Monetary Authority of Singapore 

Managing Amidst a Diversity of Challenges and Opportunities

Introduction

Good morning ladies and gentlemen. I would like to first thank Mr. Thomas P. Donaldson, President of LOMA and Mr. Robert A. Kerzner, President of LIMRA, for inviting me to speak at this Conference. This morning, I would like to share my views on the diversity of challenges and opportunities which life insurers presently face, as well as how regulators can work in partnership with industry players to build a prudent yet profitable life insurance industry. 

Let me take a few moments to review the role of life insurance. Life insurance is an important vehicle for protection, savings and investment and a key contributor to the economy. It offers risk cover and protection to policyholders, and has historically played a key role in stimulating the level of savings in the economy.

Increasingly, life insurance is also viewed as an important investment option. It mobilises savings and serves as a conduit through which funds are fed into the capital market. This entails wider benefits as finance is then made available to other enterprises.

Addressing Key Challenges in the Global Insurance Industry

The global insurance industry has faced a number of significant challenges in the past decade. Insurers have had to grapple with a plethora of changes, which have profound implications on how companies manage their operations.

• A radically transformed global financial industry

First, the structure of the global financial industry is being radically transformed. Products such as investment-linked and variable universal life policies are becoming more widespread, and these traverse the increasingly blurred boundaries between the insurance, banking and asset management industries.

Non-financial institutions have also come into the fold. In the UK, retail giants such as Marks & Spencer and Sainsbury's now offer an assortment of financial products which include personal loans, unit trusts, credit cards and life insurance. In France, Carrefour is selling hedge funds in supermarkets in a bid to attract retail investors.

All these imply increased competitive pressures for life insurers, but also a wealth of opportunities for companies to tap into strategic partnerships and exploit innovative channels of growth.  I will elaborate on the opportunities later.

• Increasing Liberalisation

Second, we have also witnessed a wave of liberalisation efforts in several Asian insurance markets, including Singapore. A restrictive admission policy is untenable in the long run as it is likely to breed inertia amongst the incumbents and lead to a dearth of competition, which is an important springboard for innovation and market efficiencies. As such, existing players now find it more urgent than ever to identify and leverage on their key strengths, both to counter external competition and to tap into hitherto unopened markets.

• Heightened Uncertainties in the External Environment

Third, one has to consider these changes against the backdrop of heightened uncertainties in the external environment. In the past, strong investment returns generated revenues that shored up profits.  The need to overhaul operations was not pressing.

However, the past few years have seen a bearish environment of lacklustre demand, low yields and a major correction in equity markets after the irrational exuberance. These have put pressure on insurers to meet guaranteed returns on policies and have galvanised them into re-examining the ways in which they do business. Managing the transition to a more dynamic and volatile operating environment will require adaptability and speed.

Managing Responsibly

In light of the realities of the current operating environment, it is paramount that insurers manage their operations in a responsible manner. This is pivotal to building consumers' trust in the life insurance industry, which would in turn help insurers to maintain their long term viability.  

• Understanding Clients' Needs

The radical and profound changes taking place in the financial industry are leading insurers to rethink ways to reposition themselves as the financial planners of choice. Insurers thus need to gain a more intimate knowledge of changing client needs and expectations, and to continually innovate to introduce products that are tailored to meet those needs.

• Building Trust

Next, challenges to the way insurance operations are managed, in particular market conduct practices, will continue to confront life insurers.  In the UK, the mis-selling of mortgage endowments and pension plans has whipped up public furore. More recent investigations in the US have unearthed a litany of negative reports over alleged bid-rigging and illicit sprucing up of balance sheets. The fallout from such cases has, unfortunately, been the erosion of consumer confidence and trust in the insurance industry.

Managing reputational risk is just as important as managing the financial aspects of insurance companies. Ensuring responsible conduct is not discordant with profit aspirations, as a lack of confidence amongst consumers would impinge upon the bottom-line. This is especially true of life insurance, where commitments are long-term and where the element of trust is central to company-client relationships. The seeds of market conduct problems are typically sown many years ago when the standards for sales practices were less developed, whilst consumer dissatisfaction normally surfaces years after the product was sold.

Hence, it is imperative that life insurers take a longer-term view in building trust and not simply focus on meeting short-term sales targets. This necessitates adequate and timely disclosures, which brings me to my next point.

• Empowering the Public

As financial markets mature, we will witness the move towards placing greater reliance on stakeholders such as insurers, consumers and financial advisers to act responsibly and prudently. Life insurers thus have the responsibility to make adequate and timely disclosures to enable their clients to make informed decisions. They should also use appropriate projections when illustrating benefits to policyholders, so as to calibrate realistic expectations.

While insurers clearly have the obligation to be more transparent, consumers should also act responsibly.   They have a duty to understand the products which they are purchasing and to disclose their risk appetite, financial standing and expectations to financial advisers so that appropriate products can be recommended to them.

