Thailand. Insurance Outlook
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- Debra Harrington
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1 Thailand Insurance Outlook
2 Editorial Note As Thailand s insurance industry expands and matures, there is still high potential for growth, as increased market demand and public awareness have contributed significantly to 13.04% overall growth in premiums received over the past year despite the political turmoil in the country. New policies and regulations have been proposed and implemented with an eye towards the imminent enactment of the ASEAN Economic Community (AEC) Framework in One significant development, Royal Decree No. 573, waives taxation on insurance premium reserves in M&A transactions, which could lead to increased industry consolidation activity. And when considering M&A deals, it is clear that in today s risk-averse fiscal environment, bancassurance agreements- a naturally synergetic relationship between insurance companies and financial institutions- are on the rise. Industry professionals should also keep an eye on the progress of OIC draft regulations intended to bring Thailand s insurance laws in line with international standards. As for litigation claim, ramifications from the massive floods of 2011 are still being felt, as a pair of overseas rulings concerning the past disaster still bears long-term consequences affecting the future. The case of Federal-Mogul v Insurance Company of the State of Pennsylvania negated the argument of a High Hazard Zone to cap liability in the absence of an official government-designated 100 year floodplain. And in Tokio Marine Europe Insurance Ltd v Novae Corporate Underwriting Ltd, an English Commercial court ruling underlined for reinsurers the pitfall of relying on unqualified follow the settlements clauses. Our team of insurance law experts at Baker & McKenzie Bangkok liaise closely with domestic and international insurance companies, insurance brokers, actuarial research institutes, and potential international investors. The portfolio of insurance services we offer-including the establishment of new operations in Thailand through mergers, acquisitions, joint venture agreements, regulatory compliance, facilitating the conversion of private insurance companies to public companies, and settlement of claims -- has a distinguished track record for impeccable and timely legal solutions and advice for our clients. The 2014 edition of Insurance Outlook is researched and written by our Insurance Practice Group to provide an informative overview of the insurance sector in Thailand. With information on industry performance and the impact of new regulations, this guide is intended as an informative digest of the insurance sector s most prominent features, one we hope you will find helpful in understanding the current conditions and trends in the Thai insurance market. Insurance Outlook
3 Editorial Note Insurance Industry Overview Insurance Business Performance 2013 Life Insurance Sector Non-life Insurance Sector M&A Summary and Trends AEC Updates Laws and Regulations Update Draft New Insurance Acts Draft Amendments to Section 10 of the Life Insurance Act and Section 9 of the Non-Life Insurance Act New Notifications Outlining Consequences for Insurance Law Violators New Investment Regulations for Insurance Companies Life and Non-Life Insurers New Reporting Requirements on Investments in Other Businesses Claims / Litigation Update Foreign Courts Issue Judgments in Thai Floods Insurance Disputes Statement of Capability
4 Insurance Industry Overview Significant market potential (life insurance policyholders at less than 30% of population, only 14% of households covered by fire insurance) and an increasing awareness of the importance of insurance have fueled bright prospects for the Thai insurance industry in all sectors, which grew by 13.04% in With regard to distribution channels, bancassurance business has continued to enjoy significant growth, and is challenging the traditional agent channel for future primacy. In the life insurance sector, agents still earned a majority of the direct premiums pie vis-à-vis bancassurance, but it is worth noting that first year life insurance premiums for bancassurance grew 26% in 2013 compared to 8.2% growth for agents, with total first year premium volumes at billion baht and billion baht, respectively. Another distribution channel worth keeping an eye for the future is the internet, which for 2013 was still a fraction at only 0.3% of total non-life direct premiums received from all channels, but realized % growth from In the non-life sector, the 200 billion baht benchmark in direct premiums was reached for the first time, and the top four in terms of market share -- Viriyah Insurance, Dhipaya Insurance, Bangkok Insurance and Synmunkong Insurance--remain unchanged from the previous year. Growth in nonlife insurance direct premiums was a healthy 13.08% in On the M&A front for 2013, three significant transactions have been announced, with Prudential Life Assurance Public Company Limited acquiring shares in Thanachart Life Assurance Public Company Limited, Meiji Yasuda Life Insurance taking a 15% stake in Thai Life Insurance Public Company Limited, and ACE INA International Holdings Limited acquiring The Siam Commercial Samaggi Insurance Public Company Limited. Thailand may see accelerated insurance market consolidation in 2014, thanks to new tax relief for M&A. Under Royal Decree No. 573, the tax on insurance premium reserves upon amalgamation or dissolution has been waived, which would make more M&A deals fiscally palatable. With the advent of the AEC Framework, Thai insurers may also look to invest in neighboring countries, most of which allow for higher proportions (from %) of foreign equity participation than Thailand s currently imposed limit of 25%. Insurance Outlook
