Date: 1 Oct 2001

Introduction

1   Good morning. It is a pleasure to see so many of you here today. To our foreign friends from both near and far I would especially like to extend a warm welcome.

2   This conference is an important event in the calendar of the Singapore insurance community. The SIRC provides an opportunity for reinsurers, insurers, brokers and other industry practitioners to discuss and evaluate strategic thinking on critical issues confronting their business. I notice more than a quarter of the participants here today have attended the conference more than twice. But the some 20 or more participants who are veterans to all five conferences can attest that none has so far taken place against the backdrop of such dramatic and important events for the reinsurance industry.

Implications of US Terrorist Attacks for Global Insurance and Reinsurance Markets

3   More than two weeks since the horrible events in the US and we still go numb when we reflect on the tragic loss of human lives. For many, the awesomely horrific and surreal scenes of the airplanes crashing into the Twin Towers and their subsequent collapse will remain permanently etched in our consciousness for the rest of our lives.

4   Moving on to cope with the aftermath, discussions about the resultant financial cost turn invariably to the insurance industry. Experience tells us that estimating losses at this stage is more art than science. But there is the consensus that this would be the largest single-event loss in history, eclipsing Hurricane Andrew and rivaling the total insured liabilities estimated from environmental claims.

5   Although considerable claims obligations would arise from a host of different policy types, there is at the moment widespread understanding that the global insurance industry should have sufficient capital to sustain this shock even if individual less well-capitalised companies may be driven out of business.

6   The most visible fallout is reduced reinsurance capacity worldwide.  Certain market segments have already been affected by the contraction. A clear example is the war and terrorist cover in airline insurance. Pricing will also harden substantially while underwriting standards tighten, as coverages become more restrictive.

7   This catastrophic event has also affected companies via the asset side of the balance sheet. Even though many insurers and reinsurers remain primarily fixed-income oriented, there has been an appreciable trend, in the last decade, to increase equity holdings. Over the last few days many found themselves in the situation where they had to liquidate assets in a declining equity market in anticipation of claims obligations.

Assessment of the Immediate Impact on the Singapore Market 

8   The MAS is monitoring the impact on the local insurance market closely. Early assessment shows that Singapore-based insurers do not have any known direct exposure to losses from the terrorist attacks. Similarly, Singapore-based reinsurers have minimal exposure to US risks as their major markets are in the Asia-Pacific region. 

9   The main impact on the Singapore insurance industry would be indirect in nature. First of all, weaknesses experienced by parent offices and foreign reinsurers may give rise to negative spillover effects on local operations. Secondly, as Singapore insurers rely heavily on reinsurance support, they would be affected by the reduction or even cancellation of reinsurance cover, restrictive coverages, and higher premium charges.

10   MAS is paying close attention to the claims situation and solvency position of local insurance companies, their parent office operations and reinsurance arrangements. While there has been no immediate concern about their liability risks, we are also closely monitoring the asset position of insurance companies, including life insurers, given the decline in equity markets.

Broader Implications for the Local Insurance Industry

11   Moving beyond the near-term consequences, it would be instructive to consider the broader implications on what has happened for the Singapore insurance industry. We should ask how things have changed as a result of this tragedy which has certainly re-defined our industry's perspective of what is "worst-case scenario". I think it is both correct to say that firstly nothing and secondly everything has changed.

12   Let me first draw attention to what has not changed. Over the last few years, MAS in partnership with industry has embarked upon a series of initiatives to enhance the business operating practices of insurance and reinsurance companies and the effectiveness of our regulatory and supervisory framework. The need for this work has not changed and it must continue.

13   An important example is the recently announced guidelines for the actuarial certification of policy liabilities for general insurers and reinsurers. This is a first step towards higher professional standards in the process of providing adequate reserves for their business.

14    The emerging framework for risk-based capital (RBC) adequacy requirements for all companies represents another move we are making with industry to calibrate the way capital is meaningfully set aside by companies to act as buffer against the myriad of risk that arise from both sides of their balance sheets.

15   Finally, our on-going risk-focused supervisory assessment (RBA) is the comprehensive tool that has been designed to help MAS supervisory officers concentrate on the important risk areas of companies under review. It brings together the different dimensions in the operations of a company into an integrated appraisal process. This seeks to evaluate the primary risk concerns of a company arising from the activities that are fundamental to the company's business and whether internal control processes and systems are adequate to mitigate against possible weaknesses. We aim to work closely with company management in the RBA process to foster the importance of treating risk management as continuous self-assessment on what is the acceptable risk for the entire company.

16   Placed together, these three initiatives along with several others such as guidelines on corporate governance and asset management, are intended to produce players in our market that are individually resilient so that our industry as a whole would be strong enough to withstand external shocks. In the sense that recent events have not altered this fundamental objective means that nothing has changed.

17   But it would be severely erroneous to believe that it is business as usual. If there is any who needed a jolt to awaken them from their dogmatic slumbers the call has arrived - loudly, rudely and powerfully. The task of building professional, well-managed companies with clear strategic direction now has absolute critical urgency. External shocks of the kind we have seen are no longer just theoretical constructs. Only insurers and regulators that succeed to push ahead with initiatives to strengthen themselves to deal with a more uncertain and risky future would remain. There is suddenly no room left in the competitive balance for the also-rans.

18   Both direct insurers and reinsurers have to refine their capacities and abilities to focus on risk management.  Reinsurers, as well as primary insurers, must invest in assets that in terms of security, return, diversification and marketability are sufficient to cover their obligations as these fall due. The investment strategy of reinsurers is further complicated because often they need to manage and match assets and liabilities in a number of currencies and have the ability to reimburse the large-scale losses of primary insurers on demand. Effective systems must be in place to manage liquidity risks and to monitor cash flows.

19   Direct insurers - both life and general - must be fully cognisant of the integral role which reinsurance plays in their overall risk management. While reinsurance can be used to help a direct insurer achieve its desired risk profile, direct companies must develop systematic procedures to assess the security of their reinsurance cover. All companies should have an established and approved overall framework for their reinsurance strategy to ensure that they maintain adequate cover with the requisite security. As an immediate step on this front, MAS would work with the industry to do a critical review of their reinsurance arrangements.

Conclusion

20   The year to date has seen insurance companies assume a disproportionate share of the limelight in the international financial press for nearly all the wrong reasons. The collapse of large general insurers has clearly highlighted how ordinary economic activities may be grounded to a halt. The entire chain of events following the US terrorist attacks has in turn brought into prominence the systemic importance of reinsurance companies.

21   It is perhaps unfortunate that such shocks are needed to remind us of how the breakdown of insurance and reinsurance arrangements can pose systemic vulnerabilities to the financial system and the economy at large. For those of us involved in this industry, we have a heavy responsibility to ensure whatever component of this risk-pooling mechanism that we operate that we do so in a sound and professional manner.

22   Risk is the lifeblood of insurance. It provides the opportunity to turn a profit but it also raises the spectre of ruin. All players in the insurance industry ought to view this contrast in much sharper relief in the post-September 11 world.

23  There is no doubt these are challenging times for the industry. It is easy to become overwhelmed by the negative events that pervade the current climate. But one should not overlook the opportunities that continue to abound. Surrounding all the uncertainty that pervades the current environment is the essential insight that the future would favour the well-prepared. The future will belong to companies that are able to place risk management at the centre of their thinking and operation. It is these companies that would survive and in large measure flourish.  I wish you a fruitful conference.