Liberalisation of the Insurance Industry
Date: 20 Mar 2000
Singapore, 17 March 2000. MAS will open up entry to the direct insurance industry, and lift the 49% restriction on foreign ownership of local insurers, with immediate effect. MAS will also adopt an open market entry policy for insurance brokers. For reinsurers and captive insurers, the existing open admission policy will remain.
1 Along with the liberalisation programme, MAS will introduce measures to raise standards of corporate governance and market conduct, and strengthen protection of policyholders' interests by insurers.
2 MAS' aim is to promote modernisation and efficiency in the industry, provide Singaporeans with wider choice and better value in insurance products and services, and enhance Singapore's position as a sound and progressive international financial centre.
3 No direct life insurers have been admitted since 1990, and no direct general insurers since 1984. The only exceptions have been direct general insurers writing specialised business beyond the expertise or capacity of existing insurers in Singapore.
4 DPM Lee Hsien Loong, in his keynote address at the 19th Pacific Insurance Conference on 16 Aug 99, explained the reasons for liberalising the insurance industry . It is to create a more contestable market in insurance that will foster the development of an efficient and forward-looking industry. This need to upgrade and modernise has been prompted by:
Blurring of borders in financial services. The insurance industry will face greater competition from other financial service providers along all aspects of their value chain. Life insurers, for instance, with their significant and growing asset base, must develop asset management capabilities and expertise on par with professional fund managers, or they will face pressure to farm out their funds for professional management.
Global innovation in product development. Life insurers have substantial scope to promote retirement products like life annuities, long-term care insurance and medical insurance. Direct general insurers need to provide a full range of insurance products, including specialised classes. Marine hull, liability, financial guarantee and computer fraud insurance offer promising business opportunities. Singapore also has potential to become a centre for Alternative Risk Transfer (ART), with market players offering a wide range of activities and services including captive insurance, financial reinsurance and the securitisation of risks.
Development of alternative distribution channels. The bulk of life insurance business in Singapore is sold through the traditional agency channel. We need to develop alternative distribution channels which cost less, and can reach a wider target market. These alternatives include independent intermediaries, bancassurance, direct marketing, the Internet, and telemarketing.
LIBERALISATION OF MARKET ENTRY
5 MAS will lift the closed-door policy on direct insurers with immediate effect. There will not be any fixed limit on the number of new entrants. The admission of new entrants will however be paced out to minimise the risk that the sudden entry of many new players, all intent on building up market share, will pressure new and existing insurers to pursue unsound, short-term market practices.
6 The criteria for awarding direct insurance licences will be:
The domestic and international rankings;
The present and past credit ratings;
Track record and reputation, with regard to compliance with regulations and the strength of internal control systems;
Commitment to contribute to Singapore's development as a regional insurance hub and an international financial centre.
7 MAS is keen to see the industry develop in terms of product innovation and the use of alternative distribution channels. Applicants with a strong record in these areas, or in specialist and niche fields, will receive favourable consideration.
8 At the same time, MAS reserves the right to impose conditions on market entry to ensure that policyholders' interests are not compromised.
9 The Insurance Intermediaries Act came into effect on 31 Dec 1999. In many countries, the presence of professional insurance brokers and independent financial advisers who represent the interests of the client is a major motivating factor for insurers to raise efficiency and give better value to policyholders.
10 MAS will adopt an open admission policy for new brokers, subject to applicants meeting our admission criteria.
11 The broad criteria that we will apply for the admission of new brokers are:
World ranking (for general insurance brokers);
Reputation, financial standing and track record;
Business plans and projections;
Commitment and ability to contribute towards developing Singapore as an international financial centre, through transfer of expertise to local staff, and risk management and product innovation.
REINSURERS AND CAPTIVES
12 MAS' open policy on admission to the reinsurance or captive insurance industry remains unchanged.
LIFTING THE FOREIGN SHAREHOLDING LIMIT IN LOCAL DIRECT INSURERS
13 MAS will lift the 49% foreign shareholding limit in locally-owned direct insurers with immediate effect. This is to enable local players to form alliances with foreign partners, to benefit from transfer of technical know-how and increased financial strength. This will enhance local insurers' ability to modernise, expand, and to become credible regional players.
14 MAS will retain the existing requirement for any increase in share-holdings (local or foreign) in a locally incorporated insurer to 5% and 20%, to be explicitly approved by the MAS. This is to ensure that only fit and proper parties assume control of locally-incorporated insurers, for the protection of policyholders' interests.
15 MAS encourages local insurers to merge or form strategic alliances with other financial industry players, in order to flourish in a liberalised environment. As in the case of banks, consolidation offers significant benefits. It will lead to greater economies of scale, facilitate IT investments, acquisitions and strategic alliances, and help attract talent to the industry.
16 Consolidation is especially imperative in the direct general insurance industry, with its large number of players each having a small market share. Larger firms with more capital and expertise would be better able to take on the large and specialised risks.
17 The risks of not achieving economies of scale and efficiency in operations in a liberalised environment are clear. The Government hopes that the liberalisation will be a sufficient catalyst to prompt consolidation. But the Government can only encourage; it cannot force insurers to merge, because only the shareholders can decide.
