Thailand-based AIA Says Its Financial Position Remains Strong

[Heng]

People cashing out their policies, or else failing to renew them. Singapore had a short run on AIA last week. No one buys life insurance without expecting to get something back.

http://www.lioninvestor.com/aig-spillover-effects-on-aia/

A run on AIA isn't the same as a run on its competitors. Most will simply cash in their polices or fail to renew (as what I'll be doing) and sign up with another firm. You haven't explained your (IMO incorrect) "If they fall, every one goes with them" statement, unless you feel that folks will suddenly decide they don't want insurance at all -which at a personal level, there will most certainly be some... but IMO not for the majority of the market, in particular the business sector-.

[onethailand]

It's called mass panic.

Imagine Bangkok Bank were suddenly to go bankrupt. Would you not seriously consider heading for your bank to withdraw your funds?

Now imagine if Government Savings Bank were suddenly to go bankrupt. Would that be serious enough for you to consider withdrawing your funds from Bangkok Bank?

Any other insurer in Thailand could fail and not cause a huge problem - but the failure of Thailand's largest insurer will create a domino effect that will decimate most insurers in Thailand - at least for a while. Only the largest and strongest will survive a fallout and it will be many months, if not years, before they begin to recover.

Let's just hope it doesn't come to that.

And btw, AIA is a financial institution, just not a bank. And businesses will not be able to stop its employees from demanding a withdrawal from AIA if they too want to avoid industrial action.

Edited September 23, 2008 by onethailand

[Old Man River]

[A run on AIA isn't the same as a run on its competitors...

Heng, failure of the life insurance market leader (which I highly doubt will occur) would have a huge negative impact on industry competitors. While you and those like you (the business sector) are astute enough to start checking financial statements and ratings, most people are not and would simply be afraid to trust any life insurance company. The money would probably go into savings in banks which are government guaranteed.

[Thai at Heart]

Heng, failure of the life insurance market leader (which I highly doubt will occur) would have a huge negative impact on industry competitors...

Does the Thai financial system have government insurance on bank accounts?

[Old Man River]

Does the Thai financial system have government insurance on bank accounts?

Yes, starting at THB 100 million and on a sliding scale downwards after 4 years to THB 1 million, which still covers the vast majority of depositors.

[Heng]

It's called mass panic.

Imagine Bangkok Bank were suddenly to go bankrupt. Would you not seriously consider heading for your bank to withdraw your funds?

Now imagine if Government Savings Bank were suddenly to go bankrupt. Would that be serious enough for you to consider withdrawing your funds from Bangkok Bank?

Any other insurer in Thailand could fail and not cause a huge problem - but the failure of Thailand's largest insurer will create a domino effect that will decimate most insurers in Thailand - at least for a while. Only the largest and strongest will survive a fallout and it will be many months, if not years, before they begin to recover.

Let's just hope it doesn't come to that.

And btw, AIA is a financial institution, just not a bank. And businesses will not be able to stop its employees from demanding a withdrawal from AIA if they too want to avoid industrial action.

It would be serious enough for me to withdraw my funds (which are already spread out among several banks and currencies) from one bank and put them in the next best bank. No different than what I am doing with AIA. The only thing that would happen is that the #2, 3, 4, 5, etc. firms would be the new 1, 2, 3, and 4 firms. What it would take for the domino effect as you describe to take place would be for all firms involved (and who knows, more may pop up) to have ALL been reinvesting their low cost capital irresponsibly. In that case, and that case alone would people say goodbye to insurance. Otherwise, IMO people have come to look at insurance as a need. Will add more below...

People cashing out their policies, or else failing to renew them. Singapore had a short run on AIA last week. No one buys life insurance without expecting to get something back.

http://www.lioninvestor.com/aig-spillover-effects-on-aia/

A run on AIA isn't the same as a run on its competitors. Most will simply cash in their polices or fail to renew (as what I'll be doing) and sign up with another firm. You haven't explained your (IMO incorrect) "If they fall, every one goes with them" statement, unless you feel that folks will suddenly decide they don't want insurance at all -which at a personal level, there will most certainly be some... but IMO not for the majority of the market, in particular the business sector-.

Heng, failure of the life insurance market leader (which I highly doubt will occur) would have a huge negative impact on industry competitors. While you and those like you (the business sector) are astute enough to start checking financial statements and ratings, most people are not and would simply be afraid to trust any life insurance company. The money would probably go into savings in banks which are government guaranteed.

