Speech by Mr Ong Chong Tee, Deputy Managing Director, MAS, at the Singapore International Insurance Conference (SIIC)
17 MAY 2006
Ladies and Gentlemen,
1.1 It gives me great pleasure to be here at this Singapore International Insurance Conference (SIIC). I understand that this is a biennial event that draws strong support and recognition across the various sectors of the insurance industry, fostering great interaction and sharing among all in the industry - the insurers, the reinsurers, the brokers and others. I am also pleased to learn that this conference has attracted many industry players from outside of Singapore. A broader participation will of course raise the quality and level of discussion, and interactions, drawing on the different experiences and perspectives.
1.2 In keeping with the conference theme of a "new insurance world order", allow me to start with 4 observations on global trends and the opportunities these present in Asia.
2 GLOBAL TRENDS AND OPPORTUNITIES
i) Strong Global Economic Growth & Premium Growth
2.1 The first observation is perhaps a somewhat over-repeated one - that of a more globalised and more connected world economic order, with a rapidly expanding Asia. According to a recent report in the Economist, the world economy will be two-thirds bigger in 2020 than in 2005. Emerging markets, and China and India in particular, are poised to be engines of global growth and will take a greater slice of the global economic pie.
2.2 The insurance industry has correspondingly witnessed impressive expansion on the back of strong global growth. This has been clearly the case in Asia. A Swiss Re research report for example
highlighted that Asian premiums have been growing faster than GDP compared to the situation in developed economies where premium growth just about matched GDP growth rates. The Swiss Re report estimated that premiums in emerging markets will grow at 7.5% over medium term till 2014, exceeding the trend GDP growth rate for these emerging economies.
2.3 This bodes well for the insurance industry in Asia. In 2004, Asia excluding Japan accounted for almost 7.5% of the world's total premiums for both life and non-life direct insurance - with premiums topping US$244bn . (Japan takes up 15% of world's total or US$492bn.) There is potential for Asia to assume a more significant market share in global insurance activities when one considers its GDP share in the world could grow from about 35% in 2005 to closer to 45% in 2020 by some estimates. Also, the relatively low insurance penetration rate in both life and non-life business suggests a low base and hence, high growth potential. (This stands at about 3.8% and 1.4% of GDP for life and non-life business respectively in Asia, compared with 5.1% and 3.9% for life and non-life respectively in industrial countries ).
ii) New capital
2.4 The second observation is that globally, the insurance industry has remained attractive to fresh capital investments. We have witnessed a new wave of fresh capital injected into global reinsurance markets. Bermuda for example, saw over US$7bn worth of new capital largely coming from new sources such as hedge funds and private equity players looking for attractive returns.
2.5 Asia, with its booming economic growth prospects, fueled in part by strong foreign direct and infrastructure investments undertaken over the last few years, have resulted in a significant demand for protection and insurance coverage. The fact that Asia has had high incidences of natural catastrophes, will mean that even as Asia grows and prosper, demands on the insurance industry for higher coverage across a wide range of risks will likely increase. Asia will, sooner probably than later, demand much more capacity than its present share globally. It is interesting to note that in another Swiss Re report, new capital raised in Asia over the last few years has however been negligible.
iii) Demand for better risk modeling and research
2.6 The third observation is that with increasing frequency and sizes of catastrophic losses compared to say 20 years ago, the insurance industry has made considerable advancement in the use of computing techniques and quantitative modeling in risk and data management. Global reinsurers, brokers and independent catastrophe modeling research entities have particularly played a crucial role in spearheading research and development, and use of quantitative catastrophe models, as well as sophisticated dynamic financial models to better quantify, price and monitor insurance and financial risk exposures on a holistic basis.
2.7 So similarly, here in Asia, with a rise of risk exposures and the sums insured, domestic insurers in this part of the world will need to step up the ability to more accurately quantify exposures and to price the volume of risks taken on. There is also a need to improve models and quantify the probability and impact of Asian catastrophe risks.
iv) Greater emphasis on more efficient capital management and insurance risk transfer via capital markets
2.8 A fourth observation is that banks have historically been at the forefront in developing financial engineering and capital market solutions to manage risks and capital, but this push to innovate for the insurance industry appear to be developing less rapidly. As an example, the outstanding volume of catastrophe bond risk capital stand at only slightly over US$4bn at the end of 2004. The growth of financial engineering and capital market solutions to mitigate and spread insurance risks outside of the industry has been steady, but slow.
2.9 However, I believe that several fundamental changes will shape the role of capital markets for the insurance industry. The operating environment is significantly different now compared to the past. Insurers arguably face a more challenging investment environment in present times. Reinsurance capacity is more tightly priced now. There have been regulatory moves towards risk based capital, and improved modeling and quantification of risks have led to increased requirements in risk capital. Shareholders are also exerting more pressure for better selection and management of risks and use of capital. Insurers and reinsurers alike will face mounting pressure to increase returns on equity, and to manage their capital more efficiently. The capital market with its deep pool of investors and innovative financial technology is therefore likely to continue to grow in importance for the insurance industry.
