Published Date: 23 January 2006

Keynote Address by Mr Low Kwok Mun, Executive Director (Insurance), Monetary Authority of Singapore, at the 2nd Asian Conference on Corporate Governance and Directors' and Officers' Liability Insurance, 23 Jan 2006

Corporate Governance - A Higher Benchmark for the Insurance Industry

1   Ladies and gentlemen, good morning.

2   I would like to thank the Asia Insurance Review for inviting me to address you this morning.

What is corporate governance?

3   Corporate governance is not a new concept but it has received much attention over the last few years.  We are all familiar with the high profile corporate collapses that have been attributed to corporate governance failures.  The corporate world has changed substantially as a result.  Regulators have also intervened to impose tighter requirements.  But what do we mean by corporate governance, and what does good corporate governance entail?

4   I found a number of different definitions.  According to a 1997 issue of the Journal of Finance, corporate governance deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on investment.  In other words, it concerns how creditors and shareholders can seek to ensure that their investment will yield the expected return.  In today's context, this definition seems a little narrow and does not fully reflect what we all now understand corporate governance to be.

5   Even the OECD's definition of corporate governance has evolved following recent experiences.  The 2004 version of the OECD's Principles of Governance defines corporate governance as involving a set of relationships between a company's management, its board, its shareholders and other stakeholders.  It goes on to say that corporate governance provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.  Good corporate governance should provide proper incentives for the board and management to pursue objectives that are in the interests of the company and its shareholders and should facilitate effective monitoring.

Importance of corporate governance for insurance companies

6   There have been many studies recently on the link between corporate performance, as reflected in shareholder value, and the quality of corporate governance.  While the studies have been inconclusive so far, one thing is clear: failure in corporate governance will lead to losses to the company and its stakeholders eventually.  I believe there is general consensus that good corporate governance is important and necessary for the corporate world.  But is it more important for the insurance industry, and the financial industry at large?  Should the insurance industry be held to a higher benchmark than the rest of the corporate world?  That is the issue that I've been asked to address today.

7   The Basel Committee on Banking Supervision, in its consultative paper on corporate governance for banking institutions, stated that minimum standards of corporate governance for banks should be more ambitious than that for non-financial firms.  This is largely because of the crucial financial intermediation role of banks and their systemic importance in the economy.

8   Likewise, insurance companies play an important financial intermediation role in the economy.  At its most basic, insurance companies assume the financial risk that individuals and corporations are not able to or would find difficult to bear alone.  Thus, insurance companies play an important role in promoting socio-economic stability.  Insurance companies, however, do not offer only risk protection but also investment and savings instruments to the public at large.  In fact, one life insurance company has as its advertising tag line, savings, investments and life insurance to reflect the suite of financial products it offers.

9   To give you an idea of the significance of the insurance industry in Singapore, total sums insured in the Singapore life insurance industry amounted to more than $330 billion as at end-2004.  As a comparison, total deposits of non-bank customers in the domestic banking unit, which are largely S$-denominated deposits, amounted to only slightly more than $220 billion as at end-November last year.  These include deposits of both individuals as well as corporations.  If foreign currency deposits are added, total deposits in Singapore's banking system amounted to about $490 billion.  Though not exactly comparable, the exposure of policyholders to life insurance companies is almost as large as the exposure of depositors to banks.

10   I hope you are now convinced of the importance of the insurance industry in our financial system.  Perhaps, given that many of you are insurance professionals, you do not need any convincing in the first place.  In that case, you would agree with me that insurance companies, like banks, would need to be held up to a higher benchmark for corporate governance.  In fact, the importance of strong corporate governance for insurance companies is also recognised by the International Association of Insurance Supervisors in its core principles for insurance supervision.  The core principles have been endorsed by insurance supervisors worldwide, including the MAS.

Corporate governance guidelines and regulations for insurers in Singapore

11   MAS strongly believes that the standards of corporate governance for banks and direct insurers need to be higher than that for other commercial entities, to take into account the unique roles they play in the financial system and the economy.  This is why in September last year, we issued an enhanced set of guidelines on corporate governance for all banks and direct insurers operating in Singapore.  The guidelines are based on the Code of Corporate Governance issued by the Council of Corporate Disclosure and Governance (CCDG) that are applicable to companies listed on the stock exchange.  Given the unique characteristics of the banking and insurance industries, we supplemented the CCDG's guidelines with additional principles and guidelines.  The guidelines are not mandatory, but are best practices that MAS would strongly encourage all banks and direct insurers to adopt.

12   We also introduced a set of regulations that are mandatory for the locally-incorporated banks and significant direct life insurers.  The regulations contain elements that MAS believes are essential for good corporate governance.  These elements are built upon the basic principle that the Board of Directors has the primary responsibility to ensure that the financial institution operates in a prudent and sound manner, with the interests of depositors and policyholders adequately safeguarded.