I agree there would be a negative impact, but I disagree that it would cause the insurance industry to collapse. IMO insurance is something that many people have come to look at as a need, not just a want. Myself, I don't trust insurance companies when they are doing well, much less when they are making irresponsible investments with their relatively low cost capital. I only keep myself and my family *lightly* insured for the convenience of "coverage" in areas where the local medical services have no idea that we can afford medical treatment. In fact, I have always been a proponent of insuring yourself (ala the Carnegie line of thinking: taking down all the wooden supports of your factories and replacing them with iron, and cancelling your fire insurance policies), keeping enough liquid capital to take care of the more likely emergencies within reason. For most folks though, the opposite is true. They buy insurance to compensate for their inability or choice not to amass enough cash for emergencies.

So the two alternatives available to most of the middle class in this situation: A) not renewing that AIA policy and NOT getting a policy to fill that void and "saving" that 30,000 Baht premium and putting it in the bank and thereby creating an absolute certainty that should one fall ill or have an accident that one could NOT afford private treatment with those savings, placing their faith in the rickety social security/gov't system, and automatically lowering themselves one class level in terms of access to healthcare.

and

B ) simply moving on down to the next best insurer and hoping that the "promise" that they put on paper that they will pay for the X hundred thousand or X million Baht (depending on your coverage of course) treatment that you would otherwise not have had the ability and/or discipline to actually save for yourself.

I'm of the opinion that most people (with the exception of the relative minority of Thais... perhaps not even 1 million folks who have the liquid assets that provides the security that insurance "provides" for much of the middle class, and prayers/religion/Chinese medicine/and gov't gold cards "provides" for the rest of the masses) will still continue to select option B.

[Old Man River]

...So the two alternatives available to most of the middle class in this situation: A) not renewing that AIA policy and NOT getting a policy to fill that void and "saving" that 30,000 Baht premium and putting it in the bank and thereby creating an absolute certainty that should one fall ill or have an accident that one could NOT afford private treatment with those savings, placing their faith in the rickety social security/gov't system, and automatically lowering themselves one class level in terms of access to healthcare.

and

B ) simply moving on down to the next best insurer and hoping that the "promise" that they put on paper that they will pay for the X hundred thousand or X million Baht (depending on your coverage of course) treatment that you would otherwise not have had the ability and/or discipline to actually save for yourself.

I never said the insurance industry would collapse, just that it would have a huge negative impact on industry competitors. For me, I have no doubt in my mind that it would have a huge negative impact on competitors. Over time, people may feel more comfortable with other carriers and insure with them, but initially no. As the government's guarantee on deposits scales down and time passes the amount of insurance purchased would go up for those initially bailing out of this industry should the market leader fail (again, this isn't going to happen and we are only discussing this from a theoretical position). When people get scared, they do not act rationally.

[Heng]

I never said the insurance industry would collapse, just that it would have a huge negative impact on industry competitors. For me, I have no doubt in my mind that it would have a huge negative impact on competitors. Over time, people may feel more comfortable with other carriers and insure with them, but initially no. As the government's guarantee on deposits scales down and time passes the amount of insurance purchased would go up for those initially bailing out of this industry should the market leader fail (again, this isn't going to happen and we are only discussing this from a theoretical position). When people get scared, they do not act rationally.

I was interpreting your comment that people would opt to "save" their premiums in banks rather than opt for insurance coverage elsewhere as industry collapse. And indeed it would be if that was the norm and the choice of the majority of insurance company clientele. The main difference in our opinions is that you think that there would be a *huge* negative impact whereas I think it would just be a *plain jane* negative impact.

[Old Man River]

OK, but let's hope that we never find out who is right.

[onethailand]

I never said the insurance industry would collapse, just that it would have a huge negative impact on industry competitors. For me, I have no doubt in my mind that it would have a huge negative impact on competitors. Over time, people may feel more comfortable with other carriers and insure with them, but initially no. As the government's guarantee on deposits scales down and time passes the amount of insurance purchased would go up for those initially bailing out of this industry should the market leader fail (again, this isn't going to happen and we are only discussing this from a theoretical position). When people get scared, they do not act rationally.

I was interpreting your comment that people would opt to "save" their premiums in banks rather than opt for insurance coverage elsewhere as industry collapse. And indeed it would be if that was the norm and the choice of the majority of insurance company clientele. The main difference in our opinions is that you think that there would be a *huge* negative impact whereas I think it would just be a *plain jane* negative impact.