2.10 In Asia, the capital markets are in a phase of growth and development. Institutional investors have become increasingly sophisticated, and also place great emphasis on reaching for yield and in portfolio diversification. Hence we can expect the region's capital markets to play a greater role to serve the needs of the insurance industry here, by offering solutions for risk diversification and for more efficient capital and balance sheet management.
3 SINGAPORE'S INSURANCE AND REINSURANCE INDUSTRY - THE NEXT PHASE OF DEVELOPMENT
3.1 Let me now turn to developments in Singapore. It follows from my comments thus far, that there will be considerable room for Singapore's insurance industry to continue to remake and position itself to serve the Asian opportunities.
3.2 We have a mix of many positives - a stable political situation, pro-business environment, sound regulatory framework skilled and educated workforce, excellent infrastructure and world class amenities, and a strategic geographic location with connections to all parts of Asia and Australia/New Zealand. We have attracted many reputable international financial institutions to Singapore, including many international insurers and reinsurers to be based here. Singapore's development as a leading insurance centre has seen a rich pool of 56 direct insurers (including Life, General and Composite), 28 professional reinsurers, and 60 captives today. We are currently the largest domicile for captive insurers in Asia and 20 of the top 25 reinsurers globally are based in Singapore. Most of the top brokers are already present in Singapore. Offshore insurance business in fact accounts for more than half of the total general insurance business written out of Singapore.
3.3 Leveraging on this critical mass of players and activities, Singapore is well positioned to progress into the next phase of development as Asia's leading insurance and reinsurance hub. There are several areas that we are focused on. These include:
i) Deepening expertise in specialist business lines and high value added broking services;
ii) Increasing capacity and attracting new capital into Singapore;
iii) Strengthening Singapore's position as a hub for captive domicile
Let me elaborate briefly.
i) Deepening expertise in specialist business lines and high value added broking services;
3.4 Within Asia, there will be increased demand for specialist insurance products - among the factors, the increased trade and infrastructure development, and a rise in Asian wealth. Singapore as an established insurance and reinsurance centre and with a growing pool of specialized insurers, will be able to play a bigger role for example in the lines of marine and aviation insurance, trade credit insurance, energy, directors and officers' liability, professional indemnity, retakaful and HNWI life insurance.
3.5 Building up the talent pool of experienced and competent underwriters, claims managers and brokers in these specialist areas is a key success factor. The insurance industry does not only compete within itself for talent, but also faces strong competition from other financial sectors and non-financial industries. The talent war is not just within a jurisdiction but across borders. I therefore encourage industry professionals like yourselves and the industry associations to take the lead in promoting professional education and upgrading of competencies. We can for example raise the expertise level and international exposure of the existing pool of underwriters and brokers in Singapore. To support such endeavours, the MAS has a Financial Training Scheme that is available to the insurance industry. This provides co-funding in the training of your staff in specialized areas, and includes support for training on the job when staff is sent overseas for as long as 6-12 months. It is not only about talent stock but also talent pipeline. The industry collectively should consider how to better profile career prospects and job opportunities by reaching out to fresh graduates and new job entrants.
3.6 I also see insurance brokers as playing an important and key role in the development of Singapore as an insurance and reinsurance centre. The role of the broker is evolving. From the matching and placing of insurance risks for their clients with insurers and reinsurers in the past, brokers have moved up the value chain to provide added services to remain competitive and relevant. The risks faced by clients have become much more complicated given regionalization and globalization of businesses. Brokers have had to keep up - not only in understanding the developments within their clients' areas of activities but also the gamut of new potential exposures and risks their clients face. Only then, can they provide value-adding risk management and insurance advice. In addition new financial industries and activities are developing within Asia, and brokers as key intermediaries, have to keep up on a steep learning curve.
3.7 Reinsurance brokers whose clients are the direct insurance companies, are similarly moving up the value chain of services. Expertise is being built in more sophisticated advisory offerings like catastrophe modeling, dynamic financial analysis and financial modeling, actuarial consulting and even capital management and capital market solutions which investment banks traditionally have provided. These will be areas which insurance companies in Asia will increasingly demand as they seek to manage their insurance and financial risks holistically. I encourage the broking community to similarly consider tapping the MAS training scheme to build capabilities in support of new and increased business needs.
3.8 In addition, insurers and brokers should also consider allocating resources - hopefully in your Singapore offices - to conduct research that will strengthen and support the ability to understand, quantify and price Asian risks. There is room to build or refine existing catastrophe models for the various Asian catastrophic risks, but also in the area of life and health insurance with respect to disease pandemics, mortality and longevity risks in Asia. This may be done in collaboration with various academia and health institutes in Singapore and the region. MAS is willing to explore this with the industry and to help facilitate the establishment of a network between industry and academia, if the industry thinks this is useful.
