Published Date: 20 March 2006

Address by Mr Low Kwok Mun, Executive Director, Insurance Supervision Department, MAS. at the Annual General Insurance Association of Singapore Lunch, 20 March 2006, M-Hotel Singapore

Good afternoon ladies and gentlemen.  Thank you for inviting me to address you at your Annual Luncheon.

2   I would like to first congratulate Mr Derek Teo for being reappointed as GIA's President for another year.  I also congratulate the rest of GIA's Management Committee members on their appointment.  I look forward to working closely with all of you for another year as we pursue the many areas of common interest.

3   Allow me to also congratulate the GIA on its 40th anniversary.  MAS and GIA have enjoyed a very good working relationship over the years.  I am confident this will continue for many more years to come.  GIA has been most supportive of our efforts to enhance the standards of risk management and professionalism in the general insurance industry.  In this regard, it has introduced a number of significant initiatives.  I will touch on a few of them later.

Promoting sound risk management standards

4   One of MAS' objectives in our supervision of the financial industry is to promote financial system stability by fostering sound and prudent management of financial institutions.  We have emphasized that the board and senior management of financial institutions play a crucial role in ensuring that their institutions are well managed.  This will help to promote stable growth in the financial industry. 

5   MAS has made significant changes to our regulatory and supervisory approach to provide more lee-way to financial institutions that are well managed and have sound risk management systems.  This is to give financial institutions the right incentives to continually upgrade their risk management systems.  The introduction of the risk-based capital and risk-focused supervisory frameworks are key examples of this approach. 

6   MAS is committed to working with the boards and senior management of financial institutions to improve their risk management systems.  We will continue to provide financial institutions with guidance on best practices in risk management.  Last month, we issued a set of Guidelines on Sound Risk Management Practices.  Underpinning these Guidelines is the emphasis on strong risk management awareness at all levels within the financial institution, with the board and senior management providing the necessary oversight to ensure the effectiveness of the risk management practices and procedures.  The Guidelines are relevant for all financial institutions and I will strongly encourage all of you to study them closely and implement those that are relevant for your operations.  We intend to issue additional guidelines that are specific to the individual sectors. For example, for the insurance sector, guidelines on risk underwriting, pricing and reserving, and agency management may be useful additions.

7   GIA is an important partner to MAS as we seek to enhance the risk management standards in the general insurance sector.  Indeed, GIA has played a useful role in providing important feedback to MAS on industry's views as we embarked on a series of regulatory changes over the years.  GIA has also risen up to the challenge to set industry standards on risk management and business conduct.  MAS supports and recognizes GIA's significant efforts in this regard.

Initiatives implemented by GIA in 2005

8   I would like to highlight two of GIA's initiatives introduced over the last year.  Firstly, GIA implemented the Agency Management Framework in May last year after substantive consultations with the industry.  The Framework encompasses a more robust set of General Insurance Registration Requirements and a set of Best Practice Guidelines on Agency Management.

9   The Framework emphasizes the important role that the principal sponsor company plays in ensuring high standards of professionalism in the general insurance agency.  As each agency is allowed to represent up to three general insurance companies, it is necessary to have a principal sponsor tasked with the primary responsibility of ensuring that only agencies that are well managed and have high integrity are allowed to operate in the industry.  This will help build consumers' confidence when dealing with agents in the general insurance industry, which is currently about 7,500 strong.

10   However, for this Framework to succeed in meeting its objectives, each insurance company has to play its respective role.  Each insurance company should undertake proper due diligence before agreeing to be the principal sponsor of an agency.  It should satisfy itself that the agency has put in place adequate systems and procedures that promote high standards of integrity and professionalism amongst its agents.  For example, any agency whose contract was previously terminated by an insurance company should be sufficiently investigated to ascertain the reasons for the termination.  The principal sponsor should assess the grounds of sponsoring such an agency and the need to exercise greater caution when accepting business from the agency.

11   Insurance companies should also be diligent in updating the Agents Registration Board of instances of misconduct by agents.  Insurance companies should recognize that it is not worthwhile to compromise on high professional standards for the short-term benefit of some additional business that a questionable agency may bring.  The cooperation of all insurance companies will help raise the level of professionalism of the general insurance industry and instill consumer confidence.

12   GIA's other important initiative is the Premium Payment Framework which was implemented in May last year.  The aim of the Framework is to facilitate the collection of insurance premiums from policyholders, agents and brokers.  It sets out clearly the roles and responsibilities of insurance companies, agents and brokers in the premium collection process.  It also adds clarity to specific timelines underpinning the billing and collection of insurance premiums.

