficiency, effective cost management, talent recruitment, and reporting Open up to employing foreign skills to support highly technical functions and human resource development to support future growth and underwriting capability Cross-border alliance is highly possible for those with the initial aim towards enhancing cross-border service-ability and strengthening market knowledge outside Thailand Scale and credibility impact bargaining power when negotiating for reinsurance In-dept study on product & channels from performance aspects Regulatory changes A need to strengthen their risk and capital management framework and put risk-based consideration at the forefront of business operations and decision making 24
4 Opportunity assessment of the AEC countries
Key facts and figures ASEAN diversity of Economic, Politics and Financial development is one challenge to make difficulty in accelerating a regional integration within short time. Each AEC country is at a very different stages of development and presents different opportunities to Thai Non-life insurers. Source: ASEAN 10 countries baseline Data, 2011 26
Market assessment framework Three dimensions of overall assessment were defined based on empirical studies, publications conducted by professional organizations and our experience from conducting similar research. For each dimension, indicators were defined and ranked in order to provide and overall assessment of AEC countries for Thai Non-life insurers. Country attractiveness Accessibility to foreigners Thailand capability 27
Country attractiveness To measure the country attractiveness 12 indicators were defined and ranked. The indicators were a combination of measuring the existing size of other AEC non-life insurance markets and the potential for growth based on underlying drivers. Selected indicators of Country attractiveness Non-life Insurance Consumption (I) Growth Enablers (G) Human Development (H) Business Environment (E) Premiums volume GDP growth Health Ease of doing business Premiums as % GDP Urbanization Education Protecting investors Premiums per capita Population Income Paying taxes Score Country attractiveness 61-100 Very positive impact on the demand for Non-life insurance 21-60 Likely positive impact on the demand for Non-life insurance 1-20 Unlikely positive impact on the demand for Non-life insurance 28
Overall assessment Country attractiveness Country accessibility score composition Country Non-life Insurance Consumption (1-100) Growth Enabler (1-100) Human Development (1-100) Business Environment (1-100) Weighted Score (1-100) High Income Singapore 47 60 100 100 77 Brunei 47 33 87 87 64 Upper Middle Income Malaysia 60 73 100 100 83 Lower Middle Income Indonesia 87 73 33 33 57 Philippines 73 73 47 33 57 Vietnam 87 73 47 47 64 Low Income Cambodia 73 47 20 33 43 Laos PDR 20 47 20 33 30 Myanmar 73 87 20 33 53 Source: Table 13: Country attractiveness scoring, page 31, The AEC landscape and impact on Thai non-life insurance industry 29
Accessibility to foreigners To measure the accessibility of other AEC countries, three indicators were defined to provide indicative assessment of the ease of entry for foreigners into these markets. Selected Indicator No or minimal restrictions in favour of market entry to foreigners (61-100) Nominal or some restrictions in favour of market entry to foreigners (21-60) Certain restrictions in favour of market entry to foreigners (1-20) Foreign ownership 70% - 100% 49%-69% Less than 49% New license availability New license available/m&a allowed Join venture or representative office/ branch allowed with business expansion limit Foreign insurer is prohibited Foreign exchange control No restriction Some restriction with controlled limits Stringent controls in force 30
Overall assessment Accessibility to foreigner Country accessibility score composition Country Foreign Ownership Limit Weighting 30% Availability of new License Weighting 50% Foreign exchange control Weighting 20% Weighted Score (1-100) High Income Singapore No limit Available but must be able to operate at a international standard No 100 Brunei No specific restriction Doubtful most players already partner with world class insurers No 55 Upper Middle Income Malaysia 70% limit Available through acquisition of local companies No 71 Lower Middle Income Indonesia 80% limit Available through acquisition of local companies No 74 Philippines No limit Available through acquisition of local companies Some 72 Vietnam No limit Possible through acquisition of local companies however political ties may be needed High control 59 Low Income Cambodia No limit Doubtful most players already partner with world class insurers No 55 Laos PDR No limit Possible joint venture or foreign branch is allowed but political ties are possibly needed No 60 Myanmar Representative office only (at present) No - but representative office is allowed High control 10 Source: Table 14: Market accessibility assessment, page 32, The AEC landscape and impact on Thai non-life insurance industry 31
Thailand capability Based on capability analysis in Non-life Thai insurers, following three aspects were selected to assess Thailand capability to compete in Non-life insurance markets in other AEC countries. Selected Indicator Highly likely to be able to complete (61-100) Likely to be able to complete (21-60) Unlikely to be able to complete (1-20) Technical expertise Developing market with high growth opportunity in both personal lines and commercial insurance Highly competitive market with high growth in personal line and commercial insurance Highly developed market with high growth in commercial insurance only Ability to cope with local regulations Regulatory regime that are similar to or less advance than Thailand e.g. absence of a RBC framework Regulatory regimes that have features which have some features which are dissimilar to Thailand e.g., Malaysia with high punitive damage award for motor vehicle accidents Regulatory regime that is more advanced than Thailand e.g., Singapore Foreign direct investment by Thai Thailand is within the top 10 of foreign investors - Thais are not within top 10 foreign investors 32
