Life Insurance in the 21st Century

1   Thank you for inviting me to deliver the keynote address for the 19th Pacific Insurance Conference. It is an honour for Singapore to host this prestigious event.

I   World Wide Trends in Insurance

2   The financial services industry worldwide has been undergoing a dramatic transformation. Financial deregulation and rapid developments in IT are major driving forces. Demarcations between financial products are blurring. Traditional barriers to cross-border financial services are coming down, although less quickly in insurance. As an integral element of the financial services industry, insurance is increasingly subject to these broader forces and trends.

3   In developed countries, insurance markets are maturing. Insurers face tough competition from other financial institutions, such as banks and securities firms. Increasingly, they have also to contend with non-financial institutions, like Marks & Spencers and Virgin in the UK. This has forced insurers to find innovative ways to structure and package the risk and investment components in insurance products, for the competitive edge. Insurers need fresh business strategies just to retain market share, in an environment where information is freely available, and inefficiencies easily and quickly exposed.

4   Growing deregulation by supervisory authorities and greater emphasis on costs and shareholder value have resulted in a wave of mergers and acquisitions between insurers, banks and asset management companies, and the emergence of financial conglomerates. The largest of these mergers, so far, has been the one between Citicorp and the Travelers' Group.

5   These conglomerates promise to revolutionise the distribution of financial products and services. The hope is that integrated entities will achieve major cost savings and synergies in the distribution of products, by sharing and streamlining distribution channels, and integrating valuable databases of customer information. The extent to which these potential gains can be achieved in practice remains to be seen.

6   One significant development specific to the insurance industry is the evolution of social security systems in the developed countries, as populations age and medical costs increase. Improvements in living standards and medical care have increased life expectancy. Many nations, especially - though not only - in Europe, are finding it increasingly difficult to provide adequately for the needs of their aged through state-provided social security. This provides insurers with challenges as well as business opportunities.

II   Vision & Prospects for the Insurance Industry

Vision

7   In Singapore, our aim is to build a world class financial centre in Asia. The insurance industry is an integral part of this vision, given its close linkages to the capital and debt markets, asset management and banking industries. We seek to become the premier insurance hub in Asia by 2003.

8   Singapore is already an important insurance centre, home to a rich mix of insurers, reinsurers, captives and brokers. Most of the world's top reinsurers operate here. We also have the largest number of captive insurers in Asia. However, there remains considerable scope for the industry to upgrade and help meet the growing demand for more complex insurance services across the region.

9   The direct general and reinsurance sectors of the insurance industry offer higher potential for cross-border development, and wider opportunities to strengthen our role in servicing the region. For direct general insurance, our immediate aim is to build up specialised areas like marine hull and the financial guarantee business. In particular, credit enhancements provided by financial guarantee insurers are a crucial element in the debt market value chain. We will strive to attract more specialised players and financial guarantee companies to further advance the industry.

10   Presently, Singapore-based reinsurers capture only 9% of Asian (ex-Japan) risks that are ceded offshore, to London and the other major centres by the direct insurers. There is therefore considerable scope for growth. We will attract more reinsurance players to Singapore. Reinsurers and general insurance companies can use Singapore as a base, to expand their regional operations and write a wider range of offshore risks.

11   We also aim to become a centre for Alternative Risk Transfer (ART), with market players who offer a wide range of activities and services covering captive insurance, financial reinsurance and the securitisation of risks.

12   Life insurance continues to be the mainstay of the insurance industry. It accounts for over 70% of the total insurance industry assets. We need to upgrade the life industry to become as efficient, competitive and innovative as in the developed markets. We also want to develop a few local players who can compete effectively with foreign participants, and in foreign markets.

13   For direct life insurers, regional opportunities in the immediate future are limited. The markets are still closed, with each country protecting its own life industry. However, as financial services become progressively liberalised worldwide, particularly through the new round of WTO trade negotiations, access should open up. The development of remote distribution channels such as the Internet will also create opportunities for life insurance companies in Singapore.

