Published Date: 01 October 2003

Keynote Address by Lee Hsien Loong, Deputy Prime Minister and Chairman, Monetary Authority of Singapore, at the 10th Annual Conference of the International Association Of Insurance Supervisors (IAIS), 1 Oct 2003, 11.30am, Shangri-La Hotel

Singapore Facing Tomorrow's Insurance Industry

Mr Manuel Aguilera-Verduzco,
Chairman of IAIS Executive Committee,
Distinguished Guests,
Ladies and Gentlemen,

1   Over the past decade, the financial and insurance industries have seen radical and profound changes. These changes started long before September 11, but the World Trade Centre attacks added more pressure on the system. 

2   First, the structure of the global financial industry is being transformed. Fierce competition has led to mergers among financial institutions.  Insurance companies too have been merging, as their profits come under pressure.  Some have taken on new roles and new types of risks.  They compete with investment banks by insuring foreign exchange and other financial risks. 

3   At the same time, banks and other financial institutions have entered the insurance business.  For example, banks are undertaking catastrophic insurance risks, and transferring them to capital markets through the issuance of insurance-linked securities.

4   Thus over the years, the boundaries between insurance and banking have become increasingly blurred.  Mergers have taken place not only across borders, but across industries too.  The most significant example was the merger between Citicorp and the Travelers group.

5   Increasingly, the insurance world is no longer restricted to the traditional financial institutions.  Non-traditional players can build market share by seizing the opportunities presented by the changing environment.  In the UK, Boots The Chemists, a company traditionally associated with healthcare, leveraged on its brand name to enter the travel and health insurance markets. 

6   Second, on top of these structural changes in the industry, insurance companies have also suffered from turbulent market conditions.  On the assets side, falls in global interest rates and equity markets have affected investment returns, which in turn caused solvency problems for companies in some countries.  Additional pressure has been placed on regimes which legislated guaranteed returns on policies.  On the liabilities side, the insurance industry has been confronted with non-traditional catastrophic events of unprecedented scale. September 11 is by far the worst-ever terrorist act in terms of fatalities and insured losses.     

7   On the whole, the insurance industry has shown resilience despite the catastrophic events and poor market conditions.  However, there has been some concern with the reinsurance industry.  Credit ratings of key players have been downgraded.  The weak market is a concern for many industries that rely heavily on reinsurance.  It does not help that no global regulatory regime yet exists for the reinsurance industry. 

8   Third, the insurance industry has become increasingly important to financial and economic stability.  Insurance companies are not immune to crises.  There have been some major failures, whose consequences have extended well beyond the insurance industry. When HIH collapsed in Australia, the ramifications were felt across the economy. Many businesses and critical services were disrupted when they suddenly found themselves without mandatory insurance cover. Doctors stopped operating on patients because they no longer had insurance coverage, and construction also stopped because contractors no longer had builders' warranty insurance.

9   Insurance companies are buying credit risks off banks in a big way. They are becoming major players in the derivatives market.  Over the years, banks have been selling more of their credit exposures to insurance companies and investment funds.  The danger is that the credit risk has passed from the banks, which have well-established practices to account for it at fair value, to entities where losses may not be so transparently evident. 

10   In its annual report released in June 2003, the BIS highlighted the rapid growth in such credit risk transfers, and the vulnerabilities that this can cause.  It was concerned that "markets lack transparency about the ultimate distribution of credit risks" and that "some market participants may take on more risk than other participants or the financial authorities are aware of."

11   As insurance supervisors, we can no longer assume that the insurance industry is the stable anchor of the financial system.  We have the responsibility to ask:  Do we really understand these flows?  What is the amount of credit risk assumed by insurance companies?  Is the risk well understood and managed properly by companies which have taken it on?   

12   There is a perception that the regulation of the insurance industry is less robust than regulation of the banking industry. There is also a view that insurance companies have lagged behind the banking industry in terms of industry practices such as risk management.  Worldwide, the insurance industry now stands at a crossroads. 


13   Some feel that regulatory bodies have to share part of the responsibility for this industry weakness.  Lax market conduct standards may have accommodated mis-selling.  Outmoded solvency standards and reactive supervision may have led to insurance companies breaching solvency limits.  By tolerating a high concentration in equities, regulators may have allowed insurance companies to become more exposed to market volatilities. 

14   So what can the supervisors do to enhance insurance supervision? 

15   First, we need to harmonize standards across financial industries.  There is a growing interest in coordinating and harmonising regulatory practices.  Common standards help to minimise regulatory arbitrage across industry lines. Players are looking beyond the traditional concepts of comparing expected claims and expenses against asset values.   The rules that govern insurers have to evolve to adopt some of the best practices in the regulatory regimes for banks.  This is already happening in the UK, Canada, Australia and other jurisdictions. 

16   Insurance supervisors need to move from national standards to adopt international best practices.  Sharing of past experiences, current practices and ideas for future development, has proven useful.  International cooperation among regulators will make them more effective, and raise standards of regulation.

