Published Date: 07 March 2007

Keynote Address by Ms Teo Swee Lian, Deputy Managing Director (Prudential Supervision), Monetary Authority of Singapore, at the 7th Asian CEO Insurance Summit, 7 March 2007, Marina Mandarin Hotel, Singapore

Mr Geoff Bromley,
Chairman of Conference,
Distinguished Guests,
Ladies and Gentlemen,

1   Good morning.  First let me extend a warm welcome to all our guests from overseas.  I wish you a fruitful and enjoyable stay in Singapore.  Allow me to also congratulate the organisers - Asia Insurance Review and The Geneva Association, also the co-organiser, Guy Carpenter, for putting together a very interesting conference program that has attracted such a strong turnout here today.

Seizing Opportunities in Risks

2   The theme of this conference, "Managing the Potential of Profits" in Risks is an interesting one.  To the layman, risk is often perceived as it is defined in the Oxford dictionary: "(1) a situation involving exposure to danger; or (2) the possibility that something unpleasant will happen."  Looking at risk from this perspective would drive an institution to focus on neutralising or at least reducing the potential adverse consequences of the risks that it faces.  In doing so, however, the institution might miss out on possible potential opportunities that it can otherwise reap.  Risk and reward are often two sides of the same coin. 

3   Over the past few decades, the risk landscape has undergone many significant changes.  There are increasing threats from terrorism and pandemics, more incidences of natural calamities, a greater prevalence of lifestyle related diseases, challenges of an ageing population resulting from longer life expectancies and a more volatile investment climate.  But remember what we said earlier - new challenges can also mean new opportunities. 

4   As an example, the report by the Intergovernmental Panel on Climate Change released last month carried the warning of a future characterised by extreme weather events as a result of rising global temperatures.  There will be long and intense droughts, fierce hurricanes, heat waves, and rising sea levels. While averting natural catastrophes is beyond the remit of the financial industry, mitigating the financial impact could soften the suffering and distress caused by these disasters.  With proper and adequate insurance coverage, those affected can be compensated for their financial loss so that communities can be rebuilt and economic activities resumed.

5   The increased incidence of man-made disasters has also driven up the need for insurance coverage.  While major corporate scandals may not necessarily be categorised as a "disaster", they have led to stricter legislations in many countries, making directors more responsible and accountable for any wrong-doing committed by the company?s staff or management.  This has driven up the demand for directors' and officers' liability cover. 

6   On a slightly different and more positive note, advancements in medical science have extended average life expectancies around the world.  On one hand, this poses a new challenge for the management of medical and life insurance portfolios.  However, extended longevity also leads to greater demand for long term care, annuities and new retirement products.

7   It is clear, therefore, that the changing risk environment while challenging, is also opening up new opportunities for insurance companies to offer more innovative risk management solutions to individuals and corporations.  I am sure there are many more areas the insurance industry can take advantage of and these will probably be discussed with great enthusiasm during the course of this conference.

Management of Institutional Risks 

8   From the perspective of a regulator, the aim is not to curtail the risk taking activities of financial institutions but to ensure that they are managed effectively.  What this means is that financial institutions need to ensure that the inherent risks in their business are adequately and promptly identified, measured and mitigated to levels that the institutions have the capacity to bear.  In the case of insurance companies, besides the critical insurance risks in pricing, underwriting and reserving, they also have to address other business risks such as credit, market, operational and reputational risks. 

9   The ability to identify and manage risks so that capital can be allocated efficiently is becoming an increasingly important factor that determines the success or failure of an insurance company in an increasingly competitive global marketplace. 

10   The amount of risks an institution can assume and the amount of capital it requires are intrinsically linked.  At the basic level, the better capitalised an insurance company is, the more risks it can take on.  More importantly, the better an insurance company understands and manages its risks across the enterprise, the more efficiently it can make use of its capital to buffer the uncertainties inherent in its business.

11   This principle is the basis of the Basel II capital framework for the banking industry.  By providing banks with the option to use more refined risk calibration models to determine their capital requirements under the Internal Ratings Based (IRB) approaches, Basel II incentivises banks to develop more sophisticated risk management systems.  Over time, the adoption of the IRB approaches by banks should lead to more sophisticated risk management practices and ultimately enhance the safety and soundness of the banking system.

12   Similarly, the development of Solvency II by the European Union aims to establish a solvency framework that more accurately captures the actual risks undertaken by an insurance company.  As part of the preparatory work for Solvency II, EU insurance regulators have analysed available data on insurance failures and near misses.  They found that the main causes were clustered around the broad themes of the quality of management and inappropriate risk decisions rather than inadequate capitalisation per se.

13   Similar to the Basel II framework for banks, Solvency II for insurance companies is built around three key pillars.  Pillar 1 stipulates the minimum capital requirements based on the level of risk posed by specific business activities of the insurance company.  This is complemented by the supervisory review process under Pillar 2 which focuses on the adequacy of the company's risk management systems and controls as well as its capital management capabilities.  Pillar 3 seeks to encourage market discipline through greater disclosure of the financial position of insurance companies. 

14   The Monetary Authority of Singapore (MAS) supports the objective of these international standards to provide the right incentives for financial institutions to adopt better risk management practices.  This principle underlined the introduction of our risk-based capital framework for insurance companies in August 2004 and also MAS? risk-based supervisory approach.  We will soon issue a monograph that explains our common risk-based supervisory assessment of banks, insurance companies and capital market players.  Many regulators in Asia have also implemented or are considering a risk-based capital framework and a risk-based supervisory approach.