Importance of independence on the Board

13   A key element of good corporate governance is the strength and quality of the Board of Directors, coupled with sufficient independence within the Board to ensure that key decisions are made after due consideration has been given to the interests of all stakeholders.  In MAS' corporate governance regulations, we have made it a requirement that one-third of the members of the Board of Directors should comprise individuals who are independent of the institutions' management, business relationships and substantial shareholders.

14   During our public consultation on the guidelines and regulations, views were expressed about whether it is more important to have well qualified directors who understand the business or directors who are independent but have little appreciation for the complexities of the financial industry.  Some have argued that given the limited pool of financial expertise in Singapore, it would be difficult to find individuals who know the business as well as satisfy the independence criteria laid down by MAS.

15   As a regulator, MAS views that both qualities are equally important.  Directors of financial institutions should understand the intricacies of the business so that they can perform their responsibilities effectively.  For example, the Board of Directors of a life insurance company should be adequately equipped to review reports produced by the company's actuary, and satisfy themselves of the strength of the company's financial condition.  In addition, the Board would have to review the company's reinsurance strategy as well as its underwriting strategy.  All of these require the directors to have sufficient knowledge of insurance, or at the very least, adequate knowledge of financial markets so that they are able to raise pertinent questions to senior management to satisfy themselves that the company's business is well managed.

16   At the same time, there should be sufficient independence within the Board of Directors to serve as a check-and-balance for key decisions that the Board has to make.  In the case of a non-financial corporation, it is acceptable to assume that a director's primary responsibility is to protect the interests of the shareholders who appointed him.  But in the case of a financial institution, such as an insurance company, to which members of the public or policyholders have entrusted their funds, the directors of the insurance company have the added responsibility to safeguard the interests of its policyholders.

17   We recognise that in the main, the interests of shareholders and policyholders are largely aligned.  For example, both the participating policyholders and shareholders would benefit from a sound investment policy that the insurer puts in place to maximise investment returns within the insurance company's level of risk tolerance.  A sound and prudently managed insurance company would give greater certainty to the policyholders on the continuity of coverage and therefore greater potential for new business growth to the shareholders.  However, there will inevitably be situations where the Board has to make decisions that could potentially give rise to conflicts of interest between management, shareholders and policyholders.  In such situations, the presence of independent directors on the Board will help facilitate more balanced and robust deliberations by the Board, taking into account the interests of all stakeholders.

18   It should be emphasised that the requirement for a minimum number of independent directors on the Board of an insurance company should not dilute shareholder control or stifle efficiency in Board decisions.  That is why MAS only expects a minimum of a-third of the Board of Directors to be independent.

19   We do recognise that some life insurance companies have relatively small operations and a small Board.    It may not be practical at this moment to require them to enlarge their Board and appoint new independent directors.  Therefore, we have decided to focus the independence requirements on the direct life insurers whose operations are more significant.  We have set the threshold at $5 billion in assets, but we will review this at a later stage taking into account international developments as well as our experience in applying the requirements on the significant life insurance companies.  Having said that, all insurance companies are still encouraged to adhere to the higher standards on Board independence where possible and if their circumstances warrant it.

The Board's responsibility

20   As you will all recognise, tighter regulatory requirements on corporate governance alone cannot ensure that companies continue to operate in a sound and prudent manner.  It is necessary for the Boards of individual companies to set out principles and practices that promote sound and prudent operations, with adequate procedures to mitigate the risks of potential conflicts within members of the Board.  At the same time, members of the Board should be adequately trained to enable them to exercise their responsibilities as directors effectively.

21   More importantly, the Board of Directors should take upon itself the responsibility of ensuring that the company has effective risk management systems and procedures, with well-defined limits that are adhered to.  The Board cannot abdicate its responsibility for effective risk management to the company's management.  The Board should also pay particular attention to the strength and effectiveness of the company's internal control systems.  Internal controls are an important element of risk management as strong internal controls will help to mitigate the risks of fraud and impropriety amongst the company's staff.  Ultimately, it is the Board's responsibility to ensure that the interests of all stakeholders in the company are safeguarded.


22   In the current corporate environment, significant responsibility is placed on the Board of Directors of a company to ensure that the company continues to operate in a safe and sound manner.  Nevertheless, despite the best of intentions, mishaps can still occur due to human error or oversight.   However, if adequate control systems and procedures are put in place, losses due to such mishaps can be kept to the minimum.

23   With the increased responsibility placed on directors in the corporate world, there is an increased role for insurance companies to offer financial protection in the form of directors' and officers' liability insurance, which is the thrust of this conference.  I have been told that there is a dearth of insurance companies offering such insurance coverage in the market today.   Perhaps, this is a growth opportunity that insurance companies could seriously consider taking advantage of.  I will therefore not keep you any longer from listening to other better qualified speakers on this very interesting subject.  I wish you a fruitful and enjoyable conference. Thank you.