Published Date: 01 February 1999

"Global Changes in the Insurance Industry - New Challenges for Regulators and Supervisors"

Keynote address by Mr Lim Hng Kiang, Minister for National Development, Second Minister for Finance and Member on the Monetary Authority of Singapore (MAS) Board of Directors, at the "OECD Conference on Insurance Regulation & Supervision In Asia"

Date: 01 Feb 1999 

Your Excellency, Mr Hashimoto
Mrs Conruyt, Chairperson, OECD Insurance Committee
Distinguished Guests
Ladies and Gentlemen


1   I am happy to welcome you to this Conference sponsored by the OECD and the Monetary Authority of Singapore (MAS). The International Association of Insurance Supervisors (IAIS) is also holding a seminar with the support of the International Insurance Foundation and the OECD, back-to-back to this Conference. This is the first time such a conference and seminar are being held in this part of the world. It is indeed an honour for Singapore to help organise and host these events.

2   The business of insurance has always fascinated me. Unlike most of you here, I am no expert in this field. Insurance strikes me as a highly complicated field, requiring many specialised and technical skills. It involves complex and laborious actuarial projection of mortality, quantitative and qualitative risk analyses and sophisticated management of assets to meet insurance liabilities.

3   If insurance is a tough business, then I guess regulating the insurance industry is a tougher job. Insurance regulators have a daunting task of not only having to know the intricacies of the business but, more importantly, they must achieve public-policy objectives, look after consumers' interest and develop a sound and progressive insurance industry.

4   The debut of the OECD Conference and IAIS Seminar on Insurance Regulation & Supervision here in Singapore is timely. The two events are targeted at Asian insurance regulators, focusing on how they should deal with the wake of the financial crisis.

5   The regional turmoil has brought much economic pain to the economies affected and delivered external shocks to the rest of the world. The insurance industry too is not being spared. Many insurers in the region have to cope with the crisis as they are faced with financial strains from poor underwriting results, dwindling investment returns, and diminished value of insurance assets.

6   Most of us are still grappling with the consequences of the economic crisis. The crisis is indeed a test on the resilience and strength of the insurance industry and the existing regulatory system. To deal with the challenge effectively, we must understand the global trends that are shaping the insurance industry.


7   The insurance industry, being an integral part of the financial services industry, does not stand apart from the profound changes in the financial landscape. In recent years, we have seen changes in the nature and source of competition within the insurance marketplace, with tougher competition coming from both the traditional financial institutions, such as banks and securities firms, and newer market entrants, such as mutual funds, insurance brokerage houses and consulting firms. Sophisticated and innovative financial products are making forays into the marketplace, adding on to its fierce competition. The challenge is already cut for you, both regulators and market players.

8   The business environment for insurance has become increasingly complex and difficult. Changes in the economic, social and technological environments also pose tremendous challenges to insurers. For example, with improvements in living standards and medical care, life expectancy has increased considerably. While the changing demographics has provided the insurance industry with plenty of business opportunities, the longer life expectancy of insured persons, higher costs of living, escalating costs of medical care and the paucity of long-term investments pose considerable challenges for insurers.

9  The difficult trading conditions of insurers are compounded by unprecedented losses faced by them. In recent years, we have witnessed a spate of natural catastrophes caused by the changing weather conditions. Such disasters, which used to take place once in a few decades or so, are increasing in frequency and posing a severe drain on insurers' finances. The tenacity at which such disasters are occurring means that insurers writing catastrophe covers have to set up huge provisions for losses. The duration of such liabilities is generally longer than the insurers' assets. Thus, the challenge of ensuring proper management of assets to meet the liabilities when they become due is heightened.

10   Then, there is the difficult investment climate to contend with. This poses a challenge on how insurers should manage their assets. The recent volatility in the equity markets as well as low interest rates suggest that insurers will have huge hurdles to cross if they are to achieve reasonable investment returns to meet their liabilities. In Japan, and more recently in Europe, low interest rates caused severe financial strain for many insurers who had guaranteed their policyholders an overly optimistic fixed rate of return over a long period of time. Faced with reinvesting long-duration cash flows for which few investment instruments can be found even in normal times, life insurers have had to reinvest matured securities at rates far below which obligations were based. The result is a mismatch in assets and liabilities, causing the financial strain.

11   I understand that the insurance industry is also faced with shrinking demand and excess capacity as well. How should you manage industry over-capacity and at the same time cope with new developments and new products? Falling demand is attributable to two trends: first, stagnating growth in the major maturing world markets; and second, as consumers become more sophisticated, they, especially the multi-nationals, prefer to fund their own exposures through in-house insurers or captives. As a result, the industry is facing steeply-falling rates from the fight for business. There is simply too much capital chasing too little demand, and this will be further aggravated by a wave of consolidation in the industry.