Prospects for Life Insurance

14   Over the last 15 years, the life insurance industry in Singapore has grown faster than GDP. This reflects increasing affluence and the growing financial awareness of our population. Since 1983, total assets have increased 22 times to $22 billion, while total premiums written expanded 16 times to $5 billion.

15   The outlook for domestic life insurance is promising. High savings ratios, steady GDP growth and the recent liberalisation of the CPF Investment Scheme ensure a steady growth in premiums and assets. Even after including CPF contributions, our levels of insurance penetration (measured as premiums as a percentage of GDP) and density (measured as premiums per capita) are lower than those in the developed markets like Japan, Switzerland and the United Kingdom. There is the potential for growth.

III   Liberalisation of the Insurance Industry

16   Singapore has adopted a closed-door policy in respect of new direct life insurers since the mid-80s, having admitted only one direct life insurer since 1986. The rationale has been to prevent unhealthy competition, given the small size of the market and the adequate number of participants, both local and foreign, already operating here.

17   The closed-door policy has, however, drawbacks. It has prevented new players with new products, more efficient distribution channels, or better marketing from entering the market. There are few catalysts of change, either to take market share away from existing players, or to cause existing players to upgrade themselves to match the competition. It has insulated the domestic insurance market from international trends. The rapid developments in the industry since the mid-80s have thus passed us by. If we simply maintain the status quo, we will be left behind. For Singapore to become a world class financial centre, and for Singaporeans to have access to high quality insurance services, our industry must keep abreast of developments in the international financial services market.

18   One symptom of the protected market is the lack of impetus among incumbent insurers in Singapore to consolidate, innovate, and develop new products and distribution channels. There are too many small players, particularly in the fragmented general insurance industry. The standard and extent of customer service lags international best practices. Life insurance is still largely sold door to door by agents. There is considerable room for improving the productivity and expertise of agents, and their ability to provide high quality financial planning advice. A few local insurers have done well in Singapore and Malaysia, but none have become significant regional players.

19   There is an important difference between the domestic insurance industry and the banking industry, which is also partially protected. There is a clear rationale for wanting Singaporean banks to maintain a significant share of the market. Banks are critical to our monetary policy, the domestic payments system, and the entire process of intermediation in the economy. If something goes wrong with the banking system, the whole economy can be severely affected. Japan's deep-seated economic problems are a prime example. In contrast, insurance, though an important industry, does not occupy the same pivotal role in the economy. Therefore the case for protecting local players is much weaker.

20   Furthermore, our closed-door policy in insurance has operated differently from that in banking. Foreign and local insurers operating here are not treated differently, whereas foreign banks are subject to restrictions in the retail market. This has allowed foreign-owned insurers who are already in Singapore inside the closed-doors to consolidate their market positions and become dominant players. They, in fact, hold more than half the market share in both the life and general insurance business. If the rationale for protecting local players is weak, that for protecting foreign players is even more tenuous.

21   MAS recognises a need to promote a couple of world class financial groups, centred around banks, that offer a broad range of financial services, including insurance. This must, however, occur in a more open and competitive environment.

22   MAS is therefore reviewing its approach to the insurance industry, to liberalise the restrictions and allow new entrants. The review should be complete within a few months.

IV   Challenges for the Industry

23   Insurance companies in Singapore have to gear up to face increased competition. Consolidation and higher capitalisation will help insurers to achieve economies of scale, withstand volatile capital markets, and make sizeable investments in IT and alternative distribution methods. Well-established local players may also consider strategic alliances with reputable foreign players, so as to benefit from their experience, expertise and financial support.

24   Besides these general issues, the life insurance industry in Singapore faces three major challenges: developing new distribution channels beyond the agency force, developing new products to meet the needs of an ageing population, and upgrading standards of asset management.

Distribution : Towards More Efficient Channels

25   In Singapore, about 90% of life insurance business is sold through the traditional means of insurance agents. Low productivity and high turnover of agents render this one of the most costly distribution channels. Its dominance gives credence to the cliche that life insurance is sold, not bought.