15   Besides regulators, rating agencies are also providing the impetus for insurance companies to strengthen their enterprise risk management capabilities.  Rating agencies are placing greater emphasis in their rating methodologies on the ability of individual insurance companies to quantify and manage risks.  For example, Standard & Poor's has created a separate, major category of evaluation that is focused on risk management.  The aim is to recognise insurers and reinsurers that have robust risk-management processes which are applied across the entire enterprise and which form the basis for informing and directing the firm?s fundamental decision making.

Management of Financial Sector Risks

16   Given the increasingly integrated financial sector and economy, the failure of even one institution or worse, a group of institutions can sometimes have a significant impact on the rest of the financial and economic system.  Thus it is in the interest of financial institutions to act in a collectively responsible manner to prevent systemic and system-wide risks from threatening the stability of the financial sector.  Likewise, besides focusing on how individual insurance companies are managing their own inherent risks, regulators also need to keep an eye on macro stability.  This involves understanding and monitoring the interlinkages across the financial sector and also watching out for weak spots that could cause repercussions for all. 

17   Another challenge for regulators is that similar financial activities are provided by a wider range of institutions.  Hence there must be consistent capital and other regulatory requirements for similar activities undertaken by different entities across the financial sector.   This could even extend across national jurisdictions in order to avoid regulatory arbitrage.   In addition, large and complex financial conglomerates have continued to gain market share and with their increased economic significance, there is a greater need for regulators to supervise them on a consolidated group-wide basis.  While this consolidated supervision is generally accepted practice for banking groups, regulators may need to do more for insurance groups. 

18   These regulatory considerations are evident in the reform of prudential rules for insurance companies in the EU.  By adopting similar concepts that have been applied in recent reforms of prudential regulation in the banking and securities industries, Solvency II seeks to limit the potential for regulatory arbitrage between financial industries and reduce regulatory complexity for financial conglomerates.

19   MAS is also mindful of this potential for regulatory inconsistency.  In the formulation of our risk-based capital framework for insurance companies, where appropriate, we sought to align the capital risk charges with those applicable to banks.  Being an integrated supervisor with supervisory responsibility for the entire financial sector has facilitated this.  But there remain areas where some further consonance may be necessary, for example, recognising the use of internal models by insurance companies is an area where a lot more needs to be done compared with what has been achieved for banks.

20   Also, with the aim of strengthening risk management in the financial sector, in February last year, MAS issued guidelines to all financial institutions on sound risk management practices.  The guidelines set out our expectations of the role of the Board of Directors in the oversight and implementation of risk management policies.  They also outline the role of senior management in ensuring that sound, effective and robust policies, procedures and systems are in place. 

21   The intent of the guidelines is not to prescribe a uniform set of risk management requirements for all financial institutions.  Instead, each financial institution is expected to implement a risk management framework that is commensurate with the nature, size and complexity of its operations and risk profile.  We are in the process of developing additional guidelines that are specific to the insurance industry and will be releasing them in the middle of the year for public consultation.

22   The proposed insurance risk management guidelines will cover areas like product development, pricing, underwriting and claims handling.  They will emphasise the importance of stress testing and scenario analysis to assess the likely impact of probable adverse events on the financial soundness of the insurer.  The insurer should use these studies to enable it to take necessary measures to enhance its financial resilience.  For example, with the increased risks of an outbreak of avian flu, an insurer should consider how such an outbreak will affect both its assets as well as liabilities.  At the same time, it should anticipate how a pandemic would affect the functioning of its operations as well as its important business partners.  This will help it ascertain the impact on its underwriting portfolio as well as design and verify the resilience of its business continuity plans. 

Management of Global Risks

23   With the increased globalisation of the financial and economic environment, regulators have a much more significant task of monitoring the risks that the global financial system is exposed to.

24   I am pleased to note that among the international financial regulatory community, there are already many efforts to jointly identify and address the risks in the global financial industry.  The work of the International Association of Insurance Supervisors (IAIS), the Basel Committee on Banking Supervision, the International Organisation of Securities Commissions (IOSCO) and the Financial Stability Forum are some notable examples.

25   In addition, cooperation including efficient and timely exchange of information among supervisory bodies, both within the insurance sector and across the financial services sector, is critical to effective supervision particularly in the case of internationally active insurers, insurance groups and financial conglomerates.  This is also essential in the context of effective supervision of the global financial system as a whole.  Hence, there has been increased interest in the signing of Memoranda of Understanding (MOU) in the past few years to facilitate the formal exchange of information among financial supervisors.

26   The IAIS has also developed a Multilateral MOU to facilitate the exchange of information amongst insurance supervisors.  In developing this Multilateral MOU, the IAIS placed significant importance on the need for the supervisory authority to maintain appropriate safeguards for the protection of confidential information in its possession.  The supervisory authority should not release confidential information on any individual institution other than when required by law, or when requested by another supervisor who has a legitimate supervisory interest in that institution and who has the ability to uphold the confidentiality of the requested information. Such safeguards are necessary in order to preserve trust between the financial sector and the regulatory community.


27   In conclusion, I would like to share with you this quote from Sir Winston Churchill: "A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty."  If there is an optimist in you as an insurer, you see the opportunity to harness the potential of profits in risks.  In a similar light, an optimist amongst regulators recognises the opportunity to harmonise regulations across financial industries and even across different jurisdictions.   This effort will take time and maybe more optimists amongst us regulators.

28   On this note, I wish you a successful and fruitful conference.