As OMR pointed out - not everyone has the business acumen or education to look ahead like you. I would be willing to bet that somewhere around 70% of AIA's accounts are held individually by people who don't understand the ramifications of the business or financial world - all they know is that there is a chance they could lose money, thus it is better to get out while they can and have something left. This mentality is very Asian, they are generally risk-averse and will scrimp and save everything they have for their family.

Insurance is not a need for most of these people - nor is it even really a want. It's a way to have some benefits, such as cheap or free medical care, protection against death of a breadwinner, etc. while salting away a little bit of their money each year which will then be paid back at maturity of the policy.

Assuming AIA were to collapse (and I too don't believe it's very likely), the entire industry would suffer a massive downturn.

Obviously global firms like Allianz will have the strength to ride out such a situation, and gradually return as #1, but the short-term future would be very volatile for them. Smaller companies like Bangkok Insurance - who in fact are giving more away in order to compete with AIA and Allianz, would be in grave danger of failing.

It's human nature. No one ever expects to see the giants fall - and when they do, many of the smaller entities go down as well. The rest of the industry bands together to show that the industry is mature and not weak - and gradually people come back. But the casualties will be high.

Any such occurrence would mean a shift in liquid funds to banks, or towards gold purchasing. Mattresses may experience an increase in sales as well

Take a look at the fall of Lehmann Brothers as well - which took down global stock markets big-time, not just other investment firms - hardly a stock escaped unscathed. Morgan Stanley got rescued. Halifax Bank of Scotland was taken over by Lloyds TSB - and Barclays, which had considered bailing out Lehmann, backed out and eventually got to buy up some of the property at a huge discount.

But banks didn't make out like bandits - they all took huge hits. It literally took governmental intervention to prevent a major crash. And investment firms fell like paper soldiers.

In Thailand, people weren't really hurt, so nothing happened. But if a large financial institution here were to fail, the collateral damage is unavoidable.

Edited September 23, 2008 by onethailand

[Heng]

As OMR pointed out - not everyone has the business acumen or education to look ahead like you. I would be willing to bet that somewhere around 70% of AIA's accounts are held individually by people who don't understand the ramifications of the business or financial world - all they know is that there is a chance they could lose money, thus it is better to get out while they can and have something left. This mentality is very Asian, they are generally risk-averse and will scrimp and save everything they have for their family.

Insurance is not a need for most of these people - nor is it even really a want. It's a way to have some benefits, such as cheap or free medical care, protection against death of a breadwinner, etc. while salting away a little bit of their money each year which will then be paid back at maturity of the policy.

Any such occurrence would mean a shift in liquid funds to banks, or towards gold purchasing. Mattresses may experience an increase in sales as well

Again, I don't think that the typical middle class insurance customer will choose to guarantee not being able to afford health/life/auto coverage and instead choose to save their premiums in bank accounts, much less gold or in mattresses. It doesn't take financial or business acumen to calculate that. It's a simple calculation that they know all too well and are reminded of on a daily basis (no different from a typical visa runner knowing he/she will likely never qualify for permanent residency or citizenship).

Although given, if you're going to assume that most of AIA's 5 million customers are of the whole life variety then sure, it wouldn't be considered a need. I'm going from the point of view that that is a minor segment of their market and that their term life + health (with low death benefits) and auto insurance (through New Hampshire) are their bread and butter. Perhaps some insurance folks could weigh in on what they think...? Unlike the west, you have far more people who know they will have land and property inheritance here, so the death payoff has never really been a big seller here. What people more often buy in insurance here is the "ability" to afford better healthcare than the masses.

Insurance sells hope against fears and those fears will still be there despite the largest insurer failing (if it were to happen).

[onethailand]

Again, I don't think that the typical middle class insurance customer will choose to guarantee not being able to afford health/life/auto coverage and instead choose to save their premiums in bank accounts, much less gold or in mattresses. It doesn't take financial or business acumen to calculate that. It's a simple calculation that they know all too well and are reminded of on a daily basis (no different from a typical visa runner knowing he/she will likely never qualify for permanent residency or citizenship).

This is where I think we differ. You're talking about a typical middle class insurance customer. I'm saying that the bulk of their customers are not educated enough. They don't "need" health/life (forget auto, I doubt New Hampshire is that big here) coverage - they lived without it before, they can certainly live without it now. The difference is that it ultimately costs them nothing to get this coverage if they invest in a policy from AIA or any other insurer. These benefits are immediate, as opposed to putting money in the bank at low interest - and if they invest in long-term fixed deposits, they only realize a benefit at the end.