5 Insurance Business Performance 2013 The insurance industry in Thailand has seen rapid recent growth, at around double-digit percentage points every year, since 2001 (except for 2005). The total amount in premiums received in 2013 increased by 13.04% over the previous year, mainly due to the public s better perception of the insurance business and an increase in riskmanagement awareness. In 2013, the total amount in premiums received by the insurance industry was Baht billion. Of this Baht billion collected, the life insurance market accounted for Baht billion, while the non-life insurance market accounted for Baht billion. The life insurance industry continues to expand, in contrast to the overall Thai economy, where recent growth has not exceeded 3% per year. The total amount in life insurance premiums received reflects an increase in growth of 13.02% in this sector, mainly due to the Ministry of Finance s policy to allow insurance premiums to be deducted from income tax; new products that meet customers needs; better understanding of insurance products; insurance investment in other businesses; and the increase of various distribution channels. In 2013 the non-life insurance industry reached total direct premiums of Baht 200 billion for the first time, representing a 13.08% increase from That increase was due mainly to the first-car buyer scheme, which saw a big increase in sales of automobiles and a consequent boost for the automobile insurance market and its share of premiums for non-life insurance, which was 55 60% of the total in that sector. Apart from automobile insurance, the figures for miscellaneous insurance were also eye-catching, as the loss ratio was low, which resulted in a high profit rate. 5 Insurance Outlook 2014 In terms of the insurance industry s capacity, there is still more room for the life insurance sector to grow, as the proportion of policyholders in Thailand is less than 30% of the population, leaving plenty of market gap for insurers to fill in. However, in the near future, insurers will have to compete harder in issuing new policies that meet customers needs and reflect their lifestyles. Likewise, there is much room for expansion in the non-life insurance industry: only 14% of Thailand s registered households are fire insured, and only 14% of Thailand s population is covered by personal accident insurance. Based on the foregoing figures, it is clear that Thailand s insurance industry is far from the saturation point, and therefore the outlook for the industry is bright. A further issue is the insurance penetration rate, and whether goals set out in the Insurance Development Plan (Volume 2) (the Plan ) from can be met. According to the Plan, the insurance penetration rate (the ratio of direct premiums received to gross domestic product [GDP]) should increase from 4.07% in 2009 to 6% in Insurance density (the ratio of premiums to population density) should increase from Baht 4,600 in 2009 to Baht 7,500 in Also, the percentage of people holding life insurance policies should reach 40% in 2014, from 26.75% in According to the statistics from , the Thai insurance industry has grown continually. In 2013, the penetration rate reached 5.4%; insurance density was Baht 9,971, which is higher than the Plan s goal for 2014; and the percentage of people holding life insurance policies was 34.68%. However, it is still questionable whether the insurance penetration rate and the percentage of life insurance policyholders will meet the goals set forth in the Plan. Life Insurance Sector As mentioned, the life insurance industry continues to expand. However, when considering the growth rate for direct premiums in life insurance, the figure was 13.02%, which was below the estimated rate of 17.3% predicted in early The main factors that caused the rate to fall below that expected were a rapid increase in living expenses and a decrease in GDP, which consequently caused a decline in purchasing power and the savings rate. In terms of growth strategies, the life insurance market adopted aggressive marketing and sales campaigns. The strategies were designed to lure customers from competitors, including through short-term life insurance policies, which have a yield rate higher than savings bank deposits, and consequently attract customers looking for higher interest rates. This resulted in an increase in companies sales volumes and the maintenance of the big companies rankings. According to the Office of the Insurance Commission (OIC) s statistical report as of the end of December 2013, the ranking of the top five life insurance companies in terms of market share, based on total direct premiums received (first-year premiums, renewal premiums, and single premiums), remained the same as the previous year. In particular, AIA remains at the top of the list, followed by Muang Thai Life, Thai Life, Siam Commercial New York Life, and Bangkok Life respectively. However, when considering the market share of the life insurance companies based on first-year premiums received, Muang Thai Life ranked first, followed by AIA, Siam Commercial New York Life, Thai Life Insurance, and Krungthai AXA Life.