ENHANCING THE PROTECTION OF POLICYHOLDERS' INTERESTS BY INSURERS
18 With greater competition in the marketplace, enhanced standards of corporate governance and market conduct are necessary to protect policyholders' interests.
CORPORATE GOVERNANCE AND THE ROLE OF KEY PERSONS
19 MAS is introducing measures to strengthen the corporate governance of insurance companies in line with international best practices. Locally-incorporated insurers will be required to have a majority of independent and non-executive directors on their boards. A majority of directors must be Singa-pore residents. In future, the re-appointment of directors will require MAS' approval, as does the appointment of directors currently. MAS encourages local insurance companies to have sufficient renewal of their board.
20 MAS will also be consulting the industry to set guidelines that clearly enunciate the role and functions of directors and Appointed Actuaries of direct life insurance companies, so that they can provide greater professional stewardship to protect and enhance the interests of policyholders. Among other things, MAS is proposing that directors be responsible for establishing the policy for determining bonuses to be paid on participating life policies.
ACTUARIAL CERTIFICATION OF GENERAL INSURANCE RESERVES
20 Actuarial certification of loss reserves is a good discipline, and should be a part of every insurer's sound management practice. Unsound rate competition and inadequate reserves would adversely affect the security of policyholders' interests and in the longer term diminish confidence in the insurance industry.
21 Market liberalisation will make the general insurance industry more competitive. To ensure good discipline and sound management practice, MAS intends to require loss reserves of general insurers to be assessed and certified by qualified professionals within the next two years. Details will be worked out in consultation with the industry
ENHANCING THE EFFICIENCY OF THE DISTRIBUTION OF LIFE INSURANCE PRODUCTS
Disclosure of Expenses
22 Along with developing the market, MAS intends to raise the level of disclosure to the standards of international best practice. Life insurance products are often complex, making it difficult for policyholders to compare the costs and features of competing products. Standards of disclosure to policyholders, especially in life insurance, need to be enhanced. This will help policyholders obtain the information to make meaningful comparisons and evaluations before choosing products offered by different insurers. It will also motivate insurance companies to improve their efficiency.
23 MAS will require insurers to disclose their expenses, and show how these expenses affect yields. The details of the expense disclosure requirements will be worked out in consultation with the joint committee detailed below.
24 The Singapore life insurance industry relies heavily on the traditional agency distribution channel, with a large number of agents of varying levels of professionalism and productivity. There is thus scope for developing alternative distribution channels, which are often more efficient, and which can offer lower costs and better benefits for policyholders.
Committee for Efficient Distribution of Life Insurance
25 MAS has formed a committee comprising leading industry representatives and MAS officials, to study and recommend changes to improve the efficiency, transparency and quality of distribution of insurance products. It will be chaired by Mr Law Song Keng, CEO of Overseas Assurance Corporation Ltd. The membership and terms of reference of the committee are given in Annex A.
26 Our objective in liberalising entry to the insurance industry is to create a more vibrant and competitive industry, with greater efficiency, choice of products and value to customers. As in the banking and securities industries, freeing entry and ownership is a necessary step towards achieving those aims. The risks and potential costs of not proceeding are greater. However, strengthened corporate governance, management practices and disclosure are equally important in developing a sound and progressive industry.
27 MAS will monitor the progress of the industry towards these objectives, and make further changes where necessary. MAS will continue to consult industry representatives in developing a conducive regulatory environment, and formulating incentives to enhance the operational capabilities of insurers, for instance, in product development, distribution and asset management. Such partnership and dialogue will be vital for the growth of the industry, and for meeting the challenge of making Singapore a regional insurance hub and an international financial centre.
THE COMMITTEE FOR EFFICIENT DISTRIBUTION OF LIFE INSURANCE
- Mr Law Song Keng, CEO, Overseas Assurance Corporation Ltd
- Mr David Beynon, CEO, John Hancock Life Assurance Co Ltd
- Mr N Ganesan, CEO, Insurance Corporation of Singapore Ltd
- Mrs Hauw Soo Hoon, GM(Life), Keppel Insurance Pte Ltd
- Mr Edmund Koh, CEO, Prudential Assurance Co (Singapore) Pte Ltd
- Ms Theresa Nai, Alternate Principal Officer, American International Assurance Co Ltd
- Mr Joseph Ivan Peters, CEO, Axa Life Insurance Singapore Pte Ltd
- Mr Tan Beng Lee, CEO, The Great Eastern Life Assurance Company Ltd
- Mr Tan Kin Lian, CEO, NTUC Income Insurance Co-operative Ltd
- Ms Teo Swee Lian, Executive Director, Financial Sector Promotion Department, Monetary Authority of Singapore
- Mr Keith Weaver, CEO, OUB Manulife Pte Ltd
The Terms of Reference of the Committee
- To work out the details of the greater disclosure of expenses and to study the need to disclose the commission component of expenses
- To review commission limits and their relevance in an environment of higher disclosure
- To study and recommend changes to the agency structure to improve efficiency and standards of market conduct
- To study and recommend appropriate qualification requirements for insurance agents, including standards required for distribution of other financial products
- To study ways to encourage the development of alternative distribution channels
1 The full text of the speech can be found under News Archive.