"Getting the Best Marine Insurance Cover at the Best Rate, Terms and Security"
Keynote Address By Mrs Hauw Soo Hoon, Executive Director (Insurance), Monetary Authority of Singapore, Marine Insurance Conference On Cargo, Hull And P&I
Date: 07 Nov 2000
A very good morning to you
Ladies and Gentlemen,
1.1 It gives me great pleasure to deliver the keynote address at this Marine Conference on Cargo, Hull and Protection & Indemnity insurance. The timing of this conference is particularly opportune as the industry is now at its crossroads. I hope the interaction these two days would provide an exciting forum to discuss and exchange views on the future and prospects of the marine insurance industry.
1.2 Insurance as we know it is the result of many hundreds of years of development. Marine insurance is one of its oldest forms. It is known that the Babylonians, Hindus and Greeks used contracts to transfer the risk burden from owners of ships and cargoes to moneylenders who agreed to cancel any outstanding loans if the ship or cargo was lost during a voyage. Apparently, the first insurance contract of which a record still exists is a marine cargo insurance document from Genoa dated October 1347 .
1.3 From humble beginnings, the marine insurance industry has since flourished to become a multi-billion dollar industry, with global premiums reaching US$ 10.8 billion in 1999. Today, the London market alone commands some US$2 billion of marine hull premiums. Other marine markets like the US, Japan and the Scandinavian countries have also developed. Indeed, the marine insurance industry today is a truly global one.
1.4 I will this morning highlight briefly the recent trends and developments in the marine insurance sector before moving on to share some thoughts on what might be the respective roles of the insurance regulator and industry players in the light of such developments. Finally, I will let you know what we, in Singapore, are aiming to achieve as a marine insurance centre for Asian business.
2 RECENT TRENDS AND DEVELOPMENTS IN MARINE INSURANCE
2.1 The underwriting cycle, like any other business cycles, has its peaks and troughs. Following its last trough between 1988 and 1992, we witnessed the cycle reaching its peak in the mid 1990s. At that time, marine hull rates approached three times 1989 rates. Industry players are noticing another downturn after several years of profits. With new capacity led largely by more competitive reinsurance rates, premium levels today have somewhat halved since 1994.
2.2 Rates aside, changing consumers' needs has forced increased competition on the marine insurance market. Cargo insurance underwriters today need to grapple with the rapid developments in technology for transportation of goods, and risk management and loss prevention techniques to manage claims costs.
2.3 Another major development is the blurring of activities carried out between marine hull insurers and Protection & Indemnity clubs. Commercial hull insurers today compete directly with the Protection & Indemnity clubs by offering fixed premium Protection & Indemnity cover whilst Protection & Indemnity clubs have moved into the traditional hull insurance business by offering '2-in-1' hull and Protection & Indemnity cover. Other players, whilst maintaining their separate identities and business franchises, have struck alliances with each other to provide their clients access to both Protection & Indemnity and hull protection.
2.4 Increasingly, the provision of one-stop fully integrated insurance cover is gaining popularity amongst shipowners. However, I note that there are differing views on the ability of such new players to deliver services with the same level of expertise and support as the traditional providers. Nevertheless, I suspect many would acknowledge that it is a development that no one in the industry can afford to ignore. These new competitors now come in the form of large international insurers with strong balance sheets and impressive global presence. It is a fact that competitors in the marine marketplace today are stronger and larger than ever before due to the spate of mergers and acquisitions in recent years by both Protection & Indemnity clubs and traditional commercial insurers.
2.5 The picture of the marine insurance scene I have just tried to describe is not one of relative calm for market players. If anything, there are prospects for rather rough weather conditions. Like other segments of the financial services industry, marine insurers would have to be make important strategic decisions about business models to survive much less flourish in the new competitive environment.