13   Having spent many years of my career in MAS in banking supervision, I am accustomed to the practice of classifying debts overdue for more than 90 days as non-performing. Loan loss provisions would then have to be made for these loans.  When I assumed responsibility for insurance supervision in MAS early last year, I was surprised to learn of instances where insurance premiums were outstanding for as long as one year or more.  I was told that insurance companies often would not want to press for payment from the insurance brokers for fear of losing the business to a competitor that is more accommodating.

14   However, such a lenient attitude towards outstanding premiums is not in the best interest of the insurance companies in the long run.  It will only promote a lax credit culture amongst the agents and brokers, and exposes the insurance companies to unnecessary credit risks.  We would therefore strongly encourage all insurance companies to give their full support to the Premium Payment Framework.  Implementing the framework will help insurance companies enhance the effectiveness of their premium collection process, and this in turn will facilitate prompt processing and settlement of claims for the benefit of policyholders.

What more can GIA do?

15   GIA has achieved much over the last year.  But there are many more challenges that GIA and its members would need to address in the area of risk management.  Allow me to outline two of these.

Maintaining Underwriting and Pricing Discipline

16   A key challenge facing insurers today is maintaining underwriting and pricing discipline in an increasingly competitive market.  The motor insurance market comes immediately to mind. 

17   The insurance industry has made commendable progress over the past years to improve practices in claims processing and manage costs in the motor insurance business.  These initiatives have reaped tangible benefits for the industry as a whole, as can be seen from the positive underwriting results displayed by the industry for the past two years.  For 2005, aggregate underwriting profit for motor insurance business amounted to S$48 million, an almost seven-fold increase over the underwriting profit achieved in 2004.

18   Whilst the motor insurance business appears to have finally turned the corner, insurance companies should be mindful about maintaining strong underwriting and pricing discipline.  The industry should not become complacent just because of the good profits achieved in the past two years.  There are already indications of premium reductions as more insurance companies join in the fray to compete for a slice of the market.  While greater competition is always a welcome sign, I would urge the industry not to abandon sound underwriting and pricing principles in the search for market share.  Otherwise, all the good work that has been done over the past few years will be unraveled.

19   While I have focused on the motor insurance business, it should be emphasized that strong underwriting and pricing discipline is equally important for every business   Growth is only sustainable if insurance companies do not sacrifice prudence for short term gains.

Prompt Contract Finalisation

20   Another challenge that insurance companies need to address is the certainty of their reinsurance contracts.  Reinsurance is an indispensable part of the insurance business.  All insurers make use of some form of reinsurance facility to manage the risks they are prepared to carry in their books.  It is therefore important for insurers to take active steps to safeguard their interests under the reinsurance contract.

21   In the course of MAS' inspections of insurance companies, we have noted many instances where the reinsurance contracts between the insurer and their reinsurance providers were not promptly finalized.  Often, the contracts were still outstanding at the point of risk inception.  There were instances where there were delays of up to one year before the contract wordings were finalized and signed.  Such a situation exposes the insurance company to the risk of unenforceable contract terms or insufficient reinsurance coverage.  It may also lead to potentially expensive and long-drawn legal disputes between the insurance company and its reinsurer.  This could ultimately lead to losses for the insurance company as it may not be able to seek reinsurance compensation for the insurance claims that it has to pay out.

22   The problem of late finalisation of contracts is not peculiar to reinsurance contracts only, but also to direct insurance contracts pertaining to large commercial accounts.  In such instances, the risks of legal disputes between the insurer and insured arising from lack of clarity in contract coverage terms will also exist. 

23   Such concerns about contract certainty are already receiving attention amongst a number of insurance regulators in the more developed jurisdictions.  The UK FSA, for example, has issued directions to its insurance industry that they have to achieve contract certainty by end-2006.  We recognize that this issue cannot be resolved by the direct insurers alone.  The other industry players - the brokers and the reinsurers - would also need to play their respective roles.  I would therefore encourage the GIA and its members to engage other relevant industry associations to work out an appropriate arrangement to achieve better contract certainty for the industry as a whole.

Concluding remarks

24   MAS has already shifted our supervisory approach from a one-size-fits-all regulatory regime to a risk-focused supervisory regime.  In our supervision of the insurance industry, our focus will be on the quality and effectiveness of each insurer's risk identification, monitoring and management systems taking into account the risk profile of its businesses.  We will place more reliance on the board and senior management to ensure that sound and effective risk management systems are in place.  MAS will provide adequate incentives for insurance companies to raise the quality of their risk management practices.

25   I would like to place on record our appreciation to the GIA for taking the initiative to heed MAS' call for the industry to take greater responsibility in raising the standards of professionalism in the industry.  GIA has done much over the past years, and I am confident that under the leadership of the present Management Committee, more will be achieved in the years ahead.  MAS will continue to work closely with the GIA to promote a sound, competitive and well respected insurance industry in Singapore.  Thank you.