Speech by Ms Teo Swee LianDeputy Managing Director (Prudential Supervision), Monetary Authority of Singapore, at the LIA Annual Luncheon, 1 March 2006
1 Good afternoon ladies and gentlemen. First and foremost, I would like to thank LIA for inviting me to your annual luncheon. I would like to congratulate the office bearers for being re-elected, obviously for their good work. This afternoon, I will start off by outlining some of the challenges facing the life insurance industry. I will then recap some of the major achievements in the industry here, before ending off with what I think are the opportunities that the industry can look forward to this year.
Changes in the life insurance industry
2 The life insurance industry now is very different from what it was just a decade ago. Changes in the external environment and consumer demographics have largely contributed to this. Let me elaborate on some of these changes.
3 Global financial markets saw much more volatility over the last ten years. The dynamics of the global financial markets have changed as a result of hikes in oil prices, threats of terrorism and pandemics, greater incidences of natural calamities, and political and regulatory changes. With financial markets becoming more integrated, the impact of such events affecting one market is easily transmitted to other markets.
4 One specific event risk that has become a significant threat is Avian flu. In recent months, the extent and speed of the virus spread across various countries around the world have increased. Just this morning, it was reported that in Germany, a cat was found to have died of Avian flu. This suggests that the Avian flu may be transmitted from birds to mammals. Although Avian flu has not spread to Singapore, and our Agri-Food & Veterinary Authority and the Ministry of Health are well prepared for any outbreak, we cannot ignore the risks and impact it may have on our economy should it do so. Even if we succeed in containing the spread of the virus in Singapore, the immediate impact could affect consumer and investor confidence. Life insurers may be affected by falls in investment income as investment markets decline while insurance claims could surge. Demand for insurance products could also be dampened as household incomes are affected.
5 We have seen the impact that SARS had on our economy. During that period our GDP growth fell to 0.7 per cent, as several sectors of the economy were affected. Indeed, even if we are lucky and spared an actual outbreak of Avian flu here, our economy could still be affected if major economies abroad are hit and we have a global slowdown.
6 Besides the potential impact on the economy, the threat of an Avian flu outbreak also highlights the importance of adequate business continuity management. It is necessary for financial institutions, including life insurers, to have in place robust, up-to-date, and well-tested business continuity plans. These plans are essential to minimize possible business disruptions and enable quick recovery of critical business functions.
7 I note that the Association of Banks in Singapore is organising an industry-wide business continuity exercise for banks in May this year and is extending this to other financial institutions, including insurance companies. MAS and other government agencies will be working closely with the ABS. I encourage life insurers to consider how they can be involved in this important exercise either as observers or participants as it will be a good opportunity to test the robustness of your business continuity plans.
8 Apart from the external environment, the consumer profile has also changed with a general improvement in educational levels and increased interest in financial planning. Insurance products now receive greater media attention as the media seeks to enlighten consumers on the complexities of these products. With consumers becoming more informed, they are raising more questions about the products that are being marketed to them and demanding greater transparency and accountability from insurance companies.
9 At the same time, life expectancy continues to improve as a result of medical advancements and better healthcare services in Singapore. Our current life expectancy is about 80, compared to 72 in the 1980s and 75 in the 1990s. This means that long-term medical insurance as well as retirement savings plans are receiving greater interest from consumers.
10 The types of insurance products being sold, and the way that they are distributed, have also changed. There used to be very clear boundaries between banking, insurance and capital market products. Banks used to offer mainly deposits and loans; insurance companies sold largely protection products with some savings element; and asset management companies simply marketed investment products. This has changed and the boundaries have become blurred.
11 Increasingly, insurance policies are being sold through banks, brokers and even post offices. Also, with the removal of the minimum death benefit requirement for investment-linked policies (ILPs), insurers now sell ILPs that are close substitutes for unit trusts. Further, many new and innovative products such as universal life and a large range of investment-linked products are emerging in the market. These cater to the needs of more sophisticated clients, and are increasingly a part of the suite of products distributed by independent financial advisors and private bankers.
Achievements of LIA in 2005
12 With a more challenging and volatile environment, competitive pressures in the insurance industry are likely to increase. The industry needs to rise to meet these challenges. It is encouraging to note that the life insurance industry here has been able to manage well so far. Life insurers reaped healthy profits in 2005, on the back of strong growth in the Singapore economy.
13 The results of the recent annual stress test on all the life insurers also indicate that most insurers can be expected to remain resilient under various short-term and medium-term stress scenarios. For the few insurers that may be more vulnerable, it is good to know that they are putting in place necessary measures to increase their resilience.
14 As an industry association, the LIA has achieved much in 2005. LIA played an important role in setting and raising standards of the industry. It introduced industry standards on disclosure requirements for the sale of long-term health insurance. It has also been actively involved in the Par Fund review, offering valuable comments to MAS public consultation, and initiating focus group discussions to seek feedback from the members of the public and the media. LIA also worked with the Institute of Banking and Finance (IBF) and the Singapore College of Insurance (SCI) to develop the Financial Industry Competency Standards (FICS) for Claims Handling and Underwriting.
15 LIA has also taken a more proactive approach in responding to public and media comments on life insurance issues. As the mouthpiece of the life insurance industry, LIA provided expert viewpoints to clarify issues to other government agencies, professional bodies and associations such as CPF, IRAS, ICPAS and CASE. In doing so, LIA has facilitated better understanding and more appropriate treatment of insurance products in the various regulatory frameworks and standards issued by such institutions.