17   The IAIS plays a key role in this.  Back in the 1990s, there were no common standards for insurance regulation.  The IAIS has since made remarkable progress, and shown leadership to the insurance regulators. The IAIS is a member of the Financial Stability Forum, and has an important role in identifying and averting instability in the insurance industry.  The IAIS' Insurance Core Principles provide a sound basis for the work of insurance supervisory authorities, covering aspects of supervisory legislation, supervisory systems and practices.

18   Nonetheless, more can be done.  The trying times that the industry is experiencing underline the urgent need for action.  The industry wants to see more effort, more commitment, and a greater sense of urgency on the part of the IAIS as well as insurance supervisors. The public needs to see the industry take real action to improve market conduct standards across the board.  The insurance industry has to regain its position as a pillar of the financial sector, and strengthen the public's trust in it. 

19   Second, we need to raise the standards of supervision.  Supervisors have to oversee insurance companies more effectively.  This may sound straightforward, but to be effective in this complex environment, the supervisors need to pay attention to a broader set of risks.  I understand that IAIS' education initiatives are underway, which will help to further improve regulatory standards. 

20   The push for group-wide assessment and supervision is a move in the right direction.  It is not enough to supervise on a solo basis insurance companies that belong to a wider financial group.  Supervisors must take into account the operations of the rest of the group, whether domestically or internationally, to have a holistic assessment of the group's risk exposure and profile. 

21   Third, supervisors can help to upgrade the insurance industry.  Insurance is probably one of the oldest, and yet least understood industries.  We need to raise the level of public understanding of the industry.  Competency building across different sections of the industry will help to raise its profile as well as promote higher standards.  You will be discussing competency building in greater detail at this conference.  

22   Market practitioners play a crucial role in this.  By providing constructive feedback, they can help regulators to keep the regulations in tune with the times, and to respond quickly to market developments.  They can also play a part in setting standards and best practices to be adopted by the industry.  The more insurance companies can abide by an adequate level of self-regulation, the lighter direct regulation and enforcement needs to be. 

23   Ultimately it is the managements of the companies, and not the supervisors of the industry, who bear primary responsibility for the prudent and sound management of their companies.  While supervisors can regulate and set requirements and standards, the industry players must understand their businesses and the risks that they have taken on, and manage them soundly.  Through the combined efforts of the supervisors and the industry, we can create a robust and dynamic insurance marketplace. 


24   Now let me share with you what MAS has been doing to build up our own supervisory capabilities, and our ongoing refinement of financial supervision objectives.   

25   For those who are not familiar with the Singapore system, the supervisors of banks, insurance companies and securities firms are all housed together in MAS.  Over the years, we have built up our supervisory capabilities across the different financial industries, and radically overhauled our supervisory approach.  These changes have made MAS more responsive to industry conditions, and helped us to create an integrated regulatory framework for the financial sector as a whole. 

Risk-based Supervision

26   MAS has moved away from one-size-fits-all regulatory approach to a risk-focused supervision philosophy.  We evaluate the risk profile of each institution, the quality of its risk management and its internal controls.  We give greater business latitude to institutions which are well-managed, and which have internal controls that are commensurate with their risk profile. 

27   In the insurance industry, MAS has been working with market practitioners and representatives of professional associations to develop risk-based capital models for life and non-life insurance businesses.  The risk based capital framework aims to refine the treatment of liability risks, and set appropriate capital charges for asset risks and concentration risks.  It should provide early indications of financial weaknesses, and thereby facilitate progressive intervention by insurance companies and MAS. 

28   We intend to conduct a final round of public consultation on the regulations in the next few months.  There will be a transitional period of one year for the insurance companies to adopt the new risk-based capital model.  2004 will be a critical period for the insurance industry in laying the foundations for a robust and risk-sensitive framework. 

29   Risk-based supervision reduces the need to rely on high minimum paid-up capital.  We have decided to lower the minimum paid-up capital requirements for direct insurers from the existing S$25 million, to S$10 million for full-fledged insurers, and S$5 million for mono-line insurers.  This will help us develop the market further, and especially to attract certain niche insurance players to Singapore. 

Objectives and Principles of Supervision

30   Over the past year, we at MAS have been rethinking our approach to financial supervision, including the fundamental question of why we regulate and supervise.  We will soon release a monograph entitled Objectives and Principles of Financial Supervision in Singapore.  This will articulate our philosophy of supervision, including the objectives that we seek to achieve, and principles that underpin our risk based supervisory approach.  This initiative is part of a larger ongoing process to review and refine our supervisory practices.

31   Our supervisory approach is risk-focused, stakeholder reliant, disclosure-based and business friendly.  Our desired outcome is financial stability.  Stability provides the basis for confidence, and is fundamental to a well functioning financial system. 

