Singapore:

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.

The Thai life industry has been experiencing strong expansion, recording an average growth rate of 20 per cent over the past four years (1999-2002). Nevertheless, during the period of the Asian financial crisis between 1997-98, the industry underwent negative growth for the first time, in line with the contraction of the economy. Success in attracting funds to life insurance products since then is predominantly attributed to the trend of declining deposit interest rates, which makes investments in life insurance policies more appealing.

Over the near-to-medium term, S&P expects the life insurance industry to undergo additional structural enhancements, particularly through mergers and acquisitions. Acutely aware of the plight of the majority of Thai life insurers, the regulator, the Insurance Department, is hoping to encourage consolidation through several new initiatives, such as its proposal to allow cross-holdings between life companies, and its recommendation to raise the level of minimum paid-up capital to Thai baht (THB) 500 million ($11.9 million) from THB 50 million.

These initiatives are awaiting parliamentary approval, and if passed, will go some way to helping consolidate the industry. This will alleviate the present condition of most of the industry's life insurers, by resulting in better-capitalised companies more able to build their businesses, with larger critical mass, a more practical market share, and improved financial strengths.

At the same time, with the overall high cost structure inherent in the domestic life industry, it is essential for life companies to practice conservative cost management, to gain competitive advantage over peers.

In addition, in the current environment of declining investment yields, life insurers must guard against being overly aggressive with their investment strategies and portfolios in search of higher returns. Prudence in asset management practices will ensure investments are of strong quality and will preserve the value of balance sheets.