6 Market Share of Direct Premiums: Life Insurance Sector (Unit: Baht 1,000) Rank Company Direct Premiums Market Share (%) Direct Premiums Market Share (%) 1 A.I.A. 109,372, ,206, Muang Thai Life 60,249, ,867, Thai Life Insurance 55,030, ,844, Siam Commercial New York Life 45,486, ,897, Bangkok Life 39,079, ,640, Krungthai AXA Life 37,730, ,923, Allianz Ayudhya Assurance 24,924, ,512, Ocean Life Insurance 13,333, ,473, FWD Life Insurance* 13,149, ,455, (11) Prudential Life Assurance 10,333, ,542, Figures in parentheses represent ranking in 2012 * Changed from ING Life in August 2013 Market Share of New Business Premium (First-year and Single Premiums): Life Insurance Sector (Unit: Baht 1,000) Rank Company Direct Premiums Market Share (%) Direct Premiums Market Share (%) 1 (2) Muang Thai Life 27,613, ,655, (1) A.I.A. 26,873, ,537, Siam Commercial New York Life 18,232, ,681, Thai Life Insurance 14,769, ,309, Krungthai AXA Life 14,610, ,744, Bangkok Life 10,533, ,767, (11) Prudential Life Assurance 5,980, ,298, Allianz Ayudhya Assurance 5,897, ,242, (10) FWD Life Insurance* 3,900, ,992, (9) Ocean Life Insurance 3,614, ,544, Figures in parentheses represent ranking in 2012 * Changed from ING Life in August 2013 Insurance Outlook
7 Direct Premiums Received: Life Insurance Sector Type of Insurance Direct Premiums (Unit: Baht 1,000) Increase / (Decrease) (%) 1 Ordinary 371,467, ,664, Industrial 7,913,154 8,292,375 (4.57) 3 Group 56,388,917 47,183, Total 435,769, ,140, Personal accident 5,579,202 5,333, Grand Total 441,348, ,473, Direct Premiums Received in Insurance Outlook 2014
8 Distribution Channels of Life Insurance Sector For the operational turnover in 2013, the bancassurance distribution channel played an important role in distributing the life insurance products. It is anticipated it will be the most significant distribution channel for the life insurance industry in the future, and could replace the traditional agent distribution channel. According to the OIC report for the year of 2013, the bancassurance distribution channel generated direct first-year premiums of around Baht 45,748 million out of the total of Baht 101,136 million. This represented an increase of 26% over the same period of The direct first-year premiums generated by the agent distribution channel was Baht 47,458 million, which represented an increase of 8.2% over the previous year. Overall, the direct premiums received via the agent channel were Baht billion, which was 54.6% of all direct premiums received via all distribution channels, an increase of 7.04% from The bancassurance distribution channel ranked second, with direct premiums received of Baht billion, or 38.53% of total direct premiums, with a significant growth rate of 23.48%. This was followed by telemarketing, which generated direct premiums of Baht billion, or 2.91%, an increase from the previous year of 13.18%. Direct premiums received via other distribution channels were Baht billion, accounting for 3.9%. Insurance Outlook
9 Non-life Insurance Sector At the end of 2013, the market share of the top four non-life insurance companies maintained the same standings as in 2012 based on total direct premiums: Viriyah Insurance, Dhipaya Insurance, Bangkok Insurance, and Synmunkong Insurance. Viriyah Insurance s high volume of direct premiums and market share in the automobile insurance sector landed the company on the top of the list by taking a substantial market share of 16.74%. Following closely, Dhipaya Insurance s domination of the market for fire insurance and miscellaneous insurance places the company in second place. The very close values of direct premiums received among the companies in the fifth to seventh positions resulted in slight shifts in their rankings. Muang Thai Insurance moved up from seventh position in 2012 to fifth position in Safety Insurance dropped from fifth position in 2012 to sixth in 2013 and Tokio Marine Srimuang dropped from sixth to seventh in The number of policies issued increased from 47,858,634 policies in 2012 to 52,066,045 policies in 2013, rising at a rate of 8.79%. The automobile insurance sector saw immense growth in terms of direct premiums received in 2013 at Baht 118,417 million, an increase of 13.96% from last year. The total direct premiums received in the non-life insurance business for the whole year is Baht 203,021 million, increasing 13.12% from last year. The increasing rate is still below the direct premiums received in 2012 which increased 29.33% from 2011 due to the Government s launch of the first car subsidy policy in Market Share of Direct Premiums: Non-Life Insurance Sector (Unit: Baht 1,000) Rank Companies Direct Premiums Market Share (%) Direct Premiums Market Share (%) 1 Viriyah Insurance 33,983, ,981, Dhipaya Insurance 23,617, ,797, Bangkok Insurance 15,057, ,432, Synmunkong Insurance 8,862, ,958, (7) Muang Thai Insurance Public 8,663, ,157, (5) The Safety Insurance 8,482, ,890, (6) Tokio Marine Srimuang 8,033, ,190, (9) LMG Insurance 5,979, ,280, (8) Thanachart Insurance 5,651, ,689, Mitsui Sumitomo Insurance 5,539, ,785, Figures in parentheses represent ranking in Insurance Outlook 2014
10 Market Share of Direct Premiums in 2013: Automobile Insurance Sector (Unit: Baht 1,000) Rank Companies Direct Premiums Market Share (%) 1 Viriyah Insurance 30,939, Synmunkong Insurance 8,106, The Safety Insurance 6,698, Bangkok Insurance 6,681, (6) Dhipaya Insurance 5,147, (7) LMG Insurance 5,033, (5) Thanachart Insurance 4,928, Tokio Marine Sri Muang Insurance 4,331, (10) Muang Thai Insurance Public 4,257, (9) Road Accident Victims Protection 3,837, Figures in parentheses represent ranking in 2012 Type of Insurance Direct Premiums (Unit : 1,000 THB) Increase / (Decrease) (%) 1 Fire 11,812,656 9,759, Marine & Transportation 5,299,296 5,193, Automobile 118,417, ,915, Miscellaneous 67,491,569 60,612, Industrial All Risks 24,989,213 21,047, Personal Accident 23,317,047 20,522, Heath Insurance 6,058,575 5,795, Total 203,021, ,480, Direct Premiums Received in 2013 Insurance Outlook
