- The Thai insurance regulator has published a draft insurance law that when implemented will overhaul the regulation of the insurance industry in Thailand. The draft will likely change, after the first round of public consultation, before submission to cabinet.
- One of the aims of the new law is to bring the regulation of insurance in line with the rules that govern banks and other financial institutions as set out in the Financial Institution Business Act.
- A range of new rules will affect insurance businesses in Asia, including relaxation of existing foreign shareholding limits, allowing certain foreign insurers to issue policies, introducing a 10% single shareholder limit, and making portfolio transfers easier.
- It remains to be seen whether the rules will affect only future acquisitions or whether there will be retrospective application. Insurers will need to monitor the situation over the coming months and make sure they are ready to comply with the new rules once they become law.
Earlier this year, Thailand’s insurance regulator, the Office of Insurance Commission (OIC), published drafts of the new Life Insurance Act and Non-Life Insurance Act (collectively the “Draft Insurance Acts”), which when passed, would repeal and replace the current Life Insurance Act B.E. 2535 and the Non-Life Insurance Act B.E. 2535 (collective the “Insurance Acts”).
This followed recent amendments to both the Insurance Acts, which introduced more flexibility for foreign shareholders and more protection for the insured in the event the insurer is insolvent or has had its licence revoked.
Many of the changes in the Draft Insurance Acts would bring insurance regulations in line with the regulatory structure of the Financial Institutions Business Act B.E. 2551 (FIBA), which regulates commercial banks and other financial institutions. Both the OIC and the Bank of Thailand (BoT), the financial institution regulator, are under the supervision of the Ministry of Finance.
Broadly the principal changes introduced in the Draft Insurance Acts are as follows:
- further relaxation for foreign participants;
- more flexibility to effect portfolio transfers;
- new reporting/compliance requirements;
- more flexible capital control; and
- more liabilities imposed on directors.
The Draft Insurance Acts anticipate future bilateral treaties between Thailand and foreign countries as the benefits of many of the relaxation on foreign participation in the Thai insurance sector are only available to insurers based in a country recognised under a relevant bilateral treaty with Thailand.
Further relaxation for foreign participants
Forms of business entity
Under the Insurance Acts, the forms of business entities which can apply for an insurance licence are limited to a Thai incorporated public limited company (Thai PLC) or a branch of a foreign incorporated insurer (Foreign Branch). Under the Draft Insurance Acts, in addition to a Thai PLC and a Foreign Branch, the following forms of business entities would also be eligible to apply for an insurance licence:
- a Thai PLC with at least 95% of its shares held by a foreign insurer (Foreign Subsidiary). Under FIBA a Thai subsidiary of a foreign bank is eligible to apply for Thai banking licence; and
- any other form of entity, such as a mutual society, (Other Form).
It is important to note that, as a matter of policy, the OIC is currently not issuing new insurance licences. The OIC’s policy on the issue of new insurance licences should be monitored in parallel with developments of the Draft Insurance Acts.
Foreign shareholding restrictions
Under the Insurance Acts, foreigners can hold up to 25% the total issued shares of a Thai insurer without any specific regulatory approval. OIC has the discretion to permit foreign shareholding above 25%, but only up to 49%. The Ministry of Finance (MoF) (with the recommendation of the OIC) has the discretion to permit foreign shareholding above 49% in the event the status or operations of the insurer might cause damage to the insured or the public; to enhance the insurer’s operations; or to enhance the insurance sector.
Under the Draft Insurance Acts, foreigners can hold less than 50% of the total issued shares of a Thai insurer without any specific regulatory approval, removing the 25% threshold and the requirement for specific OIC approval for foreign shareholding up to 49%. Specific approval of the MoF is still required for foreign shareholding of 50% or more, but the criteria for such approval have been expanded to be in line with FIBA. MoF (with the recommendation of the OIC) would have the discretion to permit foreign shareholding at or above 50%:
- to rectify the operations of the relevant insurer;
- to strengthen the financial stability of the relevant insurer;
- to protect the interests of the insured or any person who has a claim under the policy; or
- to ensure the stability of the insurance sector.
Under the Draft Insurance Acts, the restrictions on foreign shareholding (and similar restrictions on foreign directors) do not apply to any insurer which is:
- a Thai PLC which is majority owned by shareholders based in a country recognised under a relevant bilateral treaty with Thailand;
- a Foreign Branch;
- a Foreign Subsidiary; or
- an insurer which operates under Other Form.
Foreign insurers writing policies
Under the Insurance Acts, there is a general prohibition against any person issuing an insurance policy in Thailand without an insurance licence from the OIC. Under the Draft Insurance Acts, there is a specific exception to this general prohibition which allows an insurer, not licensed by the OIC but licensed in a country recognised under a bilateral treaty with Thailand, to issue an insurance policy in Thailand.
However, it is unclear from the provisions of the Draft Insurance Acts whether the eligible insurer would be required to comply with any registration or notification requirement and/or other regulations of the OIC in respect of the policies issued in Thailand. We expect the detailed requirements to be set out in regulations to be issued to implement the scheme. In addition, if the eligible foreign insurer will have a presence in Thailand it would be required to obtain a license under the Foreign Business Act B.E. 2542 (FBA), unless a specific exemption under the FBA would also be introduced.