3 BACK TO FUNDAMENTALS : A REGULATOR'S PERSPECTIVE
3.1 Much of what I have outlined as trends in the marine market is also happening in the Singapore insurance industry. Like the marine market, the Singapore insurance industry has not been spared the onslaught of rate erosion brought about by intense competition in recent years. In our small, market, we have seen keen competition and excess capacity contributing to falling rates in several classes. In particular, motor insurance recorded underwriting losses the past five years, and in the last two years, sustained operating losses to the tune of over S$50 million dollars in 1999. The outlook for 2000 is an even grimmer picture of greater operating loss for the motor insurance sector.
3.2 I would like to consider what ought to be the role of the regulator and the industry in the face of such an apparently reckless underwriting environment driven by intense competition?
Role of Insurance Regulator
3.3 It is clear that we believe that the market is the best driver for the shaping of a progressive and dynamic insurance market. The relatively unfettered working of market forces would encourage innovation and improvement amongst insurers to the benefit of consumers and policyholders.
3.4 However, no regulator no matter how committed to the free market would be indifferent to the prudential supervision of financial firms. Insurance at its core essentially involves the promise by the insurer to pay the insured sometime in the future in the light of certain agreed event. It is the security of the insurer that ultimately determines whether this promise can be made good. This is the reason why MAS maintains high admission standards to admit only financially strong and reputable insurers into our market. This has served us well in building our reputation as a sound insurance centre. At the same time, we seek to provide a conducive regulatory framework, allowing insurers the space to innovate whilst ensuring our high standards are not compromised.
Role of Market Players
3.5 Allowing market to shape the industry pre-supposes there are disciplined and responsible players in the marketplace - players who know the difference between competitive, sensible pricing and dangerous predatory pricing practices. Whilst MAS has provided the basic framework, insurers have the more crucial role to play in sustaining the development of a, competitive and sound market. Insurers should compete on the basis of sound underwriting, best business practices and high professional standards.
3.6 Sound underwriting presumes the underwriter has assessed the risk and has a technical basis for rating the risk, and based on his company's business positioning, provides a competitive yet realistic price. This would be a price that has a reasonable chance of generating a fair return to both policyholders and shareholders. Poor pricing decisions will impact adversely on the insurer's financial position. Ultimately, policyholders and shareholders will bear the brunt of irresponsible and unsound underwriting behaviour when the insurer becomes insolvent.
3.7 Competition in today's business environment is no longer confined to the boundaries of the domestic market. Insurers must increasingly come up to be measured against global standards. Those that can offer value-for-money products in a cost-efficient manner at a quality level of service will simply stand a better chance of success in today's extremely competitive environment. To do this, the insurer must adopt the best business models and practices, embrace information technology and be e-enabled in its business processes to deliver the service its clients expect.
3.8 Finally, the insurer's key success factor lies in its other most prized asset - its people. Consumer needs are changing. In order to offer the best cover, insurers need to focus on meeting the demands of their clients. Insurance professionals must be forward-looking, have a good understanding and be able to anticipate clients' needs. It is imperative that they have regular dialogue with their clients in order to tailor their products to better meet their clients' needs, instead of merely pushing tried and tested formulas. Insurance professionals also need to embark on a process of continual learning to upgrade their knowledge and skills base. In this way, insurers can rise up to the challenge of creating new innovative products to meet the changing needs of their clients.
3.9 Therefore, as insurers move into the new competitive environment, they must go back to fundamentals of (1) sound underwriting to ensure its their ship stay the course of security; (2) best business practices to ride the waves to provide their clients the best service; and (3) professional crew to serve the best cover to their clients.
4 SINGAPORE - MARINE INSURANCE CENTRE FOR ASIAN BUSINESS
4.1 This brings us to the question - where can insurers harbour their ships to prepare for their journeys? At this juncture, I would like to say a few words on MAS' initiatives to develop Singapore as a marine insurance centre for Asian business.
4.2 Europe, specifically London, has historically been the predominant marine insurance centre. Lloyd's alone writes about 13 per cent of the world's marine business, and the liability risks of nearly all the world's ocean going ships are reinsured at Lloyd's. However, with globalisation and the changing dynamics taking place in the shipping industry, it is conceivable to see some market shifts in the light of all these changes.