11 Distribution Channels in Non-Life Insurance Sector In the non-life insurance sector, companies use various distribution channels in selling their insurance products. In 2013, selling through brokers accounted for 55.94% of all distribution channels, followed by agent 14.19% and bancassurance 13.93%. These three distribution channels saw a slight increase in terms of direct premiums received in 2013 compared to the previous year. The distribution channel that saw a significant increase of direct premiums received was selling through the internet, which went from Baht 190,010,000 in 2012, to Baht 642,769,000 in 2013, increasing by %. Distribution Channels of Direct Premiums in Insurance Outlook 2014
12 M&A Summary and Trends M&A Overview Considering the uncertainty of the political situation in Thailand, it will be interesting to see whether 2014 will be the year that mergers and acquisitions (M&A) within the insurance industry take off again. From a legal standpoint, the regulatory environment regarding tax exemption seems more favorable to accelerating M&A activity than the past years. As a result, it is possible that the insurance companies may seek to expand their market shares and distribution channels, as well as new products, taking advantage of these regulatory opportunities. The insurance industry could expect to see significant activity of that it has not seen for the past several years. Recent Deals There were four significant M&A transactions announced in 2013 as follows: 1. Pacific Century Group Holdings Limited ( PCG ), a Hong Kong based private equity firm completed the acquisition of ING Life Public Company Limited ( ING ). ING has changed its name to FWD Life Insurance Public Company Limited, effective 26 August 2013; 2. Prudential Life Assurance (Thailand) Public Company Limited ( Prudential ) completed the acquisition of shares in Thanachart Life Assurance Public Company Limited from Thanachart Bank Public Company Limited ( T-Bank ). 3. Meiji Yasuda Life Insurance has completed the acquisition of 15% shares in Thai Life Insurance Public Company Limited; and 4. ACE INA International Holdings Limited acquired The Siam Commercial Samaggi Insurance Public Company Limited. Tax Reform: Exemption on Reserves to Facilitate M&A of Financial Institutions and Insurance Companies In 2013, there was the improvement of the regulation to rectify the tax obstacle impeding M&A transactions. There was significantly taxation concern around the so-called insurance premium reserve in insurance M&A transactions, particularly in the amalgamation of business and entire business transfer (EBT). The insurance industry had long faced a tax barrier as the law required them to realize that part of the accrued insurance premium reserve on which tax has not been paid as taxable income in the financial year of the amalgamation or EBT. To rectify this problem and to promote these transactions, effective 24 December 2013, a tax exemption on such reserves is granted to the amalgamated companies (in case of amalgamation) and the transferors (in the case of an EBT) under Royal Decree No The OIC and the Revenue Department successfully pushed this Royal Decree to become effective. Therefore, from now on, tax relief will be granted to amalgamating companies (in an amalgamation transaction) or an acquired company (in an EBT transaction), such that they are not required to realize that part of the accrued insurance premium reserve on which tax has not been paid as taxable income in the financial year of the amalgamation or EBT. Insurance Outlook
13 AEC Updates In 2013, the industry was responding faster to the approach of the ASEAN Economic Community (AEC) compared with The OIC has been working internally on the supporting regulations, which are intended to assist Thai insurers to be able to explore insurance markets within the AEC and to ensure that Thailand will be ready for this economic trend. The OIC s policy seems to encourage Thai insurers looking at investing overseas to expand into the AEC member countries. 1. Oversea Information Center In response to the rapidly approaching AEC integration, the OIC has come up with criteria and requirements on the establishment of overseas information centers (the Guidelines ) in response to substantial interest from Thai insurers regarding the topic. The key conditions are as follows: 1.1 Criteria for the Insurer in Obtaining Approval from the OIC (a) The insurer must possess strong financial standing and capital adequacy ratio. (b) The insurer must demonstrate readiness in operations, human resources, and information relating to the insurer s scope of work in Thailand and in the target country, as well as providing the location of the information center. (c) The insurer must possess a strong understanding of the economic, social, political, and legislative environment, as well as local insurance laws and regulations concerning the establishment of an information center in the target country. (d) Insurers are limited to establishing information centers in ASEAN member countries only, and each limited to only one (1) information center per country. 1.2 Scope of Permitted Activities (a) Information gathering, as well as coordinating research, including conducting feasibility studies for the purpose of the insurer s business expansion. (b) The information center must not be an incomegenerating unit of the insurer. (c) Providing knowledge to the general public or local insurance companies for educational purposes. Under no circumstances shall the knowledgesharing activities be within the scope of the activities forbidden per item (d) below. (d) The information center must not operate in a manner which may lead the public to believe that it is an insurer s branch or has characteristics which fall within the scope of conducting insurance business. Also, it must not operate in any manner which does not comply with the target country s laws and regulations. 2. Outbound Investment In addition to support and encouragement from the authorities, Thai insurers could ensure privileges under the AEC Framework by studying the possibility of making investments in the member countries. Expanding business to the country s borders regains popularity as AEC opens way for more cross-border transactions. Branching out or opening a representative office 13 Insurance Outlook 2014