A typical middle class customer, on the other hand, may realize the value of insurance to protect against uncertainties. But even then I doubt that the majority of them actually understand all of the conditions in their policy - well-educated or not, I think you'll agree that most of us skim long-winded contracts in small print and mostly only understand what we are told by the agent. The only part they may understand is what they are covered for, and what policy exclusions there are.

Nevertheless - it's clear that we both have a different perception of the primary makeup of AIA's clientele.

Although given, if you're going to assume that most of AIA's 5 million customers are of the whole life variety then sure, it wouldn't be considered a need. I'm going from the point of view that that is a minor segment of their market and that their term life + health (with low death benefits) and auto insurance (through New Hampshire) are their bread and butter. Perhaps some insurance folks could weigh in on what they think...? Unlike the west, you have far more people who know they will have land and property inheritance here, so the death payoff has never really been a big seller here. What people more often buy in insurance here is the "ability" to afford better healthcare than the masses.

Insurance sells hope against fears and those fears will still be there despite the largest insurer failing (if it were to happen).

Insurance may sell hope against fears in certain segments of society - but ultimately it sells something for nothing other than a 20-year commitment, and this everyone understands.

Not everyone is of course life - in fact I'd say there are more term life + health - but it doesn't really matter from the standpoint of what I perceive to be the majority of customers. My agent, for example, probably has nearly as many life/accident customers (like me, since AIA won't give me health coverage). I don't think she has many auto customers - if any.

Inheritance - well, I can't agree with that - land and property does not replace ongoing income - if it did, why would people even bother to work? If anything, they will grab as much land and property as they can, and only divest under dire circumstances or for a healthy profit. Insurance is a way to ensure that the land remains in the family by protecting the breadwinners. Obviously death payoff is not a big seller under any circumstances - but it still represents an additional benefit which they would not get from the bank.

Would those fears evaporate if AIA were to fail? No - you're right. But they would most definitely be replaced by the fear of losing a large chunk of their life savings.

[Heng]

Inheritance - well, I can't agree with that - land and property does not replace ongoing income - if it did, why would people even bother to work? If anything, they will grab as much land and property as they can, and only divest under dire circumstances or for a healthy profit. Insurance is a way to ensure that the land remains in the family by protecting the breadwinners. Obviously death payoff is not a big seller under any circumstances - but it still represents an additional benefit which they would not get from the bank.

Would those fears evaporate if AIA were to fail? No - you're right. But they would most definitely be replaced by the fear of losing a large chunk of their life savings.

Land and property often does produce ongoing income. Again, IMO I don't believe a substantial amount of people have bought (unless you count those who buy in and abandon it when they come to their senses or don't have the ability to pay into a policy long term...) into the 'protect the breadwinners' insurance marketing, although no doubt this will increase as just about every firm pitches it more and more through mainstream media. As for savings through insurance, IMO those who can afford to are often educated enough to know that it's a bad idea financially compared to the other (even) limited instruments available to locals, especially because of the relatively relaxed tax liability here... which leaves the only folks who actually buy in as those who get pitched by some persistant insurance salesman.

Edited September 23, 2008 by Heng

[onethailand]

"Protect the breadwinners" is a benefit - as opposed to the major selling point. Though you're right about the increase in insurance commercials with a theme along those lines.

Land and property owners are primarily upper-class LOL - and they make up a minority of those buying insurance policies. I was thinking more of farmers when you said land and property owners... and as you know farmers are hardly rich... if they are able to put any money away at all, they can put it into the bank and get low interest, or they can put it into an insurance policy (naturally sold by some relative or neighbor's daughter who is an agent) and at least have a few health or accident benefits.

I'm going to step out of this conversation now because I don't think we're going to agree on anything but disagreeing... plus I've got a ton of stuff to do and this discussion is too distracting (in a pleasant sort of way) but it was nice to have a civil discussion in here as opposed to a lot of the "bigger manhood" and rabble-rousing discussions which unfortunately permeate TV.

[Heng]

All good One. Enjoyed it.

[Crushdepth]

"Press releases are issued for the benefit of shareholders, not for the enlightenment of the public."

- Neal Stephenson, author of ...And then there was the command line.