THAILAND has taken an important step towards liberalising its life insurance sector, but analysts warn the 12 new licences to be granted may not be in step with an industry that has been described as underdeveloped and inefficient.

Of the Bt56.2 billion life insurance market, the top five companies ­ American International Assurance, Thai Life Insurance, Ocean Insurance, Muang Thai Insurance and Ayudhya Jardine CMG Life Assurance ­ control as much as 90 per cent. The remaining seven companies virtually do not compete.

''I think the government is allowing too many new players into the market. Why don't they study the liberalisation of the securities and finance sector before they liberalise the life insurance industry?" Nimitr Nonthapunthavat, head of research at Bangkok Bank Plc, said.

At a time when the government is spearheading consolidation in the finance sector by encouraging mergers between the more than 90 finance companies, it is loosening its control over the life insurance sector.

''Some insurance companies are even smaller than a provincial branch of a commercial bank. They will be hard-pressed to compete against the incumbent and new companies, particularly at a time when the country is experiencing an economic downturn," Nimitr said.

Other analysts wondered whether supervision of the life insurance companies would be adequate. The Commerce Ministry regulates the life insurance business while the Finance Ministry and the Bank of Thailand supervise the banks and finance companies. The Securities and Exchange Commission looks after securities companies.

A banker who asked not to be named said with the increased competition in the life insurance sector, commerce officials should make sure they have the resources to adequately supervise the life insurance companies. The Bank of Thailand's inadequate supervision of the finance company sector has been cited as the underlying reason for the present financial crisis.

Finance companies, whose credit plans were not supervised closely enough by BOT officials, are paying the price for over-expanding and entering the real estate and hire-purchase markets.

The banker said a life insurance company should be treated as a financial institution, for it takes long-term savings from the public and re-invests the money for long-term gains. Yet, he added, if public savings are not properly managed, a crisis of confidence in the insurance sector could occur which might cause further instability in the financial system.

He recommended that the supervision of the life insurance sector should be transferred to the Finance Ministry or the Bank of Thailand.

By agreeing to grant 12 new life insurance licences, mainly to those who belong to the old-boy network, the Commerce Ministry may be introducing too many competitors at one time. Nimitr said the government should have let in four to five new players at a time to allow the industry to make the necessary adjustments.

Dr Scott Christensen, an investment analyst at JF Thanakom, said he was not as concerned with the number of new insurance players as he is with whether the government will regulate the industry effectively. However, he believes the government's policy is rather contradictory since it is forging consolidation in the finance sector but it is handing out insurance licences in large numbers.

The latest round of insurance liberalisation, according to Christensen, will cause industry costs to rise because there will be staff poaching. While the large players will be able to absorb the higher costs, the smaller insurance companies will get hammered.

Sukhathep Chansrichawla, president of the Thai Life Assurance Association, said that in fact the association had proposed the Commerce Ministry issue less than 28 new licences. Because the government decided to grant almost 30 new licences at once, he expects sudden fierce competition over the next six months. Companies which received the new licences will have to procure staff in order to start operations in 90 days.

Sukhathep claims the new companies are offering to triple the salaries of employees at existing companies. He forecast the head-hunting practices would negatively affect clients in the long term because the increased costs are likely to be passed on to them.

Sukhathep said he does not expect insurance premiums to fall in price. Apart from paying for the higher salaries, insurers will have to pay more for new kinds of insurance, such as HIV insurance.