14 becomes a crucial tool for business to expand to neighboring countries under AEC framework. The fierce competition also demands that insurers analyze the target country s market by opening a representative office. According to the framework, AEC member states must progressively liberalize the insurance sectors as identified by each Member State by 2015, or the latest by Liberalization Timeframe Year Insurance Sectors Countries 2015 Life Insurance Indonesia, Malaysia Non-Life Insurance Reinsurance and Retrocession Insurance Intermediation Services Auxiliary to Insurance Brunei, Cambodia, Indonesia, Malaysia Brunei, Cambodia, Indonesia, Malaysia, Philippines, Singapore and Vietnam Cambodia, Malaysia, Indonesia, Philippines, Singapore and Vietnam Brunei, Cambodia, Indonesia, Malaysia, Philippines, Singapore and Vietnam 2020 Life Insurance All Members Non-Life Insurance All Members 2.2 Progressive Liberalization (a) Remove restrictions to market access (foreign shareholding limit, partnership requirement, nationality requirement, etc.) (b) Ensure national treatment for foreign investors (c) Actual liberalization commitments of each Member States are shown in the ASEAN Framework Agreement on Services (AFAS) 2.3 Current Foreign Equity Participation Limit Below are the foreign equity participation limit to invest in the AEC countries. Country Life Insurance Non-Life Insurance Brunei N/A N/A Cambodia 100% 100% Indonesia 80% 80% Laos 100% 100% Malaysia 70% 70% Myanmar N/A N/A Philippines 100% 100% Singapore 100% 100% Thailand 25% 25% Vietnam 100% 100% Insurance Outlook
15 Laws and Regulations Update Draft New Insurance Acts The OIC has also launched the draft new life insurance act and the draft new non-life insurance act (the Draft New Insurance Acts ) for public comments. The Draft New Insurance Acts will repeal and replace the current Insurance Acts and they will introduce certain new concepts to the insurance business. The Council of State representative explained that the central motivation for overhauling Thai insurance laws is to raise standards within the insurance industry and thereby meet international standards, including those of financial institutions. For this reason, the Draft New Insurance Acts have adopted numerous concepts from the Financial Institution Act B.E (2008). A sample of key proposed changes includes: (a) Approval required for Major Shareholders a shareholder who holds at least 10% of an insurance company must obtain approval from the OIC. (b) Appointment of Directors, Persons Authorized to Manage the Company, and Consultants - the appointment of directors or authorized persons (e.g. manager, assistant to manager, directors who are executives or persons in equivalent positions, and consultants) must first obtain approval from the OIC. (c) Definition of Parent Company, Affiliates, Associated Companies, and Related Persons the definitions are provided in order to specify the types of transactions which can be undertaken between the insurance company and these persons. Moreover, an insurance company is not allowed to establish affiliates unless approval is obtained from the OIC. (d) Representative Office foreign insurers are allowed to establish representative offices in Thailand and Thai insurers are allowed to establish representative offices outside Thailand, upon receiving approval from the OIC. (e) Foreign Shareholding Limit foreign shareholding is limited to less than 25%. The foreign shareholding limit can be increased up to 49% with approval from the OIC and can be increased above 49% with approval from the Ministry (f) of Finance and the OIC. The definition of Thai under the previous Insurance Acts has been removed. Reporting on the Acquisition of Every 5% of Shares any person holding or acquiring 5% or more of shares in an insurance company, either directly or indirectly, must report it to the OIC. (g) Insurance Business Group introduces the concept of Insurance Business Group (similar to Financial Business Group). (h) Insurance Policy in general, insurance policies and all their riders must be certified by an actuary prior to issuance, except in the case of certain policies which may require the approval of the OIC before issuance. (i) Insurance Agents and Brokers the concept of corporate agents in reference to brokerage will be introduced. The Draft New Insurance Acts are expected to take effect in Currently, they are under the consideration of the OIC and related authorities. 15 Insurance Outlook 2014
16 Draft Amendments to Section 10 of the Life Insurance Act and Section 9 of the Non- Life Insurance Act (the Draft Amendments ) Legislative Background: The first priority in respect of the regulatory improvement is the amendments to the Insurance Acts which came into effect in February The amendments quickly proved controversial among insurance companies and investors alike, introducing a definition of Thai shareholder in insurance companies that requires shareholding participation of Thai individuals or non-registered ordinary partnerships in which all partners are Thai nationals. Numerous insurance companies have found it challenging to conform to these requirements. In response to the industry s concerns, Draft Amendments, prepared with the assistance of the Office of the Insurance Commission (OIC), are currently pending consideration and approval in Parliament. The Draft Amendments will revise the definition of Thai shareholder as specified in the 2008 amendments and institute new shareholding requirements: the company (insurance company) must have persons of Thai nationality holding shares not less than 75% of the total shares sold, whereby the said amount of shares must have voting power of not less than 75% of the total voting power. This means the participation of Thai individuals or non-registered ordinary partnerships in which all partners are Thai nationals is no longer required. Further, the Draft Amendments will provide the Minister of Finance with greater authority to issue special permission to insurance companies wishing to increase their foreign shareholding ratio. The 2008 amendments only allow the Minister of Finance to authorize a foreign shareholding level above 49% if the company s standing or operations are in a condition that threatens to cause damage to the insured or the public. Under the Draft Amendments the Minister may issue