Asean: Financial system risks range from very low to very high

Financial system risks among the ASEAN4+Vn countries vary from low to very high but are becoming more complex in Southeast Asian countries as financial system volatilities are caused by both domestic and foreign factors inside and outside Southeast Asia, according to AM Best. By ASEAN4+Vn, the rating agency is referring to Indonesia, Malaysia, the Philippines, Thailand and Vietnam.

Financial system risk is divided into insurance risk and non-insurance risk. Financial system risk (insurance) is the risk that the insurance industry’s levels of development and public awareness; transparency and effectiveness of regulation; reporting standards; and regulatory sophistication will contribute to a volatile financial system and compromise an insurer’s ability to pay claims. Financial system risk (non-insurance) is the risk that financial volatility may erupt because of inadequate reporting standards, weak banking systems or asset markets, or a poor regulatory structure.

AM Best, in its special report headlined “Insurance Markets Advance as ASEAN Countries’ Economies Grow”, said that Malaysia is an example of low financial system risk, with proactive supervision and prudent lending practices in place in the banking sector. Vietnam is an example of very high financial system risk with an undercapitalised banking sector and a high bad-debt ratio. Progress toward compliance with international standards is an ongoing project for most ASEAN4+Vn countries.

AM Best said: “It is important to be cautious about the changing environment, because financial crises impacting Southeast Asian countries in the past have had a significant impact on their economic performance as well. A financial crisis is similar to a natural disaster in that it is unavoidable, difficult to predict and recurring. While the insurance industry is integrated within the financial sector, companies can mitigate financial system risks, which include variations in economic growth; volatility in interest rates and investment returns; liquidity risk; and currency fluctuations.”

Source: AIR eDaily