Life Insurance, 2007 & Outlook, 2008: Growing with Bancassurance (Business Brief No.2072)

During the first half of this year, direct premiums to the life insurance industry grew 15.6 percent over-year to THB90.62 billion. This represented the highest growth of the past three to four years. Notably, this growth in premiums came mainly from the first-year premiums of new business rather than renewal premiums.

After recording slowing growth for five consecutive years (2002-2006) – decelerating from 24.8 percent in 2001 to only 4.6 percent in 2006 – the life insurance industry has accelerated in growth this year thanks to a sharp decline in fixed deposit rates in the financial institution system. Earlier this year, the rate stood at around 2 percent against the peak of over 5 percent last year.

It could be said that bancassurance – where banks serve as sales agents – has contributed greatly to the rapid growth in the life insurance industry. The accountability and trustworthiness of banks with bancassurance aids in expanding the customer base for the industry. Typically, consumers show greater trust in banks as insurance sales agents than in other agents. The market share of premiums via bancassurance has been rising since commercial banks received permission to operate insurance business in 2002. Marketing strategies have been launched in earnest since 2004. Of the total premiums earned by the industry, direct premiums via bancassurance increased from 5.7 percent in 2004 to 10.8 percent in 2006. Looking ahead, the market share of bancassurance is expected to rise to a range of 13.0-15.0 percent in 2007-2008. Meanwhile, the market share of premiums via sales agents is expected to drop from 89.8 percent in 2004 to 82.8 percent in 2006. In 2007-2008, that share may fall to 77-80 percent.

On the downside, the life insurance industry has been affected by numerous negative factors during the latter half of this year. Among them have been record high oil prices, which are likely to deal a severe blow to the GDP, as well as inflation and waning consumer confidence in the year to come. Worse, a bullish trend in fixed deposit rates that has resumed since the end of the third quarter of this year will not help, either. The hikes in fixed deposit rates are a response to the Bank of Thailand's savings bonds issued at the end of August. Furthermore, the forthcoming issue of Financial Institutions Development Fund (FIDF)'s savings bonds in late November is seen as being another catalyst for earlier-than-expected increases in deposit rates at commercial banks. This can be seen from the launch of fixed deposit products with interest rates of 2.0-3.5 percent p.a. in the final quarter of this year. Under these circumstances, other forms of savings, especially life insurance – a long-term savings product – are likely to be hindered. Currently, interest rates on insurance policies range between 3.0-4.0 percent.

However, KResearch projects that the 2H07 performance of life insurance companies will still likely not fully show this negative impact. But, the situation may result in weaker growth in direct written premiums over the entire year to around 10.0-14.0 percent growth over the end of last year, accounting for around THB192,000-199,000 million, compared to the first half this year in which growth was 15.6 percent. As for our projection for 2008, the growth of direct insurance premiums next year will decelerate to around 5.0-6.0 percent compared to this year, and have a value of around THB202,000-210,000 million.

Life insurance business in Thailand has the chance to carry on growth during both this period of economic repositioning and during recovery, but that growth may seem less striking. (The exception to this would be if any occurrence of special significance such as the government granting permission to increase tax deductions on insurance premiums over the present ceiling at not more than THB50,000/person/year, etc.).

KResearch holds the view that the growth rate in direct insurance premiums earned from bancassurance will likely continue leading the growth in the life insurance business. Meanwhile, there are also indications that sales channels through company representatives can only maintain the market share and prevent it from dropping too rapidly. This trend suggests that life insurance companies should improve bancassurance, giving it more variety, adjusting products to better suit customers in different age groups, and targeting others besides working-aged customers motivated by tax deductions. If they continue with that focus, the expansion of their customer base may falter after having shown substantial growth for at least three consecutive years.