1   Global Trends in Insurance

1.1   Technology and financial deregulation are leading to dramatic changes in the financial landscape. Traditional demarcations among financial products are blurring. Distinctions between the banking, insurance, securities and fund management industries are diminishing. Mergers and acquisitions across traditional boundaries are gathering pace. The internet is transforming all aspects of the business. And barriers to entry in national markets, still present in much of Asia, are gradually being lifted. Competition is unstoppable, and is being embraced.

1.2   As an integral part of the financial services industry, the insurance sector is exposed to all these forces. Insurance companies are facing increasing competition from other financial institutions, as well as new entrants to the financial industry. Insurers are increasingly using alternative risk transfer techniques to move some of the risk they write onto the capital markets. At the same time investment banks are creating derivative instruments that protect subscribers from particular event risks. Such products, hovering at the fringes of insurance, banking and capital markets, are creating opportunities for these different players to encroach each other's traditional domains.

1.3   Traditional product-oriented approaches to sales in businesses like stockbroking, insurance and fund management are giving way to new business models centred on the customer, and aimed at providing total risk solutions and financial planning services.

1.4   Technology, competition and cost imperatives are driving the emergence of alternative distribution channels. Traditional distribution models are now facing growing competition from infomediaries and other e-commerce intermediaries. The internet is allowing for vastly increased richness of consumer choice, and accelerating consumer knowledge and expectations. Internet-savvy consumers are able to purchase a widening range of personal financial service, anywhere and at any time, at the click of the mouse.

1.5   Competition and an increased focus on returns also leading to pressure to deconstruct the traditional value chain of financial services to gain efficiencies. There is a growing separation of the back-office, front-office distribution and structuring operations. New, non-traditional players are emerging, specialising within segments that they can deliver competitively, and out-sourcing others. There is enhanced focus on true competencies. Typically, non-traditional players with little or no legacy systems, branch networks and agency forces to manage have been quicker to exploit potential efficiency gains and to focus on the needs of the customer. Even departmental stores, in the UK for example, have entered the insurance distribution business, focusing on servicing the client while outsourcing processing and underwriting functions to more competitive operators.

2   Growth Potential in Asian Insurance Markets

2.1   There is immense growth potential in Asian insurance markets that waits to be tapped. Pre-crisis insurance growth rates in Asia were already among the highest in the world, with many Asian countries registering growth in excess of 10% per year in both the life and non-life sectors. The Asian crisis has also highlighted the need for individuals to save more wisely, in quality products aimed at long term returns. It is a mindset that will gain currency as Asian populations, still young on average, get older, much as has happened in the developed societies.

2.2   The potential for growth is also evident in the low rates of insurance penetration in Asia, well below those in mature markets. Insurance premiums averaged 2.4% of GNP in Southeast Asia in 1998, compared to 8.7% in the US and 12.1% in the UK¹.

2.3   Several Asian markets are characterised by significant market concentration among a few major players. There is also heavy reliance on the traditional agency network. Despite competition among incumbent firms for agents, and pressure on returns, these developments have not led to significant adoption of alternative distribution channels to supplement the agency force. Regulatory initiatives to allow new players into the market, and to raise standards of disclosure, especially of expenses, are likely to be important drivers for the introduction of alternative and more efficient methods of distributing products. Liberalisation and enhanced disclosure are essential if we are raise standards, and ultimately unlock the growth potential of the industry.

3   Moving Ahead with Liberalisation

3.1   A traditional concern in emerging markets about financial liberalisation is the fear of market disruption. The Asian financial crisis has indeed demonstrated the dangers of premature deregulation, with weak regulatory and supervisory systems being unable to match the added risks taken on by market participants in a more competitive environment. Sound regulation is a prerequisite for opening up, and for ensuring that increased competition does not come with imprudent market conduct by intermediaries, or expansion without requisite risk management expertise.

3.2   These are valid concerns, and dictate that the pace of opening be guided by the maturity of regulatory systems. Equally, however, there is a danger of delay in opening markets, leading to a perpetuation of inefficient practices among protected incumbent players, at consequent cost to consumers and the economy at large.

3.3   The case for local market players to be given time to mature and develop before markets are opened is a traditional one, the old 'infant industry' argument. The evidence is clear. In financial services, just as in other industries, infants more often than not fail to grow up in the absence of tangible threat of competitive pressure. Protected markets breed sluggishness among both regulated and regulator. A clear and reasonably ambitious schedule for admitting new players, including in particular foreign players with global expertise in risk management and product development, is necessary. Sound and prudent market practices, and the build-up of capabilities among regulatory staff, can be expedited by the import of new players with strong track records.

4   Singapore's Liberalisation Initiative

4.1   Singapore has decided to open up its insurance market, and to do so decisively. In August last year, during the Pacific Insurance Conference held in Singapore, DPM Lee Hsien Loong set out MAS' thinking on the liberalisation of the insurance sector. We had, since 1990, adopted a closed-door policy in respect of direct insurers. The only exceptions have been direct general insurers writing specialised business beyond the expertise or capacity of existing insurers.

