Opening Address by Mr Ong Chong TeeDeputy Managing Director, Monetary Authority of Singapore, 2nd Asia Pacific Rendezvous
1 It is a great pleasure to join you today. Allow me to thank Captive & ART Review for organising this conference. I understand that this is the second year running of this captive-themed conference and certainly, this year’s event is as relevant as the one last year in raising the level of awareness of alternative risk management solutions.
2 I am heartened to see the turnout here today, including friends from overseas. This gathering of a good mix of participants ranging from brokers, risk and captive managers to corporate representatives will present an excellent platform for discussion and networking.
3 Many of you are probably familiar with the history of captive insurance. The industry did not really take off until the 1950’s and 60’s, after large corporations in the US and Europe who found themselves unable to find low cost insurance coverage decided to set up their own captive insurance companies. This impetus to obtain large liability covers through self-insurance has since formed the cornerstone of the industry’s growth over the next few decades.
4 But it is not only the convenience of adequacy, affordability and flexibility that has contributed to the growth of the captive insurance industry. Even in periods of soft cycles when the commercial industry had the capacity to provide such insurance coverage, we saw continued growth in captive insurance. Indeed, a captive report issued by Marsh earlier this year showed that the steady and positive growth in captives has continued regardless of market conditions.
5 So what are the other positive growth drivers? Some of the other advantages will include a more holistic approach to risk management such as cost efficiency, better cash flow management, and higher level of management focus on risk and recovery systems. Some have also argued that captives, because of corporate parentage, are better insulated from volatile market conditions. I am sure many of the expert speakers in this conference will be able to articulate these benefits in greater depth.
6 With this backdrop, it is perhaps not surprising that global captive formation has seen steady growth going back over the past 30 years. According to the Marsh’s report that I alluded to earlier, there are currently approximately 2,750 captives that are owned by publicly identifiable companies, compared to about 2000 in 2005. And their experience has shown that captives can be long-term strategic tools that provide value to their parents, regardless of the short-term pricing swings of the insurance cycle.
7 Globally, there is also increased emphasis on Enterprise Risk Management (“ERM”) – that is - managing all the risks of a corporation through a strategic decision-setting process and identifying potential events that may affect the entire entity. As corporations continue to expand their businesses in new markets, both via organic or acquisition routes, risks have commensurately become more complex. No longer is the main focus just on hazard risk, credit risk or foreign exchange risk; now risk management has to recognize risks in other forms, such as relating to human capital, reputation, business continuity, supply chain management and so on. The increased emphasis on corporate governance means that enterprise risks are increasingly recognised and have to be managed. Therefore, the aggregate cost of financing the corporate group risks can be optimally lowered with the ability to complement the benefits of traditional and captive insurance.
8 The name “captives” connote a unique, subservient relationship. As captives generally do not insure the risks of unrelated parties, they are therefore in most jurisdictions, subjected to less stringent regulatory requirements as compared with commercial insurers. However, over time, some captives have started to move into the “capturing” space to insure risks that are not directly related to their parent or group companies. To address concerns amongst insurance regulators of potential regulatory arbitrage, the International Association of Insurance Supervisors (“IAIS”) is therefore developing a guidance paper on the regulation of captives, with particular emphasis on the need to ensure that captives are subject to the appropriate regulatory framework depending on the nature of the risks that they insure.
9 Allow me now to make a couple of observations on the industry developments in the region. The Asian growth story is a familiar one following the Asian financial crisis, led by emerging economic giants of China and India. Along with Asia’s economic growth, Asian corporates will advance and emerge as a new wave regional or global MNCs. As business lines become more regional or even global, and hence more complex, a comprehensive approach towards risk management will be necessary.
10 The level of risk management sophistication is still at a relatively nascent stage of development. In this regard, the growth of captives will likely see further growth impetus in Asia as a growing risk culture take root. In the 2007 Aon G500 Report, top Asian companies only have a 27% take-up rate of captives compared to 77% in the US and 95% in the UK. 64% of the top 500 companies in the world have their own captives. The report thus highlighted the huge potential that exists for the Asian markets, taking into consideration global expansion of the Asian G500 members. In China, none of its 20 G500 companies have a captive and of the 70 Japanese G500 companies, only 23 have a captive. This suggests much scope for development of the captive industry in this time zone as the captive concept gain traction as a useful risk management structure.
11 Hence as Asia is poised to embrace more sophisticated risk management solutions, captive insurance will have a role to play. The choice of an Asian captive domicile will be guided by a centre that has good regional connectivity, efficient business infrastructure, stable political regime and an efficient tax and pro-business environment; and importantly, a respected regulatory and legal system. These are of course the very attributes that have led to Singapore’s growth as one of the largest captive domicile in Asia. Let me share some observations about Singapore as a risk management and captive insurance centre.
12 Firstly, in our regulatory function, we constantly work with industry participants to foster risk awareness, a strong risk management culture and sound practices. We have issued risk management guidelines to highlight the key pillars of best practice. We have placed additional emphasis on financial institutions’ BCP Plans and in fact, a broad segment of the financial industry will be carrying out an Industry-Wide Exercise on Business Continuity next month. These efforts are complemented by private sector initiatives as well. For instance, a Risk Management Institute (“RMI”) has been set up under the National University of Singapore. The RMI Institute will generate and disseminate leading edge knowledge on risk management through financial research, executive education and certification programmes.
13 Secondly, we have an established insurance industry and a critical mass of service providers offering extensive risk-related services to corporates seeking ways to manage and transfer risks. We expect to see the ecosystem of service providers grow to cater to the potential demand in Asia for more sophisticated risk management practices, apart from traditional insurance and reinsurance, including in insurance securitization.
14 While there are currently few insurance-linked securitization deals transacted in Asia, I think the trend for future growth will be there, riding on Asian corporations and insurers’ increasing sophistication in their management of risk and capital. In this regard, the MAS has released a Consultation Paper on Proposed Regulatory Framework Governing Special Purpose Reinsurance Vehicles or SPRVs, in May this year.
15 With a critical mass of captive insurance companies and major reinsurance players and captive managers in Singapore, the captive industry has seen healthy growth. In 2007, the captive insurers recorded gross premiums of close to S$750mil, which makes up a significant 22% of Singapore’s offshore insurance fund business. It is noteworthy as well, that a more diversified set of corporations across different industries, have set up captives here, demonstrating the versatility of the captive facility in Singapore to cover a wide range of risks.
16 To conclude, Asia continues to present an exciting time for many industries and businesses. In particular, the Asian corporations will ride on the wave of growth and rising prosperity in the region and with that, require more comprehensive risk management solutions. Captive insurance will be an increasing feature of that new landscape ahead.
17 Thank you.