special permission if: 1) the increased foreign shareholding is necessary to maintain business operations; 2) the increased foreign shareholding would improve the financial stability of the insurance company to protect the insured; or 3) the increased foreign shareholding would increase stability in the insurance industry. Current Status The Draft Amendments was submitted to the House of Representative in August 2013 and are awaiting the House of Representative s final approval. If the Draft Amendments are approved, they will be sent to the Senate for further consideration and approval. Below are key steps which the Draft Amendments will need to go through: (a) Obtain approval from the House of Representatives (b) Obtain approval from the Senate (c) PM presents to King for signature (d) King signs the Draft Amendment Bill (e) PM certifies the Draft Amendment Bill (f) Enact Draft Amendment Bill in the Government Gazette, becoming effective. Due to the on-going political situation in Thailand, the timeframe in which the Draft Amendments will become effective is still uncertain. However, after the election is completed and the new government is formed, the House of Representative will be able to continue to review and approve the pending Bills, which also include the Draft Amendments. New Notifications Outlining Consequences for Insurance Law Violators On 23 August 2013, the OIC issued two notifications concerning rules and procedures governing the public announcement of noncompliance with life or non-life insurance laws (the Notifications ). The primary aim of the Notifications is to increase public awareness of violations within the insurance industry. Key Provisions The Notifications establish procedures for the announcement of non-compliance with life or non-life insurance laws by a life insurance company, a non-life insurance company, insurance agent, insurance broker, actuary or loss adjuster. Under the Insurance Outlook
17 Notifications, the OIC will publish a description of the violations on its website or in newsletters for the general public s awareness. Examples of non-compliance include: (a) failure to maintain the required minimum capital; (b) failure to comply with reporting requirements, including: 1. submission of financial statements or operational reports; 2. modification of annual reports at the order of the OIC; 3. disclosure of financial status or overall operation status; 4. submission of annual reports calculating the liability of insurance policies issued; or 5. inaccurate reporting of the abovementioned reports or disclosures; (c) an order by the OIC to increase or reduce the capital of an insurance company or to remove directors, managers, or persons responsible for the operations of an insurance company when the company s operation is in financial distress; (d) revocation or suspension of licenses of insurance agents, brokers, actuaries, or loss adjusters; and (e) any violation or instance of non-compliance by a life insurance company, a non-life insurance company, insurance agent, insurance broker, actuary or loss adjuster, for which the OIC may impose a fine. New Investment Regulations for Insurance Companies On 25 October 2013, the new OIC Notification re: Investment in Other Businesses by Life/Nonlife Insurance Companies (the New Investment Regulations ) governing the investment of insurance companies came into effect. The New Investment Regulations amend the previous regulations with the aim of ensuring insurance companies are investing in appropriate assets to generate adequate returns and maintain a sufficient reserve to fulfill their obligation of compensation payments to insured creditors under the insurance policies. The changes set forth by the New Investment Regulations seek to: (a) align the investment activities of insurance companies with the Risk-Based Supervision (RBS) criteria; (b) categorize investment activities based on risk, liquidity and flexibility of investments; (c) implement Good Governance and Fit and Proper principles; and (d) align Principle-based investment with Rule-based investment. What are the Key Changes? In order to achieve the abovementioned goals, the New Investment Regulations have introduced significant changes to the management of investment of insurance companies, as follows: 1. Duties of Directors The New Investment Regulations require the Board of Directors of insurance companies to be responsible for the approval of the investment policy and risk management policy associated with an investment. The Board of Directors shall also be responsible for monitoring investments to ensure they comply with the policies and related regulations. 2. Investment Committee Apart from monitoring an investment to ensure compliance with the New Investment Regulations, the Board of Directors must appoint at least three members from the Board of Directors or management as the Investment Committee. This committee will act as the key administrator in preparing the investment plan for the Board of Directors approval and implementing such plan. As the Investment Committee will play an important role in overseeing the investment portfolio of the insurance company, its three members must have the following qualifications: (a) a person at the director or management level of a company; and 17 Insurance Outlook 2014