4.2   Our earlier thinking was that the market could be well served by the existing players, who included large foreign firms. We were concerned that the rapid entry and exit of insurers would lead to unhealthy competition and market instability.

4.3   These concerns were not irrelevant. But our closed-door policy contributed to a degree of inertia among incumbent insurers in the innovation and development of new products and distribution channels. In effect, it insulated the industry from the forces engaging the international industry, forces which have spurred the development of new products and more efficient practices.

4.4   We believe that creating a more competitive insurance market is now necessary to raise standards to match international best practice, and enable Singapore to be a leading centre for insurance services in the Asia-Pacific.

4.5   Three weeks ago, we lifted our longstanding closed-door policy on direct insurers. We did so unilaterally. The 49% foreign shareholding limit in locally owned direct insurers was also lifted. Our open policy on admission to the reinsurance and captive industry remains. We have also adopted an open admission policy for insurance brokers.

5   Towards Greater Efficiency in Distribution

5.1   A second major concern that we have had has been the quality and efficiency of distribution in the Singapore life insurance industry. As in most Asian markets, this is dominated by tied agents remunerated by commissions. In Singapore, about 85% of new premiums written in 1999 were brought in through agents.

5.2   The sales productivity of agents in Asian markets is low compared to that of the more mature markets. New policies sold per agent per year a few years ago averaged 13 in most Asian countries with a few hovering around 25. This compares with 40 in the US. In Singapore, the number of new policies per agent was only about 20 in 1999.

5.3   The more developed insurance markets are lessening their dependence on the traditional agency distribution system. Evolving consumer knowledge and sophistication, and new providers, are leading to the rapid growth of non-traditional methods of distribution over the last decade, giving these markets a wider network of distribution channels.

5.4   In the UK, the Independent Financial Advisers (IFAs) brought in the most business in 1998, capturing 52% of life insurance business, while the agents brought in 29% of the business. Bancassurance captured 11%, and direct marketing 3%². In continental Europe, bancassurance is more developed. In France, bancassurance captured 55% of the life insurance markets in 1997³, while tied agents had 12% of the market share.

5.5   Given the much lower costs of bancassurance compared to agency channels, it is not surprising that bancassurance is predicted to have the highest market share within Europe within ten years⁴. One of the more ambitious projections of this trend, by Reuters, suggests that more than 60% of new life and pension premiums will come through bancassurance in Europe by 2002. Studies in the US point in the same direction.

5.6   The internet will also grow in importance, both as a source of information and a platform for transactions and payments. It is allowing for further cost reductions, and increasing competition by enabling consumers to compare and choose from competing products on a scale that no other medium has allowed. It will transform the business, and the configuration of players in the market, in ways that we cannot predict today.

5.7   There are essentially three prongs in our approach to enhancing efficiency of distribution channels in Singapore. First, we want to see insurers in Singapore exploiting alternative distribution channels, including independent intermediaries, bancassurance, direct marketing, the internet and tele marketing so as to reduce costs and improve service to consumers.

5.8   Second, we want to raise the professionalism of the traditional agency distribution system, which will have an important role to play for some time to come. We have to raise levels of skill and productivity among agents. We also want to encourage the growth of a class of intermediaries that is qualified to distribute a broader range of financial products. To facilitate this, MAS is currently studying the licensing requirements for independent financial advisors, and codes of conduct aimed at achieving consistent standards for the sale of different investment products.

5.9   Third, we want to see higher levels of product and expense disclosure, up to the standards of international best practice. There is no sound reason why Singapore cannot have disclosure standards similar to the developed markets. Improved disclosure will allow for more transparent competition, and could encourage the development of more efficient channels of distribution.

5.10   MAS has recently announced the formation of 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. The Committee, headed by Mr Law Song Keng, will begin its work in mid-April. Its first set of recommendations, with regard to disclosure of expenses and commissions, is expected in three months.

6   Conclusion

6.1   The opening of markets and blurring of borders in financial services will mean increased competition, new issues in risk management and new challenges for both industry participants and regulators.

6.2   Market participants in the Singapore insurance industry will thrive if they take the initiative to adopt new, cost-saving distributional channels, exploit the potential of the internet, upgrade the skills and quality of their agency forces, and strengthen their risk management and operational capabilities so as to remain competitive in an open and increasingly integrated financial market.

6.3   As regulator, we find it absolutely essential to keep a close dialogue with the market as we go about regulatory change. MAS will continue to work closely with the industry and build on ideas gained from the market as we develop a risk-based regulatory and supervisory framework, and seek to improve transparency and efficiency, so as to spur the industry's growth.

¹ The gap in penetration rates is understated given the preponderance of unbundled products in the developed markets which actually reduces measured insurance premiums.

² Source: Association of British Insurers. Cited from Tillinghast - Towers Perrin analysis.

³ Figures are based on industry estimates from brokers and insurers. Source: Insurance in Europe, The Stationery Office. Cited from Janina Clark, "Technical Report: European Union" in Reinsurance (September 1998).

⁴ Source: A View From The Top, LIMRA. Cited from "Distribution 'Key' to Success in Europe", Life Insurance International (April 1999).