1   Introduction - the Global scene

This is an extraordinarily challenging time for the global insurance industry.  As Song Keng puts it, we are still experiencing the aftershock of 9-11.  Equity markets have experienced steep falls.  Interest rates are at or near historical lows.  Some general insurers have had to make large provisions for increases in claims over the past few years.  These factors have affected insurers in different markets to varying degrees.  Eg. European insurers have been more exposed to falls in equity values than insurers elsewhere.  In the past, insurers tended to rely on investment returns for profitability. They can no longer do this.  While underwriting discipline is now returning, underwriting profits have yet to recover.  All these factors have weakened the financial health of insurance companies.  And while direct insurers struggle to strengthen their own balance sheets, the reinsurers they rely on have also been weakened, for many of the same reasons.

2   The Local scene

Insurance companies here in Singapore face many of the same challenges as companies around the world.  Some of our general insurance companies are branches or subsidiaries of global companies, and so are affected by international trends.  However, general insurance companies in Singapore generally do not have the high equity exposure seen in the European markets.  But, we can?t be complacent.  Many of our companies have seen lean years and some need to strengthen their financial positions.  In meeting these and other challenges facing the industry, there is a collaborative role for insurers, industry associations and the regulator.  Let me describe the role of each.

3   Role of Insurance Companies

Insurance companies need to take a more disciplined approach to underwriting, pricing and investment strategy.  Some companies have been more concerned about maintaining market share than on earning underwriting profits.  Some have simply not had the data to understand their own loss experience and make proper pricing and underwriting decisions.  More discipline is needed in both areas.  While Singapore insurers have been more cautious than their European counterparts in using equities to back policy liabilities, there is room for improvement in the investment strategies followed by our companies.  But I should point out that what I have been describing are, to some extent, symptoms, not causes.  The causes are more fundamental.  Companies, and I am talking broadly here, not just about the situation in Singapore, have, with hindsight, suffered from inadequate corporate governance and weak risk management and control cultures.  Boards of directors need to examine carefully their own performance.  One of the most important roles of a board is to ensure there is appropriate risk management and internal control within the organisation.  Boards have much to do.  And I will return to this subject.

4   Role of Industry Associations

Industry associations have an important role to play.  They can and should advise their members on best practices.  They can set standards and guidelines for their members.  These standards cover important areas such as governance, risk management, business and market conduct, and important consumer issues such as disclosure and fair treatment of customers.  Industry associations can also set best practices for particular lines of business, and advise members on such issues as accounting policies and indeed regulatory issues.

5   Role of the Regulator

Historically, the role of the regulator has been to help set the legislative framework for the industry and then ensure compliance with the legislation.  Insurance regulation in many countries has often been quite prescriptive, emphasising form over substance.  But in recent years, and none too soon, insurance regulation has begun to change.  The International Association of Insurance Supervisors (IAIS) has been very active in establishing core principles for insurance supervisors, which reflect a changing view of insurance supervision.  Modern insurance supervision now focuses more on substance than on form.  There is a greater emphasis on monitoring quality of corporate governance and risk management and control practices ? factors that will contribute to the financial health of an insurance company over the longer term.  But there is also more vigorous intervention required of supervisors to protect policyholders, when companies exhibit weak practices or undergo a deterioration in financial health.