18 (b) a person with expertise and experience of not less than three years in investment management, risk management or securities analysis. 3. Investment Guidelines and Policies In order to ensure that an investment proceeds in a clear and well-defined manner, insurance companies are required to prepare a written Investment Policy, Investment Plan, Risk Management Plan, and Investment Manual to be submitted to the OIC on a yearly basis. 4. Investment Division Insurance companies are required to set up an Investment Division, that will report to the Investment Committee, with sufficient resources, information, and a system which corresponds to the level of complication of the company s investments. The New Investment Regulations also specify the qualifications of those responsible for the investments of the company, including those with experience in relation to the investment. 5. Permitted Investments and Conditions While the New Investment Regulations do not impose many changes in permitted categories of investments, there are significant revisions to the conditions of investment in each permitted category. Besides these conditions, the New Investment Regulations also introduce the following concepts concerning investment proportion: (a) Counterparty Limit (investment proportion by type of issuer or counterparty); (b) Product Limit (investment proportion by type of asset); and (c) Issuer Limit (investment proportion by issuer). Life and Non-Life Insurers New Reporting Requirements on Investments in Other Businesses Following the issuance of the New Investment Regulations, the OIC issued two new Registrar Directives which require Life and Non-life insurers to submit Monthly Investment Ratio Reports in a form provided by the OIC (the Reports ). The Reports distinguish different types of investment products in which insurers invest, as well as specifying the investment limitation ratio (Product Limit) for these products. The Reports must be submitted electronically in Excel format, as specified by the OIC, along with an identical hard copy by the end of the following month in which the report was generated, with the exception of March, June, September, and December, for which they can be submitted within 45 days from the end of the month. This process has been in effect since December Insurance Outlook
19 Claims / Litigation Update Foreign Courts Issue Judgments in Thai Floods Insurance Disputes In 2011, Thailand was affected by the most expensive flood in its history. The floodwaters covered a widespread area over a significant period of time. From these facts we see issues arising with respect to insurance and reinsurance claims. Three years on, these insurance cases are reaching the foreign courts including the two following cases. Federal-Mogul Corp. v Insurance Company of the State of Pennsylvania 1 is interesting for the issue of sublimits in the liability context and whether the court s decision that Thailand was never situated in a predetermined floodplain will be a predictor for future decisions. Tokio Marine Europe Insurance Limited v Novae Corporate Underwriting Ltd 2 is notable for the English Commercial Court s latest guidance on what it is that a reinsured must prove in order to make a recovery under a follow the settlements clause and, in particular, the standard of proof required. 1 Case No. 2:12-cv (E.D. Mich.) 2 [2013] EWHC 3362 (Comm) Federal-Mogul v Insurance Company of the State of Pennsylvania In October 2011, US automotive parts company Federal-Mogul Corp. suffered damages and loss in excess of US$ 88 million when heavy rains flooded its industrial park facility in Ayutthaya, Thailand. In May 2012, Federal-Mogul filed a lawsuit against its insurer claiming that it was obliged to pay the full claim amount but so far had only paid US$ 30 million. The insurer limited the amount based on the High Hazard Zone flood sub-limit provision in the policy. Federal- Mogul argued that the provision did not apply and filed an action seeking coverage under the policy s US$ 200 million annual aggregate limit for flood liability. The principal issue was whether Federal-Mogul s facility was in a designated High Hazard Zone. A High Hazard Zone for flood as defined by the policy required the damaged property to be partially or totally situated in a predetermined area within a 100 year floodplain as designated by a government, authority, or official map. The court determined that since the insurer was relying on the exclusion or sub-limit to exclude certain payment, it bore the burden of proof. The court held that the insurer could not prove that the High Hazard provision limited Federal- Mogul s recovery because the policy unambiguously required that a formal, predetermined 100 year floodplain must have existed at the time of the flood. Neither Thailand nor any other government or authority had ever formally determined that Federal-Mogul s facility was in a 100 year floodplain prior to the flood. Therefore the limitation did not apply and Federal-Mogul was entitled to its claim above the $30 million limit. The case is on appeal. Tokio Marine Europe Insurance Ltd v Novae Corporate Underwriting Ltd Tesco and its Thai subsidiaries suffered considerable property and business interruption losses during the 2011 Thai floods. Tesco was insured under a global master policy with ACE along with local policies issued by local ACE subsidiaries. Various reinsurers agreed to reinsure ACE for a 55% share of losses under a facultative reinsurance (reinsurance), in which Tokio Marine had a 12.5% participation. Tokio Marine obtained a facultative excess of loss reinsurance (retrocession) from Novae which reinsured Tokio Marine for 12.5% of Tesco s losses. 19 Insurance Outlook 2014
20 Tokio Marine paid its share of the settled claims following the 2011 floods in Thailand then sought recovery from Novae under the retrocession which contained an unqualified follow the settlements clause. Novae denied liability on several grounds including that it did not agree that the floods constituted a single event. Five preliminary issues came before the court. The first set of issues related to whether or not the terms of the Original Policy had been incorporated into the retrocession and whether the term Original Policy included the local policies or just the master policy. Hamblen J concluded that the retrocession and reinsurance were materially the same and that to exclude the local policies would have constituted a radical mismatch in coverage which would not have made commercial sense. The three remaining preliminary issues related to the construction of the follow the settlements clause in the retrocession contract which contained the following unqualified follow the settlements clause: This Contract is subject in all respects.to the same terms, clauses and conditions as original and without prejudice to the generality of the foregoing, Reinsurers agree to follow all settlements (excluding without prejudice and ex gratia payments) made by the original Insurers arising out of and in connection with the original insurance Hamblen J distinguished the clause as unqualified as opposed to qualified, which generally contains