AM Best believes new regulations in Thailand allowing insurance companies to leverage insurance capital bonds as an alternative source of financing will boost capital adequacy, improve financial flexibility and offer companies the opportunity to lower their overall cost of capital. In its new Best’s Special Report, “New Capital Bond Rules Will Help Thailand Insurers Unlock Additional Financing Source,” AM Best notes that while a more-optimal capital structure will be beneficial to risk-adjusted capitalisation, the potential for excessive levels of financial leverage exists, which could negatively affect an insurer’s liquidity and cash flow and lead to financial instability. In particular, higher financial leverage could pose additional debt repayment pressure for companies with relatively modest earnings.
The new regulations apply to just Thailand-licensed life and non-life insurers, excluding local branches of foreign carriers, and under the new rules, proceeds of issuances may form part of an insurance company's total available capital to support capital adequacy ratios if eligibility conditions are met. Under Best’s Credit Rating Methodology (BCRM), subordinated debt may also receive equity credit, which can impact a company’s financial leverage and the calculation of its available capital in AM Best’s proprietary economic capital model, Best’s Capital Adequacy Ratio (BCAR).
Overall, AM Best views greater access to financing sources as credit positive to Thailand’s insurance market. Although the industry’s regulatory solvency level is generally robust, the capital adequacy ratio has exhibited volatility over recent years, due to a tightening regulatory framework and the wider macroeconomic environment. Thailand also is prone to natural catastrophes and other shock events, such as the 2011 floods that caused significant strains on capital adequacy. Consequently, this new access to capital is viewed as prudent given the uncertainty over further development of the COVID-19 pandemic, and presents an alternative to a reliance on equity financing, particularly foreign capital, at a time when many global players are re-evaluating their business portfolios.
To access a complimentary copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=306598.
AM Best is a global credit rating agency, news publisher and data analytics provider specialising in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.
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