6   MAS Regulatory/Supervisory Approach

IAIS is the reference source for most insurance supervisors worldwide for best practices of insurance supervision.  MAS refers to IAIS core principles and standards in making regulations, adapting them where relevant for local conditions.  MAS has been playing an important role in the IAIS.  MAS is on the Executive Committee and chairs the Education sub-committee of the IAIS, and actively participates in sub-committees such as the Solvency and Investment sub-committees.  As someone who is still relatively new to Singapore and MAS, it may not be unseemly for me to say that MAS is one of the most advanced supervisors in implementing the regulatory and supervisory philosophy reflected in the IAIS Standards.  MAS' new approach emphasises three important principles.  First is reliance on the institution's own processes and controls, particularly corporate governance in the institution.  I talked earlier about the importance of strong governance, and governance oversight of risk management and internal controls within an institution.  MAS is placing a heavy emphasis on this and has recently issued for comment guidelines on corporate governance for banks and insurance companies.  The second is encouraging a high degree of disclosure to customers, policyholders and shareholders of institutions in order to permit them to make more informed decisions, and to enhance market discipline.  The third principle is risk-based supervision  -  moving away from a compliance-oriented, one-size-fits-all approach to one in which we vary the intensity of supervision according to the riskiness of institutions, and the risks within institutions.  This is a more flexible approach to supervision; more responsive and adaptable to changes in the business climate.  Because our new approach places heavier emphasis on the institution's own processes, it necessitates closer collaboration and more co-operation between regulator and insurance companies.  This new approach also sets the stage for closer co-operation between the regulator and industry associations.  The regulator sets the broad regulatory framework.  In doing so, he must consult closely with companies and industry associations, because they have the market knowledge, and are abreast of business developments and trends.  They can help ensure that the regulatory framework is practical and workable.  Within the framework set by the regulator, industry associations can set guidelines and best practices to help ensure that the aims of the regulatory framework are met.  When the industry association is in a position to establish best practices on the part of its members, the role of the regulator is made easier.  The regulatory framework can then be set at a higher level and can be much less prescriptive.  This benefits companies and regulator alike.  In its risk-based supervisory approach, MAS' role is evolving into a ?financial doctor? more than a ?policeman?, and a modern doctor at that, one who practices preventative medicine.  The purpose is to help companies strengthen their internal controls and reduce their institutional risk level.  However, MAS cannot guarantee the financial health of every insurance patient.  This is the primary responsibility of the Boards and managements of the companies themselves.  What we do is to work closely with Boards and management to advise them of our concerns and urge improvements when these appear to be needed.

7   Contributions from the General Insurance Association

I am pleased to say that the General Insurance Association has been a valuable partner in strengthening the insurance industry in Singapore, and in supporting changes to MAS' regulatory and supervisory approach.  The GIA and its members have been proactive in seeking to improve industry practices and in co-operating with MAS.  There are many examples of the fruits of this successful partnership, some of which were referred to by Song Keng in his remarks.  Working with MAS, GIA established the Committee on Enhancement of Standards in General Insurance (CESGI) in August 2001.  CESGI developed standards and a Code of Practice that have been accepted by practitioners under a market agreement signed last year.  Some elements of the Code of Practice will be included in MAS' risk-based supervisory framework.  Another important GIA initiative was the motor insurance task force that reviewed current market practices in writing motor insurance.  This task force has made recommendations on such important issues as an independent claims assessment centre, a knock-for-knock agreement, and apportionment of liability.  A particularly important GIA project has been the formation of the Insurance Dispute Resolution Organisation or IDRO.  This will give consumers who are not able to resolve disputes directly with their insurance companies the opportunity of seeking a resolution from a separate tribunal, established and funded by the industry, but set at arm's length from it, to ensure independence and objectivity.  IDRO was launched on 27 February with the full support of all eligible GIA and LIA members.  The GIA and the LIA are to be congratulated on this important initiative.  GIA has been involved in other important industry initiatives, including the development of a regulatory framework for health insurance, the establishment of risk-based capital for general insurers, and consulting on our proposed guidelines for enhanced corporate governance.  Taken together, this is an impressive list of reform initiatives undertaken by GIA.  GIA is now in the process of implementing the recommendations of various committees and workgroups.  We look forward to their successful implementation.  They will further enhance the standards in our general insurance industry for the benefit of policyholders and all Singaporeans.

8        Conclusion

The insurance industry faces difficult challenges.  There are still major uncertainties ahead.  Individual companies, industry associations and regulators must play a role in ensuring that the industry successfully addresses these challenges, and manages for uncertainty.  The task will not be easy.  Every day, stories in the financial press underline the struggles of the industry around the world.  In Singapore, we are making good progress in addressing many of these challenges.  Working in close collaboration, GIA, individual companies and MAS are working to modernise and improve practices throughout the industry, including the regulatory framework.  General insurers play a very important role in society and our economy.  We need a strong industry and we are making good progress in making it stronger.  MAS looks forward to continuing close collaboration with GIA, and many of you in this room, as we continue this important work.