26   The distribution of life insurance products worldwide has undergone a sea-change over the last decade. Alternative distribution channels have developed rapidly. Bancassurance, direct marketing, the Internet, tele-marketing, call centres, all now threaten the role of the traditional insurance agent.

27   Insurers in Singapore must invest in IT to implement some of these alternative distribution channels so as to reduce cost, target a wider market, and improve client service. If they fail to do so, new entrants will exploit these alternatives to the full, and take away business from existing players.

28   Nonetheless, agents still play a useful role, provided they continually upgrade their skills and knowledge. As insurers widen their product range and design more complex insurance packages, bundling in other financial products, consumers will have a greater need for reliable, informed advice from financial intermediaries.

29   We should develop bancassurance more strongly in Singapore. Singapore is similar to France, because most local banking groups have insurance subsidiaries, but our banking groups sell far less insurance business than French banks. We have good potential for bancassurance, because the highly developed branch networks of the banks provide a ready made extensive distribution system for insurance products. Banks and insurers will need to integrate their business plans and operations. And there are no regulatory impediments to the integration here, unlike in the US.

30   Apart from bancassurance, we need to develop the role of the insurance broker. The recent emergence of life brokers in Singapore will give consumers a wider choice of products to meet their needs. In developed countries like the UK, brokers use league tables to identify the best performing and most efficient insurers. This gives insurers an incentive to improve their performance and efficiency. The Insurance Intermediaries Act passed earlier this month provides the platform for developing a strong broker distribution network in Singapore.

31   The Internet is a promising medium for insurers to advertise products and service policyholders. However, actual sales of life insurance products over the Internet have been quite low. The Internet trade is still dominated by inter-company transactions. But as the Internet continues to develop dramatically by the day, it will offer the potential for life insurers to sell to consumers, and to cross-border clients. Singapore must position itself to take advantage of the development of "web-enabled" distribution when volumes take off.

Products: Meeting needs of an Ageing Population

32   Singapore's population is ageing rapidly. We project that by 2030, 30% of our population will be above the age of 60¹. Living standards are improving, life spans are growing longer, and health care costs are rising². Life insurers have a major role to play in meeting the needs of the elderly, through pooling risks and managing savings. Retirement products like annuities, medical and long-term care insurance are ideally suited to this growing segment of our citizenry. This should provide ample business opportunities for our life insurers.

33   We need to develop our local debt market further, to enable the life insurers to match long-term annuity liabilities. MAS' recent efforts to do so have yielded encouraging results. We will press on with our plans to develop the debt market, and study ways to promote these retirement products.

Asset Management: Growing Need for Expertise

34   Because the life insurance industry has grown rapidly, it now has substantial assets under its management. In addition, as borders between the insurance and asset management industries blur, insurers are offering products which are mainly investment products, with only a small component of insurance. The Investment-Linked Products and Single Premium Bonds are prime examples.

35. Fund management has therefore become a key responsibility for insurers. It cannot just be treated as secondary to the insurance aspects of the industry. Insurers must be able to manage their customers' funds professionally, and maintain the same high standards as fund managers offering unit trusts, although their time horizons and risk preferences will often be different.

36   Singapore insurers have so far focussed mainly on participating business. Hence, most of the investment risk has been passed on to policyholders. It is therefore imperative that funds are managed properly and well, as the consequences of poor investment decisions directly affect policyholders' returns.

37   Traditionally, insurers invest their assets in the countries where their policies are written, in order to avoid currency risks. However, given our small economy, there are fewer opportunities for Singapore insurers to invest in local-denominated assets, compared to British or US insurers. As the assets of insurance companies grow, it will become increasingly difficult for them to diversify their portfolio to earn sufficient risk-adjusted returns through local investments.

38   Increasingly, therefore, insurers will feel the need to invest more of their assets offshore. They will have to manage the currency risks involved by diversifying their overseas investments and designing products that allow them to share risks with their customers, for example Investment-Linked Products and possibly even foreign-denominated products.

39   This problem is not faced by insurers alone. Fund managers as well need to diversify their investments overseas. In theory, a regional or global portfolio that is properly diversified across countries and asset classes should offer better returns, for the same level of risk, than a purely local portfolio. But in practice a regional or global portfolio will require much more skill and knowledge to manage.