16 LIA has also done much in educating consumers about life insurance. Through close collaboration with MAS in the MoneySense programmes, the LIA has taken an active role in conducting seminars, developing consumer guides on insurance products such as ILP and health insurance, and publishing educational columns in the media.
17 All these initiatives have helped to raise the profile of LIA and the life insurance industry.
What LIA can look forward to
18 The LIA has made commendable accomplishments in the past year, and we urge you to continue with your good work. What more do we think can be done?
19 First, we would like to encourage LIA to further its consumer education efforts by urging its members to take keener interest in consumers concerns and perspectives when dealing with consumer queries and complaints. LIA could also consider spearheading consumer education programmes to increase the level of understanding of life insurance. Efforts could also be made to improve the clarity and understandability of product documents provided to policyholders. Building trust in the life insurance industry will help to further raise the standing of the industry among policyholders and investors.
20 LIA can also play an even more active role in developing industry standards and best practices. There are many areas that the association can look into.
21 Risk management is an important area especially given the increasingly volatile environment and as insurers expand their range of offerings into more complex products. Insurers need to understand and manage the increasing risks that they are exposed to.
22 On the market conduct front, apart from remaining vigilant against errant practices in the industry, it is essential that LIA raise the level of professionalism and ethical standards of agents. Abuses by agents such as fraud and misselling can tarnish the image of the industry. I am confident that LIA can work with its members to promote best practice processes and controls to minimise the occurrence of such improper conduct.
23 With the increasing demand for financial planning products, LIA can also play an important role to raise the financial planning expertise of insurance agents and financial advisers, so that they are well equipped to offer sound advice and structure appropriate products to meet consumers' needs. LIA can explore working with the various financial advisers industry associations to raise competency standards of representatives and adopt best practices in the provision of financial advisory services. I would also urge LIA to continue to work with the SCI and IBF to roll out the Financial Industry Competency Standards(FICS) training programmes for the life insurance industry. LIA is well placed to reach out to its members to share with them the benefits of FICS and encourage them to incorporate these standards into their organisational training frameworks. These standards, which were benchmarked against global standards, provide a well-structured framework for institutions to raise the skill level of their employees. Institutions that offer their employees professional development opportunities will be better placed to attract good quality staff.
24 MAS has been consulting the industry to gather views and ideas to grow our insurance market further. We have received useful feedback so far and would like to thank you all for your ideas. MAS will work with LIA to further develop the local insurance market so as to better meet the needs of various groups of consumers.
25 There are two particular segments of the market that I would like to touch on next.
26 First, on catering to the needs of High Net Worth Individuals. Given the increasing growth in wealth creation in the region and Singapore's rapid development as a private wealth management centre, the opportunities to service sophisticated investors in Singapore and the region abound. As these sophisticated investors visit Singapore for business or pleasure, some of them may take the opportunity to seek advice on suitable wealth management products, including insurance offerings. Indeed, industry players have told us that there is increasing interest from clients across Asia to come to Singapore for their insurance solutions. To date, we have admitted a few specialist insurers into the market to serve the needs of such High Net Worth Individuals, and we would welcome more.
27 Second is retirement planning. Singapore is experiencing a rising trend in both elderly dependency ratios and life expectancy. The percentage of the population above 60 years old was only 11% in 2000 but is projected to more than treble to 35% in 2030. The elderly dependency ratio (elderly persons to working adults) is projected to rise from 10 in 2000 to 45 in 2030. This phenomenon is also seen in many countries around the world. As a result, annuity products are expected to grow in importance as the world population ages and as countries increasingly shift from defined benefits to defined contribution social security systems. The annuities market is being touted as the next big market in life insurance as demand shifts in tandem with life expectancy, from insuring against the risk of untimely death to insuring against the risk of outliving ones assets.
28 We would like to encourage the industry to actively consider structuring and marketing suitable products for wealth management as well as retirement planning out of Singapore. MAS will be working alongside you to help facilitate the growth of these markets.
29 Another area I should mention is the Risk Based Capital (RBC) Framework. I would like to thank LIA for the considerable effort put in throughout the five years working with MAS to develop a more risk focused capital framework for the industry. Implementation of the RBC framework has been very smooth. Our work on this, however, has not ended. The framework will need to be refined as we gain experience in applying the new system. We would continue to tap on the expert advice of the industry for this purpose. It is definitely in everyones interest that we have an RBC regime that is effective.
30 To conclude, I would again like to congratulate LIA for the achievements over the past year. 2005 has been a good year for the industry despite the challenges in the market. There will be many opportunities in 2006 and beyond for the life insurance industry to grow, and I urge LIA to take advantage of these opportunities to bring the industry to greater heights.
31 I would like to highlight that Singapore will be hosting the annual meetings of the International Monetary Fund (IMF) and the World Bank this year. We expect more than 16,000 delegates from over 180 countries converging in Singapore for this event. While the event involves mainly the banking sector, many of you are part of financial services conglomerates. Your Group CEOs may attend the meetings. This will be a good opportunity for you to network with other financial sector professionals and showcase Singapore's life insurance industry.
32 Finally, I wish LIA success in the years ahead, and we at MAS look forward to maintaining our close working relationship with LIA to achieve our mutual goal of developing a healthy and trusted life insurance industry. Thank you.