additional language specifying that claims must fall within the terms of the insurance and reinsurance contracts. It is settled law that for unqualified follow the settlement clauses the reinsurer will indemnify the reinsured if the reinsured acted honestly and took all proper and business-like steps in making their settlement; and the claim falls within the risks covered by the reinsurance agreement. In addition, the burden of proof is on a reinsured to show that its claim arguably falls within the terms of the reinsurance. Hamblen J held that Tokio Marine was required only to show that the claim arguably fell within the terms of the retrocession and not that the claim was covered on the balance of probabilities. The court assumed that ACE acted in an honest, proper, and businesslike manner in concluding the original settlement with Tesco therefore Novae was precluded from reopening the original settlement. The case is on appeal. Lessons Learned While the two cases set out above are very different, one thing is clear: when insurers draft up policies for use in Thailand, there should be sufficient consideration afforded to what they wish to achieve rather than to rely on the unthinking adoption of a formula which may have worked elsewhere: a. The Federal-Mogul case shows that where there is a well established exception for certain exclusions, it is not sufficient to simply adapt it for foreign use by prescribing any measure which is similar to the US system since this very system may not exist in the foreign country; and b. The Tokio Marine decision is a lesson for reinsurers that if they adopt the language of an unqualified follow the settlements clause, it will be too late for them to attempt to qualify their obligations ex post facto. We note that these two cases were decided by the foreign Courts and we have to wait to see if the Thai Court would rule on the same principles. Insurance Outlook
21 Statement of Capability For many years, our Insurance Practice Group has been a key participant in the Thai insurance industry and has acted as legal advisor to organizations in various parts of the insurance industry network, including domestic insurance companies, international investors, insurance brokers, as well as Thai insurance regulators. Our experience in this field enables us to play an active role in assisting international investors from more mature insurance and reinsurance markets, who are eager to participate in an existing domestic operation or a joint venture with an existing local insurance entity. Our insurance law specialists advise insurance clients of all types, at all stages of operation from establishing their operations in Thailand (often through mergers, acquisitions, or joint venture agreements) to regulator compliance, insurance policy drafting, and the settlement of claims. We have also given advice to a number of clients on the procedures for corporate and financial restructuring, to enable them to legally achieve their business objectives, in light of the strict regulatory regime. The broad range of insurance-related matters we handle includes: - Thailand regulatory issues; - policy issues (life and casualty insurance); - mergers, acquisitions, and joint ventures; - development of new insurance and investment-linked products; - insurance-related claims and subrogation matters; - investments by insurance funds and asset management; - bancassurance; - tax aspects of insurance, investment, and corporate restructuring; and - litigation claims. As part of Baker & McKenzie s Global Insurance Practice Group, we are also able to draw on the experience of our offices in leading international insurance markets, such as those in New York, Chicago, London, and throughout Europe. We are able to provide timely and cost-efficient multi jurisdictional reviews of relevant insurance, tax, corporate and regulatory issues facing international underwriters in the various markets in which they operate. 21 Insurance Outlook 2014
22 Baker & McKenzie has been global since inception. Being global is part of our DNA. Our difference is the way we think, work and behave we combine an instinctively global perspective with a genuinely multicultural approach, enabled by collaborative relationships and yielding practical, innovative advice. Serving our clients with more than 4,100 lawyers in over 40 countries, we have a deep understanding of the culture of business the world over and are able to bring the talent and experience needed to navigate complexity across practices and borders with ease. Visit to learn more For more information please contact Insurance - Regulatory, M&A Pornapa L. Thaicharoen Tel No.: ext pornapa.thaicharoen@bakermckenzie.com Jakkarin Bantathong Tel No.: ext jakkarin.bantathong@bakermckenzie.com Sorachon Boonsong Tel No.: ext sorachon.boonsong@bakermckenzie.com Sivapong Viriyabusaya Tel No.: Ext sivapong.viriyabusaya@bakermckenzie.com Preeda Meksrisuwan Tel No.: ext preeda.meksrisuwan@bakermckenzie.com Ampika Kumar Tel No.: ext ampika.kumar@bakermckenzie.com Dispute Resolution - Insurance Claims Kanit Vallayapet Tel No.: ext kanit.vallayapet@bakermckenzie.com Wynn Pakdeejit Tel No.: ext wynn.pakdeejit@bakermckenzie.com Manu Rakwattanakul Tel No.: ext manu.rakwattanakul@bakermckenzie.com Pisut Attakamol Tel No.: ext pisut.attakamol@bakermckenzie.com Chaiporn Supvoranid Tel No.: ext chaiporn.supvoranid@bakermckenzie.com Suksawat Watewai Tel No.: ext suksawat.watewai@bakermckenzie.com Paralee Techajongjintana Tel No.: ext paralee.techajongjintana@bakermckenzie.com Piya Krootdaecha Tel No.: ext piya.krootdaecha@bakermckenzie.com Timothy Breier Tel No.: ext timothy.breier@bakermckenzie.com Chirachai Okanurak Tel No.: ext chirachai.okanurak@bakermckenzie.com 2014 Baker & McKenzie SCP. All rights reserved. Baker & McKenzie SCP is a member of Baker & McKenzie International. In accordance with the common terminology used in professional service organizations, reference to a partner means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an office means an office of any such law firm. This may qualify as Attorney Advertising requiring notice in some jurisdictions. Prior results do not guarantee a similar outcome.
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