3.9 Such research can go a long way in enhancing the quality of insurance underwriting and risk control, as well as helping insurers and brokers to innovate new products. This will also serve to prepare the ground for the time when insurers in Asia need to tap the capital markets more aggressively to diversify their catastrophe risks or raise funding through securitization of their future profits or liabilities. Capital market investors who are unfamiliar with insurance risks will need to understand how insurance risks behave and how they can be modelled and quantified, before buying insurance linked capital market products. The MAS has a financial research scheme that can be tapped should you consider the building of such research capabilities as a necessary competitive advantage. My colleagues in the market development function will be happy to provide details.
ii) Deepening Capacity and Attracting New Capital to Singapore
3.10 Let me move on to the point on attracting new capital. Singapore has done well to attract a critical mass of specialist insurers and reinsurers. They have in turn provided expertise and fresh capacity. However, there is scope for further growth. A significant proportion of reinsurance volumes ceded outside domestic markets in Asia are presently not retained within Asia. A number of factors may account for this. These include the historical relationship that many insurers in Asia have with London
based brokers and the more competitive terms and availability of capacity offered for larger, complex risks; given the underwriting expertise and more sophisticated risk management systems centralized in the large insurance centres outside of Asia.
3.11 The other interesting feature seen in established reinsurance centres such as London and Bermuda is the ability to also attract fresh new capital that enters the insurance markets. For London, much of the new insurance capital flows into the Lloyd's market, while in Bermuda, we have seen the establishment of start-up companies. A good number of those set up in the 80s/90s have grown to be significant providers of global reinsurance and retrocession capacity.
3.12 With the strong business growth prospects in Asia and the heightened levels of risk exposures and coverage required, I would like to encourage reinsurers in Singapore to further build up the pool of necessary expertise with the underwriting authority and capacity in Asia, to take on Asian risks. An area which has seen a resurgence in Asia and the Middle East is Islamic finance. There is a corresponding strong interest seen in the development of life and general takaful business. As with conventional insurance, reinsurance or retakaful will play an important role in providing capacity to support the growth of the emerging takaful industry.
3.13 Given the critical mass of reinsurance activity in Singapore, we are keen to attract retakaful players to Singapore. To date, we have 2 reinsurers, Tokio Marine Retakaful and Scor Vie, who already provide retakaful capacity. There is room for Singapore to grow its reinsurance market further, both in conventional reinsurance, including life reinsurance, as well as retakaful. Singapore will continue to welcome reinsurers of good standing to set up operations here. In this regard, reinsurance companies with only a short track record or even newly established ones could be considered if they are well capitalized with an acceptable rating and managed by experienced insurance professionals with a track record of disciplined underwriting and risk management. This is in line with our objective of growing a vibrant reinsurance industry that is also financially strong and well-managed.
iii) Strengthening Singapore as a Captive Domicile
3.14 With the rapid growth of Asian economies, corporations in the region are getting larger and more sophisticated. Many of these corporations will be looking at captives as an alternative risk transfer vehicle. Indeed, the captive insurance industry has been growing rapidly as more corporates focus on
risk management, and see the economic merits of keeping and self insuring some of their risks in-house. The global growth rate has been at 10%. In Asia, captive managers estimate the potential growth rate to be as high as 25%. Singapore is currently the largest captive domicile in Asia with close to 60 captives. Captive insurers form an important component of the insurance industry, and contribute to its depth and development. To further support the growth of the captive insurance market, the government announced in Budget 2006, a tax exemption on the offshore income of captive insurers with effect from February 06. This serves to level the playing field with major captive domiciles and we are confident that Singapore will be as competitive in attracting Asian captives to domicile here.
4. SUPPORTING ANCILLARY SERVICES
4.1 Within the insurance ecosystem, I am pleased to note the development of thriving insurance-related service providers such as in accounting, legal services, loss-adjustors and IT/e-platform providers. We have two of the top forensic insurance accounting and claims firms, who have found Singapore to be an excellent base to service the region. In addition, entities such as Ri3K, the world's only insurance electronic trading platform from the UK, use Singapore to assist cedents and reinsurers in facilitating better auditability and process clarity with their highly sophisticated technology infrastructure. We have also seen an increased number of specialized legal firms who have set up shop here and in all, these have greatly broaden the range of niche services available in our industry.
5.1 In conclusion, let me make reference again to the conference theme of "Succeeding in the New Insurance World Order". Asia is in an exciting phase of development and growth. The insurance industry is an important component of the evolving financial markets and a cornerstone of economic, business and even social infrastructure. The prospects for growth are bright. As you set about your business strategies, my colleagues and I at the MAS intend to continue our industry dialogues with as many of you as possible - and with your respective industry associations.
5.2 Permit me to once again commend SIBA for organizing an excellent conference programme. I wish you all a most fruitful time ahead. Thank you.