OBG talks to Pravej Ongartsittigul, Secretary-General, Office of the Insurance Commission

Interview: Pravej Ongartsittigul

How has the industry reacted to the floods in 2011?

PRAVEJ ONGARTSITTIGUL: The floods hit Bangkok at the end of 2011, at a time when insurance policies were being renewed. Consequently, insurers simply turned down any renewal requests. We removed catastrophe risk from the total risk package – as we knew it would not be renewed – and were able to cover all other risks.

It is noteworthy that Thailand was the first country to establish a catastrophe insurance fund, the National Catastrophe Insurance Fund (NCIF), within a few months of major flooding. Enacted as a legal entity by a royal decree, the fund operates by helping to bridge the gap between the market rate and the rate offered to the public by the fund. At first the gap was very significant, but within four to five months, the gap narrowed. The floods have caused property claims of about $15bn, 90% of which were in the seven industrial estates, mainly in Ayutthaya and Pathum Thani. If we could have been able to protect that area then property loss would have dropped to 10%, which would not have rendered it a catastrophe. Additionally, the government has implemented many water management projects, researching the options available to prevent future flooding.

What provisions are established by the NCIF?

PRAVEJ: We have divided policy buyers into three categories. For general households, the fund provides coverage of up to BT100,000 ($3190) in damages, with a premium of about 0.5% – around BT500 ($15.95). Response to this from our 1.3m policyholders in general households has so far been positive. In areas that have never been flooded before, we will cut the rate by half – to 0.5%. It will take a capacity of BT130m ($4.15m) to insure these households.

For small and medium-sized enterprises (SMEs), we have 230,000 policyholders that have an insured sum of less than BT50m ($1.56m). Given the small scale and lack of sophisticated equipment for most of these firms, 30% coverage is sufficient. The premium rate is set at 1%. Lastly, for industrial sector, we currently have about 15,000 policyholders. In order to limit the liability of the fund at a reasonable level, the fund provides up to 30% coverage, the same as for SMEs, but with a relatively higher the premium rate of 1.25% Since the introduction of the fund, there have been a few changes in response to the increase of confidence in the catastrophe insurance system. There are three major changes. The first is an increase of the retention rates (the minimum risk that insurance companies are required to bear before reinsuring the remaining risk to the fund) from 1% to 95% for households and SMEs, and 25% for industrial sector. The second is an increase to the sublimit from 30% of the total sum insured to 50%. Finally, non-life insurance companies are allowed to sell catastrophe risk insurance at a rate lower than the rate being offered by the NCIF and do not have to reinsure the risk to the NCIF.

How will the implementation of risk-based capital (RBC) affect the asset-liability mismatch (ALM)?

PRAVEJ: The RBC framework has been effective since September 2011, but because of the floods we have provided flexibility to the timeframe. The RBC regime will continue, but we are open to more flexibility if needed. According to RBC requirements, insurance policy liabilities must be actuarially calculated and sufficiently backed by good quality assets. As a result, liquidity risk has become a concern. In seeking sufficient cash, the market reacted with several means, liquidating assets, injecting capital or borrowing. For life insurance companies we do see an ALM issue, but not because of impacts from the flood. Life insurance contracts with long-term guarantee dividend rates were very popular in the past. Thus, life insurers must find long-term investments to match liabilities. Although we do have companies like PTT issuing 99-year bonds, and the government has 30- and 50- year bonds, there are not enough. There is good news – the gap between long-term assets to match with liabilities is narrowing as capital markets develop under new financial standards.