12   Traditional boundaries between financial products are also getting blurred. New products, such as finite risk reinsurance, and capital market based-instruments like insurance derivatives and risk securitisation, are emerging in some insurance markets. Hovering at the fringe of the insurance and banking businesses and capital markets, such financial products pose unprecedented challenges to regulators.

13   Even traditional distribution channels for product lines are no longer neatly compartmentalised. The emergence of alternative distribution channels has significantly changed the way financial products are now distributed. With the influx of Independent Financial Advisers and bancassurance set-ups in recent years, insurance products are no longer solely distributed by insurance intermediaries, but are increasingly packaged with other financial products as "total solutions" to the consumers. Indeed, financial activities are getting more integrated.

14   In the US and Europe, insurers are also tapping into unconventional distribution channels such as direct marketing, telesales, electronic commerce over the Internet or interactive kiosks, to sell their products. While the track record of these distribution channels has yet to be proven, such revolutionary distribution channels are bridging the gap between insurers and consumers, and could pose a significant threat to the traditional role of insurance intermediaries.


15   What then are the implications of the changing financial landscape and difficult insurance environment for insurance regulators?

16   Just as these fundamental shifts in the landscape pose extraordinary challenges to the insurance industry, they also make it inadequate for regulators and policymakers to continue to rely on regulatory models developed in an earlier era. With these rapid changes in the environment, our regulatory framework for supervising financial markets could have become less effective, or even outdated. Indeed. many are suggesting that it is time for a new approach to regulation - an approach that will respond to the dynamic marketplace and restore balance to the playing field.

MAS' Approach

17   In the case of Singapore, MAS has moved from the "one-size-fits-all" model of regulation to a more supervision-based system. Well-managed institutions will be given more operational flexibility to innovate and respond to the changing needs of the market, while weaker ones will face stricter controls. MAS will also be adopting a risk-based approach in supervising the insurance industry. While the frequency of examinations of insurers will be stepped up, these will be focussed largely on the risk areas. Examinations of insurers will be conducted on a no-surprise basis.

Admission policy

18   Further, in the wake of the trend towards liberalising financial markets, MAS is doing a comprehensive review of its admission policy for insurers. Singapore's vision is to have an insurance industry that is not only financially strong but is also efficient, progressive and innovative in its products and distribution methods. Details will be announced when the study is completed.

Role of Financial Guarantee Insurers

19   In the meantime, MAS welcomes specialist insurers to set up in Singapore. In this regard, I would like to highlight that MAS already has in place regulations for the licensing of financial guarantee insurers. Such insurers play a key role in credit enhancement of debt securities. Analysts agree that the region would have to undergo a comprehensive restructuring of its financing channels. More corporations will have to come directly to the capital markets for funding and rely less on short-term bank debt which used to be their primary source of funds.

20   However, as the crisis has left many international investors wary of emerging market credit, there will be great scope and opportunities for institutions that can provide credit enhancement for the securities that will be issued. One of the strategies that Singapore has adopted in our quest to become a financial centre is to position ourselves as a hub for international debt issuance and trading. Attracting specialist financial guarantee insurers to provide their services from Singapore is an important component of this strategy. Indeed, this was one of the areas identified by the International Advisory Panel to the MAS last week as being very important for Asian debt markets to flourish. I am happy to announce that MAS will make further legislative amendments to allow for the setting up of branch operations by triple-A rated financial guarantee insurers, such as Financial Security Assurance.


21   Ladies and gentlemen, the economic crisis has forced many Asian economies to undertake a fundamental review of their financial sector policies and to address inherent weaknesses in their financial systems. Insurance regulators and supervisors of the insurance industry must examine and re-think their supervisory philosophy and strive to formulate a more resilient and prudent regulatory framework.

22   Globalisation of markets means that this review cannot be carried out in isolation, oblivious to the changing environment and other regulatory regimes. There is a greater need for regulatory co-operation amongst markets. More dialogue and exchange of information between regulators is essential. The private sector must also play its important role in developing the industry. Insurers must rise up to the challenges that technological advancements bring to the marketplace, and also provide more value and protection for consumers.

23   This Conference is a springboard for more collaboration among the OECD Insurance Committee, the IAIS and Asian regulators. With greater collaboration, we can all learn from each other's experience. We should close ranks and move together towards developing an insurance industry that contributes to the economic growth in our respective countries, but which is also an industry that is highly regarded for its professionalism, progressiveness and high standards of supervision.

24   On this note, I wish all participants a fruitful conference. And to our foreign guests, I also wish you an enjoyable stay in Singapore. Thank you.