40   Insurers must therefore upgrade their fund management and product development expertise, and develop links with external fund managers. Traditional approaches to investing in the local stock or property markets will have to be enhanced considerably, with formal procedures and analytical disciplines, and the infusion of more high quality investment professionals.

41   We must ensure that the asset management capability, systems and reporting framework of our life insurers meet the highest international standards. This will enable them not only to meet policyholders' expectations, but also to compete successfully with unit trusts and other financial products.

V   Challenges for MAS

42   As the supervisor of the insurance industry, MAS faces considerable challenges too. The issues include ensuring robust management of risks inherent in volatile capital markets, keeping up with rapid product development, and the concentration of market shares in the industry. Although liberalising the industry is an essential measure, it is not a panacea to address all these issues. MAS will take steps to ensure that further liberalisation will not compromise the security of policyholders' interests.

Corporate Governance

43   One key component of MAS' recent liberalisation package for the banking industry is measures to strengthen the corporate governance of banks. Over the last two years, MAS has embarked on a fundamental, controlled shift from regulation to supervision. It has sought to give industry participants and market forces greater free play, without lowering prudential standards. The basic philosophy is that the primary responsibility for the soundness and safety of financial institutions rests with the institutions themselves.

44   For this approach to work in the insurance industry, insurers need to strengthen their management teams, and place greater emphasis on instituting rigorous risk management and control processes. In life insurance, the professionalism of Appointed Actuaries will have to be enhanced in line with international best practice. Although the Appointed Actuary is appointed and remunerated by the insurer, he has the duty to fully support the supervisory function, in order to protect policyholders. This is particularly so for participating and CPFIS business.

Risk-Based Capital

45   The existing statutory framework for solvency and capital adequacy is essentially a "one-size-fits-all" approach. However, as the industry develops and insurance companies increasingly specialise, their risk profiles will diverge. Therefore regulators clearly need to introduce risk-based solvency standards to provide greater flexibility to insurers as well as better protect policy-holders' interests.

46   In banking, the risk-based capital approach is well established. There are clear guidelines from the Bank for International Settlements (BIS). For insurers, there is no widely accepted guideline yet. Canada and the US have implemented a risk-based capital approach, whereas the European Union is deliberating on the feasibility of another model. We will study carefully international best practices and implement a statutory framework that measures the risks specific to each insurer, and is consistent with the approach we have adopted for banks.

Enhanced Disclosure Standards

47   As we move closer to a caveat emptor environment, we must enhance disclosure standards across all financial services, including insurance, to enable investors and customers to make informed decisions. Disclosure is especially important for life insurance products, as the commitment is generally long-term, and the structure of benefits too complex for most consumers to understand fully without adequate disclosure.

48   Policyholders should be entitled to know the details of the remuneration of his financial intermediary and the other expenses incurred by the insurer. This will allow them to better understand whether they are getting value for money. It will also help them to compare a proposal against similar products by other insurance companies, and also other financial institutions.

VI   Conclusion

49   MAS will continue working closely with the industry in its effort to make Singapore a world class financial centre. The Finance and Banking Sub-Committee of the Competitiveness Study Committee has provided much valuable feedback. We have reviewed the recommendations and taken appropriate action in respect of most of the recommendations. Since then, we have formed the Financial Centre Advisory Group (FCAG) and International Advisory Panel (IAP), to help MAS to continuously obtain feedback and views from the industry.

50   I am confident that together we can develop a strong life insurance industry in Singapore, and achieve our vision of making Singapore the premier insurance hub in Asia.

51   I wish you a fruitful and enjoyable conference.

¹ For perspective, in Germany and Japan - both acknowledged as OECD countries facing the worst effects of a graying population - the over-60s share of the population is forecast to rise from 21% now to a peak of 36% in 2035.

² According to Victor Fuchs, a Stanford economist, health care expenses for the average person above 65 are three times the figure for those below that age; and for the over-85s, the figure is three times that for those aged 65-74.