Finally, the industry has a key role to play in consumer education. Insurance is a common but yet little understood product. As more complex product designs come to the fore, the industry should engage in initiatives to educate consumers so as to empower them to take charge of their finances. I am heartened that the Singapore Life Insurance Association (LIA) has been an active supporter of the MoneySENSE national financial education programme. Under the MoneySENSE initiative, LIA has reached out to a wide segment of the population by conducting a series of community seminars on life insurance and health insurance, and producing consumer guides and articles in the mass media. I encourage all insurers to support and participate in this national initiative.

Leveraging on Opportunities

Amidst an increasingly challenging operating environment and a greater need to manage responsibly, there are also opportunities, both global and local, which life insurers can capitalise on.

• A Slice of the Wealth Management Pie

As mentioned earlier, there has been increasing convergence between the wealth management and insurance industries. I have spoken about the competitive pressures arising from such convergence. Let me now touch on some of the opportunities that have become available.

In some parts of the world, the growth of the insurance sector in the past decade was largely driven by wealth management products such as investment-linked policies and endowments. Singapore's own experience bears testament to that. With product and technological innovation, traditional insurance products are being married with other financial instruments to create alternative solutions.  Such products straddle the boundaries between the banking, insurance and asset management industries. As such, there are great synergies to be harnessed and lessons to be shared as financial industries become more integrated.

Life insurers need to be attuned to such opportunities and leverage on their key strengths in order to compete effectively with other players jostling for a slice of the lucrative wealth management pie.

• Ageing Populations

An ageing population is now a distinctive trend in many advanced countries, particularly in the US, Japan and Western Europe. In Asia, this will become an eventuality as economies modernise. Falling birth rates, improved living standards, longer life-spans and rising healthcare costs would mean that government safety nets are unlikely to suffice when wrestling with the fiscal consequences of ageing.

Life insurers have a major role to play here. Through the pooling of risks and the offer of savings and protection vehicles such as annuities, medical and long-term care insurance, they would be able to meet the needs of the elderly and generate new business growth.

Let me now touch on a few prospects that are more specific to the local market.

• Development of Medical Insurance Market

Early this year, the Ministry of Health announced the details of the reformed MediShield scheme, which is a national medical insurance scheme that principally caters to inpatient care. The reforms include allowing private insurers to offer enhancement plans on top of the basic coverage provided by the Central Provident Fund Board.

In addition, unions have been advocating portable medical benefits for workers to protect them from loss of medical insurance benefits should they resign or become retrenched.

With a potential market of more than one million policyholders, Singapore can support a competitive and dynamic private medical insurance industry. There is scope for greater private sector participation in this sector. This would help to catalyse product innovation, competition and reduce market inefficiencies, and ultimately translate into greater benefits to policyholders.

• Exploiting Niche Segments

We are also expecting the emergence of new specialist insurers in the local market. These mainly target niche segments comprising expatriate and high net worth clients. While there is currently only one such registered insurer here, this is an area that we are looking to develop and hone our expertise in.

MAS' Role

Finally, I would like to conclude by sharing some insights on MAS' role amidst this diversity of challenges and opportunities. MAS is both supervisor and developer of the financial sector in Singapore. As supervisor, we would exhort prudence and risk management. As developer, we would be an advocate of innovation, enterprise, and risk-taking.

It appears as if these dual roles are inherently incompatible. But in reality supervision and development are complementary tools. A sound and robust financial sector is the fruit of effective supervision, which in turn contributes to development through attracting reputable players to do business in Singapore.

MAS is committed to partnering the life insurance industry to achieve long term viability through responsible management. In recent years, we have made a concerted move towards fostering a more consultative approach to supervision and placing greater reliance on stakeholders to achieve our goal of a sound and progressive financial sector. This can be evidenced by the increasing emphasis on corporate governance and by reminding the Board of Directors that they are ultimately responsible for key aspects of operations such as investment and reinsurance.

In addition, the regulatory landscape in Singapore has been altered considerably with the adoption of a risk-based supervisory framework. This is also evident in developed countries such as the US, Canada and Australia. In particular, the risk-based capital regime is designed to incentivise insurers to manage their risks prudently. Those which do so would free up capital that can be invested in more profitable avenues. This should augur well for the future.

Conclusion

To conclude, the financial and insurance industries have undergone radical and profound changes over the past decade, but there are also opportunities amidst an increasingly challenging operating environment. In seeking to address these challenges and tap into available opportunities successfully, it is critical that life insurers recognise the need to achieve long-term sustainability and profitability, and not just pursue short term gains.

It is thus incumbent on companies to manage their operations in a transparent and accountable manner. This includes making proper disclosures to policyholders and building up the public's trust in the life insurance industry. Recent investigations in the US, Australia and the UK, as well as greater emphasis on corporate governance and increasing public scrutiny on the industry attest to that need.

As a regulator, both MAS' supervisory and developmental roles strive towards the shared purpose of fostering a sound and progressive financial sector. We can prescribe rules to ensure a minimum level of prudence, but the ultimate responsibility for the operations of life insurers rests with the Board and management. An element of corporate responsibility and self-regulation is required to bring this purpose to fruition. As such, it is all the more imperative for companies not just to manage their operations profitably, but also responsibly.

I wish you all a fruitful and enjoyable Conference. Thank you.