Overall assessment Thailand capability Thailand capability score composition Country High Income Singapore Brunei Upper Middle Income Malaysia Lower Middle Income Indonesia Philippines Vietnam Low Income Cambodia Laos PDR Myanmar Technical Expertise Weighting 40% Commercial reinsurance including catastrophe risk from offshore Commercial line based on economy structure (oil & gas exporter) Personal lines (Takaful compliance) and commercial lines Personal line (Takaful compliance) and commercial lines with catastrophe protection Personal line and commercial lines with catastrophe protection Personal line and commercial line based on industrial and infrastructure projects Commercial line based on industrial and infrastructure projects Commercial line based on industrial and infrastructure projects Commercial line based on industrial and infrastructure projects Ability to cope with local regulations Weighting 20% Complex moving towards international practice e.g., Solvency II Moderate based on development of solvency measurement (% of net written premium Moderate regulations are developing and are similar to Thai e.g., RBC Moderate regulations are developing and are similar to Thai e.g., RBC Moderate regulations are developing and are similar to Thai e.g., RBC Moderate based on development of solvency measurement (% of net written premium) Moderate based on development of solvency measurement (% of registered capital) Moderate based on development of solvency measurement (% of registered capital) Moderate for representative office operation Foreign investment by Thai Weighting 40% Weighted Score (1-100) Below top 10 countries 20 Below top 10 countries 26 Within top 10 countries 68 Below top 10 countries 46 Below top 10 countries 38 Below top 10 countries 50 Within top 10 countries 50 Within top 5 countries 58 Within top 5 countries 74 @ Source: 2015 KPMG Table Phoomchai 15: Assessment Advisory of Ltd., Thailand a Thai capability limited liability in foreign company markets, and a page member 33, firm The of AEC the KPMG landscape network and of impact independent on Thai firms non-life affiliated insurance with KPMG industry 33
Overall assessment Final assessment results Color codes definition Country High Income Country attractiveness Weighting = 20% Accessibility to foreigners Weighting = 20% Thailand capability Weighting = 60% Ranking High Opportunity Moderate Opportunity Low Opportunity Singapore 77 100 20 8 Brunei 64 55 26 9 Upper Middle Income Malaysia 83 71 68 1 Lower Middle Income Indonesia 57 74 46 4 Philippines 57 72 38 7 Vietnam 64 59 50 3 Low Income Cambodia 43 55 50 6 Laos PDR 30 60 58 5 Myanmar 53 10 74 2 Based on the KPMG analysis, the greatest opportunity is within the upper and lower middle income countries where the potential for growth is higher since the insurance markets are already developed and a good base for further development This is supported by the level of M&A seen in recent years, as foreign shareholdings limits have been raised (in particular Malaysia and Indonesia) Whilst the long term potential for growth in C,M,V, L is very high, however, given the current stage of development this will take time Thailand is seen as attractive to foreign investors Source: Table 16: Final assessment scores, page 34, The AEC landscape and impact on Thai non-life insurance industry 34
5 Roadmap
Get ready for the future Responding to opportunities: Thai outbound investment Cross-border service ability Capturing growth in emerging markets Cross-border alliance Increase capability Capitalisation and technical expertise to capture opportunities in the Thai market Responding to threats: Address capability gaps compared to global players System & data, actuarial capability, functional expertise Profitability pressure Product, distribution and operational efficiency (system & process) data mining and performance analysis Regulatory changes Enterprise risk management implementation 36
Creating a valued insurer a vision for success "Increasingly, we see successful insurers harnessing four attributes: they are focused, efficient, agile and are trusted by their customers, regulators and investors. Above all, they place focused, efficient, agile and are trusted by their customers, regulators and investors. Above all, they place their customers at the hear of their business." Source: The Valued Insurer, KPMG International, 2013 37
Roadmap (Now 2020) Now Capitalisation Operational quality and efficiency In-dept profitability study Culture change (competitiveness) Before 2015 Leading-edge technology Cross-border alliance Friendliness of working environment foreigners ERM Capacity Big data Before 2020 RBC II readiness 38
Contact us Thank You Noel Ashpole Partner, Financial Services T: +66 (0)2 677-2794 E: nashpole@kpmg.co.th Pantip Gulsantithamrong Executive Director, Financial Services T: +66 (0)2 677-2121 E: pantip@kpmg.co.th Chanchai Sakulkoedsin Executive Director, Financial Services T: +66 (0)2 677-2337 E: chanchai@kpmg.co.th Itthipat Limmaneerak Associate Director, Financial Services T: +66 (0)2 677-2654 E: itthipat@kpmg.co.th 2015 KPMG Phoomchai Business Advisory Ltd., a Thai corporation and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Thailand. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International. Produced by KPMG s Financial Services Practice in Thailand