New flexibility to effect portfolio transfers
Under both the Insurance Acts and the Draft Insurance Acts, any whole (or partial) portfolio transfer requires the specific approval of the OIC. However, the Insurance Acts do not prescribe mechanisms to effect a portfolio transfer or any scheme of arrangement which permits policies to be transferred without the specific consent of the relevant policyholders. Under the Draft Insurance Acts, any whole (or partial) portfolio transfer must be notified to the policyholders, who must be given at least 30 days to object to the transfer. Any policyholder who does not object within the prescribed period is deemed to have consented to the transfer. In practice, due to the practical difficulties of obtaining consents of each policyholder, insurers have used the “deemed consent” method in past portfolio transfers, whereby policyholders were notified of the proposed transfer of their policy and are deemed to have consented to the transfer if there is no objection within the period specified in the notice. Although commonly used, there were uncertainties as to the effectiveness of the “deemed consent” method. The Draft Insurance Acts would provide much needed certainty in future portfolio transfers.
More reporting/compliance requirements
The Insurance Acts do not prescribe any reporting or compliance requirements on the acquirer in respect of an acquisition of shares in an insurer. However, insurers themselves are required to notify the OIC of any change of shareholding of shareholders holding 5% or more of its shares. Under the Draft Insurance Acts, any person who acquires 5% or more of the shares in an insurer must make a post-acquisition notification to the OIC within the period to be prescribed in the regulations. There is a similar post-acquisition reporting requirement in FIBA. The reporting requirement does not apply to Foreign Subsidiaries, Foreign Branches and insurers operating under Other Forms.
The Insurance Acts do not prescribe any single shareholding limit. Under the Draft Insurance Acts, any single shareholder can hold up to 10% of the shares of any insurer without regulatory approval. Any single shareholding above 10% requires the specific approval of the OIC. Any M&A transaction as well as internal reorganisation which results in a single shareholder holding more than 10% of the shares would likely require specific approval of the OIC. The Draft Insurance Acts do not prescribe the criteria and/or factors the OIC would consider in granting its approval for any single shareholding above 10%, including whether or not it would apply a fit and proper person test. There is a similar single shareholding limit in FIBA. The single shareholding limit does not apply to Foreign Subsidiaries, Foreign Branches and insurers operating under Other Forms.
The Insurance Acts do not prescribe any requirements to obtain prior approval of the OIC in respect of a change of articles of association, memorandum of association or directors. However, as a matter of practice, the Ministry of Commerce (MoC) would not register any change of articles of association, memorandum of association or directors by an insurer unless the OIC has approved such change. The Draft Insurance Acts requires an insurer to report any change of its articles of association, memorandum of association, directors or management personnel to the OIC, within 15 days after such change. This requirement is substantially in line with an existing notification of the OIC. In addition, any appointment of director or management personnel require the prior approval of the OIC. It is unclear whether the MoC would, as a matter of practice, still require approval of the OIC prior to registration of any change of articles of association or memorandum of association. FIBA requires any financial institution to report any change of the articles of association, memorandum of association, directors or management personnel to the BoT, within 15 days after such change. Pre-approval of the BoT is also required for any appointment of directors, managers, management personnel or advisor.
More flexible capital control
The Insurance Acts and related regulations require an insurer with capital below 100% of the prescribed Capital Adequacy Ratio, i.e. eligible capital/capital charges for certain prescribed risks, (CAR) to submit a remediation plan to the OIC. In addition, the OIC also has the discretion to impose “appropriate measures” if an insurer’s capital is below 140% of CAR. The Draft Insurance Acts does not refer to any specific CAR. Instead the OIC can:
- require an insurer to submit a remediation plan, if its capital is below the level, which the OIC considers, can affect the integrity of its business;
- immediately suspend business operations of any insurer, if its capital is below the level, which the OIC considers, can affect the insured or the public; and
- recommend to the MoF to immediately revoke the licence of any insurer, if its capital is below any of the levels referred to above and can cause severe damage to the insured or the public.
More liabilities imposed on directors
The Draft Insurance Acts imposes criminal penalties on each director, management personnel and responsible person in the event the insurer violates certain provisions of the insurance act, unless he or she can prove that he or she did not take part in the violation. The criminal penalties are similar to the provisions under the Insurance Acts. However, the Insurance Acts refer to only directors and responsible persons, but not management personnel.
In addition, the Draft Insurance Acts would also impose the following additional penalties on directors which are not in the Insurance Acts:
- directors would be held jointly liable to the shareholders and the insured for any damage from violation of the insurance act or order of the OIC, unless he or she can prove that he or she did not take part in the violation; and
- directors would be liable to the insurer for damages resulting from violation of his or her general fiduciary duties unless he or she can prove that in making his or her decision, he or she: (i) has considered sufficient facts; (ii) acted in good faith; (iii) acted for the benefit of the insurer; and (iv) acted without any conflict of interests. The Draft Insurance Acts also prescribe the following specific examples of breaches of general fiduciary duties:
- failure to report inadequate CAR to shareholders within 1 month of being aware of such fact;
- failure to comply with the insurance act; and
- failure to keep and disclose proper accounting records and assets.
It remains to be seen when and in what form the Draft Insurance Acts will be passed into law. Insurers will need to monitor the situation over the coming months and make sure they are ready to benefit from and comply with the new rules once they become law.