'The Value of Trust and Confidence'
Address by Shane Tregillis, Assistant Managing Director (Market Conduct) Monetary Authority of Singapore at the Life Insurance Association, Singapore's Annual Luncheon 05 March 2003, 12:30pm
I am pleased to be able to join you today at the annual luncheon of the Life Insurance Association (LIA) of Singapore. This luncheon marks another year in LIA's efforts to promote the development of Singapore's life insurance industry and to protect the interest of life insurers and policyholders.
Changes in the Insurance Industry
2 My topic today is the importance of maintaining and enhancing confidence as a key imperative for the insurance industry in Singapore as it confronts both structural change and difficult global market conditions. Increasingly, the trust and confidence of customers in the reputation of an industry or a financial institution should be considered a strategic asset that requires continued investment to ensure long term growth in shareholder value. Investing in good corporate governance is central to this effort.
3 The Asia insurance market is witnessing some significant structural changes. In Asia, demographic shifts, such as a decline in family size due to falling birth rates, increased urbanisation and an aging population will impinge on the life insurance industry going forward. It is estimated that by 2030, an average of 20% of the population of APEC countries will be above the age of 60 . With a greying population, the need for traditional life cover and rate of savings are expected to decline.
4 We have also seen changes in the demand for different types of insurance products. The unbundling of policies into their insurance and investment components has coincided with the decrease in sales of traditional life insurance policies over the past decade and the development of investment-linked products worldwide. Investment-linked products were introduced in Singapore about 10 years ago, and they have contributed to about 30% of new businesses over the last few years.
5 The emergence of alternative distribution channels, such as banc assurance and more recently the Internet, are challenging the role of traditional insurance intermediaries in the product sales distribution process. For example, banc assurance, which only emerged a few years ago in Singapore, now represents about 20% of the number of policies sold in Singapore in 2002.
Opportunities in Asia
6 While these are no doubt challenging times, there are still opportunities for the growth of Asia's insurance industry. According to a study by Swiss Re in 2001, Asia's life insurance market (excluding Japan) is expected to grow by more than 8% in the period from 2001 to 2005. There are a number of factors taken into consideration in this projection.
7 Firstly, most non-Japan Asia countries (except South Korea and Taiwan) have life insurance penetration rates below 4%, as compared with 11% in Japan and 8% in the US . The relatively low rate of life insurance premium penetration rate is an indicator of future growth opportunities for the life insurance industry in the region.
8 Secondly, the opening up of the markets in China and India offer an untapped potential for the insurance industry's growth over the next several years. China's insurance sector has registered 10 to 15% revenue growth for several consecutive years . With its accession to the WTO, the insurance market in China will be fully liberalised with no geographic or product restrictions by the end of 2006. Similarly, India has opened its insurance sector to competition.
9 Thirdly, the region's ageing population signals the need for governments to consider how best to ensure sufficient retirement provision. Most Asian governments are looking to the private sector to take a lead role in meeting this challenge. This presents yet another area of opportunity for the industry.
Impact of Recent Corporate Failures on the Insurance Industry
10 In the shorter term, depressed equity markets have put heavy downward pressure on the assets and profits of insurance companies worldwide.
11 This has been compounded by the numerous corporate scandals over the past years that have shaken investor confidence and are creating continued uncertainty about the timing and strength of recovery in global financial markets. Nearer to home, the collapse of the HIH, a major player in Australia's insurance industry has highlighted questions about governance, risk management practices and corporate transparency, which are resonating throughout the insurance industry. The Royal Commission appointed to enquire into the failure of HIH will soon hand its final report to the Australian Government. It will be interesting to see what emerges.
Good Governance for Fostering Confidence and Promoting Growth
12 Sound governance practices of insurers are a key element in fostering the public's trust and confidence. This is vital for the continued growth of an industry where premiums are paid many years before claims are met.
13 We often hear that well-governed companies are not only more profitable, but investors are also likely to give them a higher stock market value. This theory is given empirical support by a McKinsey Survey in 2002. More than 60% of investors surveyed indicated that governance considerations might lead them to avoid individual companies with poor governance.
14 The message from this and other similar studies is that insurance companies can focus on sound governance and strong risk management practices, and this can enhance the growth in their shareholder value even in today's challenging environment.
Good Governance for Policyholder Protection
15 Apart from enhancing shareholder value, insurers also have a duty of care to another group of stakeholders 'the policyholders' because of the premiums they have paid in expectation of risk cover or investment returns some time in the future. It is essential that this duty be discharged responsibly, soundly and effectively.
16 To enhance the existing corporate governance framework of locally incorporated direct insurers, MAS recently issued a consultation paper on a set of governance Guidelines and Regulations.
Guidelines and Regulations on Corporate Governance: Significant Proposals
17 In its draft guidelines MAS has proposed that the Board ensures that management formulates policies to promote fair, responsible and professional dealings with the public and policyholders.
18 Similar to corporate governance codes promulgated in major financial jurisdictions, MAS has also proposed that there be a strong and independent element on the Board to exercise objective judgement. Independent directors play an important role in providing a level of assurance to the regulator and general public, that decisions made by the Board will reflect the interests of all key stakeholders and the company as a whole.
19 The proposed Regulations are more prescriptive for significant insurers than for smaller direct insurers. The requirements for these larger players are consistent with those for Singapore's banks.
Importance of Market Conduct and Discipline
20 I have talked about the importance of adopting good corporate governance for the long-term growth of the insurer and protection of policyholders. This in turn bolsters trust and confidence of the public in the industry. Another aspect to maintaining this trust and confidence, not only in the insurance industry, but also the financial services industry more generally, is upholding high professional standards in dealing with customers.
21 In a survey conducted in Australia last month by the Australian regulator, ASIC, on the quality of advice by financial planners, the results have shown that many people are not getting the quality of advice or service they deserve. A few of the inadequacies identified include the failure to show how a recommendation was suitable for the client, planners ignoring key client requirements, and recommending higher-fee investments without appropriate explanations. This has served to highlight the need for improvements to be made in the quality of advice and service provided by financial planners in Australia.
22 Although Singapore's financial advisory industry is still in an early stage of development, we should strive to establish high standards of service and quality of advice to the retail customers right from the start. To minimise practices such as mis-selling and the provision of false or misleading information to clients, the Financial Advisers Act (FAA) has established a number of business conduct requirements, amongst others, which govern product information disclosure and having a reasonable basis for recommendations made.
23 The FAA requirements build upon and support the recommendations made by the Committee for Efficient Distribution of Life Insurance Products (CEDLI) that the industry has been putting in place since 2001.
24 We acknowledge that life insurance companies have put in laudable effort over the last two years to implement CEDLI's recommendations. This has helped to raise the overall standards of insurance advisers. However, more needs to be done to ensure that all 15,000 insurance advisers are competent to provide sound advice to the insuring public in Singapore.
25 2002 has been a difficult year for the global financial and insurance industry with 2003 already shaping up to be equally demanding.
26 At the same time, there are considerable new opportunities emerging for growth in the region for those entities that are willing to take up the challenges involved, including ensuring high standards of corporate governance and putting in place professional standards for sales, advice and service to customers. For those that do, there is every reason to be confident that they will grow and prosper.
27 Industry associations, such as the LIA, have an important role to play in encouraging and assisting all your members to adopt high standards of corporate governance and professional practices in their dealings with customers to ensure that the whole industry continues to prosper in the future.
I wish you well for the rest of your meeting today and all your activities for the coming year.