Published Date: 09 July 2007

Keynote Address By Ms Teo Swee Lian,Deputy Managing Director,Monetary Authority Of Singapore, at The Asia-Pacific Rendezvous, 9 July 2007, 9.15 am, Rasa Sentosa Resort, Singapore

1   Thank you for the introduction Mr. Mattholie. Ladies and Gentlemen, good morning.  Before I begin, I will like to thank Captive & ART Review for organising Asia’s first captive-themed conference in Singapore.  With the rapid growth and expansion of companies in Asia, as well as the increased focus on risk management, this event is certainly timely. This conference will raise the level of awareness for alternative risk management solutions and keep the industry abreast of the latest developments in this area.

2   We have here today, participants from diverse backgrounds and interests. Some of you are experts from the broking and captive management industry, and others, representatives from corporates who have interest in learning more about alternative risk management strategies such as captive insurance. Given the size of the gathering here today from 11 countries, some from as far as the Carribean, I have no doubt that the conference will be an exciting one with plenty of networking and discussion opportunities to exchange views and ideas.

History of Captive Insurance

3   First, I would like to bring all of us back in time to understand the genesis of the captive insurance industry.

4   As many of you know, captive insurance is a means of self-insurance. Corporates who choose to self retain some of their insurance risks would set up their own insurance company, hence the notion of “captive” insurance.   This concept of self-insurance can actually be traced back to the infancy of the insurance industry itself. As early as 1782, there were instances of mutual insurance companies being formed by fellow members to provide insurance coverage to the group. This is in fact how Protection and Indemnity Clubs came about, where shipowners formed their own mutuals to provide marine liability coverage. In the 1920’s and 1930’s, we saw the first captive insurers when several major companies like Unilever and Lufthansa set up their own insurance companies.

5   Captive insurance did not develop into a real growth industry until the 1950’s. This was when a US fire protection engineer Fred Reiss, advised his large corporate clients who were facing difficulties finding low cost insurance coverage, to set up their own captive insurance companies. This idea gained momentum and led to rapid growth in the formation of captive insurers by corporates in the US and Europe.

6   Today, it is estimated that there are more than 5,500 captives worldwide. Aon’s Global 500 Report released last year shows that 64% of the top 500 companies in the world have their own captives. The US and UK have an even higher penetration of captive insurance with 77% and 95% respectively of their Global 500 companies owning at least one captive each. Captive insurance has become an important feature of many of these companies’ risk management programmes.

Benefits of forming captives

7   The most obvious reasons why corporates form captive insurance companies are the inability of the commercial insurance markets to provide adequate coverage, affordable pricing, and flexibility for insuring the risks they face. However, it is interesting that even during soft cycles in the insurance markets when there is increased capacity for the commercial industry to provide cheaper coverage for corporate protection seekers, captive insurance has continued to thrive.   

8   So clearly, there are other important benefits of captives. These relate to the increasing adoption of a more holistic and sophisticated risk management approach by companies. Indeed, with the greater volatility faced in the business environment coupled with the rapid pace of globalisation, corporates are increasingly being exposed to a higher frequency and a greater multitude of risks arising from operational, market and environmental factors. Risk management has become just as important as business strategising.

9   Self insurance or self retention of risks within the group inevitably brings about a greater level of management focus on risks as well as on recovery management processes and systems. This greater attention paid to risks results in more discipline and corporates can enjoy better control over and efficiency in their risk management and risk financing. Moreover, the corporates are shielded from volatile pricing in commercial insurance markets. Captive insurers also have direct access to and support from the reinsurance market. This enables the company to achieve better claims experience as a group as well. The investment income that accrues on the retained premiums within the group further enhances the balance sheet of the corporates, particularly if they have a good claims experience record.

The Asian experience and potential

10   While the captive insurance concept is well-rooted in western countries, it is still very nascent in Asia, with the exception of Japan and Australia. From the same Aon G500 Report, top Asian companies only have a 27% take-up rate of captives compared to 77% in the US. There is therefore a lot of potential for growth and we are optimistic that the captive concept will increasingly gain recognition in Asia as a useful risk management tool. There are a few drivers which we believe will contribute to this growth.

11   One is the increasing awareness and greater focus placed on risk management among Asian corporates. Asia, ten years on after the 1997 Asian Financial Crisis, is back on the growth track and experiencing robust economic expansion. In a recent IMF Survey[1], GDP of emerging Asia which includes China, India and ASEAN is projected to grow by more than 8% in the next two years. Asian corporates are now in a phase of rapid regionalisation and globalisation and this will bring correspondent increases in many new risk exposures. Like their counterparts in US and Europe, these companies are also recognising the importance of controlling and managing these risks in a manner which enhances overall profitability and efficiency of business. 

12   Furthermore, the increased emphasis on corporate governance globally and Asia is no exception, inevitably implies that enterprise risks cannot be ignored even if they are not insurable in the traditional market. One such example is the business interruption risks posed by potential pandemic flu for which capacity is hard to find in the commercial insurance market. Captive insurance can thus fit into the overall risk management programme and fill in the gaps for insurance cover. It will be no surprise that the aggregate cost of financing adequate cover for group’s risks can be lowered significantly if the complementary benefits for traditional and captive insurance are maximised. In time to come, we believe that this will be well-received in this region.     

13   With the fundamental shift in risk culture, Asia is poised to embrace more sophisticated risk management solutions and captive insurance certainly has a role to play. Now let me turn to what has been happening in the captive insurance industry in Singapore.

Singapore as a captive insurance centre

14   Presently, Singapore is the largest captive domicile in Asia with 61 captive insurance companies and 5 captive managers. We have witnessed good growth over the past years, recording average annual growth rate of near to 23% since year 2000. Furthermore, we also noticed that corporations from more diversified industries are setting up captives here in Singapore. This is a reflection of the flexibility for the captive insurance facility.

15   There are various factors that Asian corporations will want to look at when deciding on a captive insurance domicile. The first is to be in a location that is strategically located in Asia for easy access to anywhere in this region. There should also be an efficient infrastructure which facilitates operations. This includes a credible legal system, stable business environment and strong economic fundamentals. Singapore also has a risk-based supervisory regime which applies supervisory intensity and regulatory requirements commensurate with the risks that the institution poses to the financial system.

16   Captive insurers being self-insurance vehicles also place importance on an efficient tax regime to minimise costs. Singapore has a wide network of double tax agreements with over 50 countries around the world which gives advantage to tax recognition. The tax on income for captives is also comparable to that of other captive domiciles.

17   Another key factor is that Singapore has a critical pool of international reinsurance players, with 16 of the top 25 global players having a presence here. This makes for easy access to international reinsurance. Singapore is also host to a group of reputable service providers including the global top 3 largest captive managers[2] which already have long-standing operations here.

18   We think that as Asian corporates become more sophisticated and embrace enterprise risk management, there is great potential for growth in the captive insurance industry. As regulators, we are keen to help foster greater risk awareness. We look forward to working with industry to continue to develop a conducive business environment to help facilitate innovative and efficient risk management solutions for all corporations.

Concluding remarks

19   On this note, I shall conclude my speech. Once again, may I commend the Organisers for holding this important seminar and we hope it will be the first of many. We need more opportunities for such a distinguished gathering to come together to share and learn from each other in this important area of finance.

20   Thank you.

1 IMF Survey Magazine, "Asian Financial Crisis - Asia Ten Years After"; May 30 2007

2 According to Business Insurance Survey in Mar 6 2006