4.3 Asia possesses a mighty shipping force. 40% of the world's commercial tonnage are controlled by Asian owners and Asian operations. The Asian shipping lines are still growing strongly with shipping traffic in Asia envisaged to be growing the fastest. With expressed growing desire by the Asian shipping community to have services nearer home, one can expect that existing insurance arrangements with present providers will change. There is therefore a strong case for the emergence of a marine insurance centre for Asian business in the region.
4.4 For many years now, Singapore is one of the busiest seaports in the world. Our location at the crossroads of the main shipping routes has facilitated the development of Singapore as a principal centre for shipping activities in Southeast Asia. It is a focal point for some 400 shipping lines linking Singapore to more than 300 ports in 130 countries worldwide. There are more than 800 ships in the port at any one time. These ships can look forward to a variety of services, including cargo handling, warehousing, distribution, bunkering and ship supplies. And all these services will require some form of insurance.
4.5 From a business point of view Singapore is a natural location from which marine insurers can service the marine insurance needs of the Asia-Pacific shipping community. Singapore's stable political and business environment, unparalleled infrastructure and geographically strategic location have attracted many international insurers to use Singapore as their Asian base. Over the past two years, MAS has put in efforts to attract marine insurance specialists. To-date, we have admitted three Protection & Indemnity clubs. MAS is part of the multi-agency efforts to develop an array of services, including shipping agencies, shipping registry, ship broking and surveillance, classification societies, finance and insurance, to support the development of Singapore as an International Maritime Centre.
4.6 MAS is continually striving to attract world-class marine insurance players who can offer products and services at the best rate, terms and security. Market liberalisation initiatives announced earlier this year reflect our commitment and desire to become an insurance centre of world-class standard. We are also working on enhancing our regulatory framework for insurers. For marine insurance specifically, we are looking at making our regulatory framework more conducive for specialist classes of underwriters like the Protection & Indemnity clubs.
4.7 In addition, we are also committed to enhancing the operating environment for our players. In February this year, we put into effect the Tax Exemption Scheme for Offshore Marine Hull and Liability Insurance Business. Available to all general direct insurance and reinsurance companies in Singapore, Approved Marine Hull and Liability insurers ("AMIs") will be exempted from the tax on underwriting profits, as well as certain income derived from investing premium income and shareholders' funds in relation to marine insurance business. These are insurers that have made additional commitment to writing offshore marine hull and liability insurance business from Singapore. The AMI scheme provides experienced marine insurers with the relevant expertise an added incentive to grow their business focuses here, and contribute to developing the level of marine hull and liability underwriting capabilities in Singapore. We have seen good interest to this scheme, and this morning, I am pleased to announce the names of the first batch of Approved Marine Insurers awarded this incentive. They are Swiss Re, HSBC Insurance (Asia) Ltd and Gerling Global Re. All three companies have proven expertise in marine hull and liability insurance, and have also demonstrated clear commitment to expanding the level of marine insurance capabilities and their presence here.
4.8 I am sure there are many other deserving candidates out there, and would like to urge other general insurers and reinsurers to consider expanding their marine insurance business here, and to work together to grow the level of expertise for marine insurance services in Asia Pacific.
5.1 The best marine insurance cover at the best rate, terms and security does not equate to the lowest rate alone. The best deal is a product that is adapted to meet the client's needs at a competitive realistic price, serviced by high professional standards and bonded together with strong security. Insurers must therefore work at providing the above to the best of their capability. And this can happen if people take on a professional approach, adopt best practices and continually upgrade themselves.
5.2 Ladies and Gentlemen, as you spend the next two days to ponder over preparations for your marine adventures to ride the big wave, I wish all a fruitful conference, and to our foreign guests, an enjoyable stay in Singapore. Thank you.
1 D.G. Hart, R.A. Buchanan and B.A. Howe, The Actuarial Practice of General Insurance 5/e (Sydney: The Institute of Actuaries of Australia, 1996).