32   In seeking financial stability, we do not aim to totally prevent failure in any financial institution.  It is the business of financial institutions to intermediate risks and to take on risks.  Institutions can incur substantial losses if the risks are not well managed, or if risk events turn out more severely than anticipated.  No regulation or supervision can completely prevent losses without making it impossible for financial institutions to operate meaningfully.

33   MAS, however, can and does require institutions to maintain prudent levels of capital to buffer against possible losses.  Besides capital, we require institutions to have a sound risk assessment and risk management framework, and adequate internal controls.  With these measures, we seek to minimise the risk of a failure.  But we cannot and should not guarantee the soundness of financial institutions.  This is more so for the branches of foreign institutions operating here, whose operations globally are influenced by factors beyond MAS' control.  Should the interests of depositors or policyholders become compromised, we will do what is within our powers to protect their interests. 

34   One challenge that MAS faces, like other regulators, is to educate the public about this reality and to manage public expectations.  MAS plans to introduce deposit insurance and policy-owner protection schemes in the near future.  These schemes will make explicit the level of protection available to depositors and policyholders.  They will also help to make consumers realise that risks are inherent in the financial sector.  The public and the industry must understand that MAS does not guarantee success, nor can it ensure that there will never be any failure.

35   The best defence against financial instability is to have institutions that are well managed.  This calls for active involvement of the Board in overseeing the management of each institution.  It also requires management that is well informed of the risks assumed by the institution.  Both the Board and management play a part in identifying and pre-empting problems, and the primary responsibility for risk oversight rests with them.  In other words, our supervision is stakeholder reliant.  MAS' role is to ensure compliance with prudent standards, encourage the adoption of best practices and ensure the prompt rectification of weaknesses.  This approach will minimize the need to interfere with their business decisions and keep the regulatory framework business friendly. 

Safeguarding Consumer Interests

36   Besides the macro issue of systemic stability, MAS is also concerned about safeguarding the interests of consumers. This is a particular concern in the insurance industry, because of the complexity of the products and the risk of mis-selling. In Britain and elsewhere, mis-sold insurance products have created serious problems, and regulators have been forced to intervene actively to set things right.

37   MAS seeks to maintain a balanced approach to this issue.  We have given up the old prescriptive approach in favour of a disclosure-based regime.  We cannot dictate what products institutions may sell, or protect consumers such that they never lose out.  Instead, we want to have self-reliant consumers.  Consumers who have adequate and meaningful information to look after their own interests.  Consumers who are well equipped and empowered to exercise their rights to enforce market discipline on institutions.  Consumers who can take responsibility for their own financial decisions. 

38   Such an approach can only work if financial institutions disclose information promptly, accurately, and adequately, and abide by high standards of professional and business conduct.  MAS will ensure that these requisite conditions for consumer self-reliance are in place, and that institutions practise fair dealing with their customers. 

39   What do we do when disputes arise?  MAS cannot adjudicate commercial disputes between financial institutions and their customers.  These are matters to be settled bilaterally - by negotiation, in industry mediation panels, or in the courts.  However, MAS can ensure that consumers have the information and channels to ascertain and enforce their legal rights, conveniently and affordably.  We are continuing to work with industry bodies to achieve this. 

40   Many policyholders will find going to court to enforce their rights a daunting and expensive exercise.  We therefore need alternative, more convenient and less formal avenues for dispute resolution.  The insurance companies have entered into a voluntary arrangement, known as the Insurance Dispute Resolution Organisation (IDRO).    MAS is hopeful that both policyholders and insurance companies will find IDRO a fair and expeditious mechanism for dispute resolution, and that IDRO will help us to minimise the need for more formal regulatory or statutory arrangements.


41   These measures will help the MAS to bring about the necessary conditions for financial stability, which are strong financial institutions, efficient and transparent financial markets and well-informed consumers.

42   We ask ourselves: Is our approach working?  Is it achieving what we have set out to do?

43   We benchmark ourselves against international standards and best practices.  We have put ourselves through the Report on Observance of Standards and Codes (ROSC) self-assessment programmes developed by international associations of supervisors like the IAIS.  Recently we participated in the Financial Sector Assessment Programme (FSAP), which was jointly conducted by the IMF and the World Bank.  These processes have been useful and beneficial, although rather resource-intensive, and have generated many suggestions for improvements that we will follow up. 

44   The Codes that we have used for the Insurance ROSC and FSAP are based on the IAIS' Insurance Core Principles.  The FSAP is coming to a close, and we are confident that it will show that we have achieved a high level of observance with the Core Principles, and that all essential preconditions for effective insurance supervision are in place. 


45   MAS will continue to work closely with the industry practitioners to help upgrade the insurance sector, and to remain in compliance with international standards and best practices.  To this end, we look forward to further achievements of the IAIS in developing insurance supervisory standards, and fostering the implementation of these standards in the insurance industry. 

46   I wish you success in your deliberations.