Published Date: 12 March 2008

Speech by Mr Low Kwok Mun, Executive Director (Insurance Supervision Department), Monetary Authority of Singapore, 7th LIA Annual Luncheon, Grand Plaza Park Hotel, Grand Ballroom Level 2, 12 March 2008. 12.30pm

Good afternoon, ladies and gentlemen.

2   I would like to thank the LIA for inviting me to join you in your annual luncheon today.  I am glad to have the opportunity to speak to you on issues which I believe are important for the further development of the life insurance industry in Singapore. 


3   Let me begin by congratulating all of you for the excellent performance in the past year.  As announced by LIA last month, new business weighted premiums for 2007 amounted to S$1.7 bn, the highest in the last five years.  Total assets managed by the life insurance industry totaled almost S$108 bn as at September 2007, a significant 22% increase compared with the previous year.

4   Singapore’s life insurance industry has grown in complexity over the years.  Insurers are moving up the value chain to offer new products to meet the needs of the more affluent and sophisticated consumers.  Products such as universal life policies and variable annuities have been introduced to complement the suite of life insurance products already available. 

Protection Gap in Singapore

5.  Life insurance density in Singapore, measured in terms of premiums per capita, has never been higher.  According to the Sigma reports published by Swiss Re on world insurance premiums, insurance density in Singapore increased from US$1300 in 2003 to US$1617 in 2006.  This puts Singapore in the same league as advanced economies like US, Canada, Taiwan and South Korea.  It is clear that Singaporeans are spending more on life insurance, spurred on by the strong economy and asset markets in the past few years.

6   However, does this paint the correct picture of the sufficiency of life insurance coverage among Singaporeans?  According to a NTU study commissioned by LIA in mid-2006, the average Singaporean working adult is under-insured by nearly 75%.  This means that should the average adult pass away prematurely, the payout from his insurance policies will only cover 25% of what the surviving members of his family require for their expenses and living needs.  In dollar terms, the study estimated that an average adult aged 40 requires S$480,000 in insurance coverage, but the current protection level of all his insurance policies is only S$118,000.   This contrasts starkly with the high insurance density noted earlier. 

7   LIA also commissioned Saffron Hill Research to conduct a survey of Singapore consumers.  The survey found that 3 in 10 persons do not have any insurance policy.  Among those who have purchased some form of insurance policy, only 46% think that they are sufficiently covered and about a quarter do not even know how much they are covered for.

8   The results of both these studies should not surprise us since investment-linked and participating products, which are usually offered with relatively low protection coverage, jointly account for over three-quarters of new single and annual premium businesses.

Role of Insurance Companies

9   I am glad that LIA had taken the initiative to commission both these studies.  But what do we do with the findings?  The studies highlight a worrying gap in the amount of insurance protection among Singaporeans which must be addressed.  In my view, there are three important changes that would need to occur if this protection gap is to be narrowed.  Allow me to elaborate on each of them and the role that the insurance industry and the LIA can play.

Mindset change among consumers

10   First and foremost, we should provide consumers with accurate financial advice.  One common reason for the low protection coverage among many consumers is the misguided impression that it costs too much to purchase adequate protection. Many prefer to purchase products that provide a return for the money they have invested. In addition, many consumers are often confused about investment-linked products or participating products. They mistakenly believe that by purchasing these products, they are adequately protected even though such products have relatively low protection coverage.   In addition, some naively think that their surviving family members will be able to adjust their lifestyles in the event of their premature demise. 

11   Consumer education is therefore critical.  LIA, working with MoneySense, should step up its public education efforts.  However, this should not be done only at the broad community wide level, but more importantly at the individual consumer level at the point of sale.  In particular, when marketing insurance products to their customers, life insurance agents should provide professional financial advice that is in the best interest of the consumer.  This is particularly important because the consumer would naturally be attracted to products that provide a return on his investment rather than one that is seen to be purely a cost.  The consumer should be adequately equipped to make informed choices which truly meet his needs.

12   For example, a 35 year old working adult who is married with two young children should be presented with the option of purchasing a pure protection product that will cover all of his family’s living expenses for the next 20 to 25 years should he pass away prematurely.  However, it would not be surprising if this 35 year old is not aware that with a premium of only about S$100 per month for the next 25 years, he can purchase a protection plan that provides coverage of about S$500,000.  Instead, he would most likely be presented with the choice of a participating policy that provides coverage of less than S$50,000 with the same amount of premium, or an investment-linked policy illustrating a return that is better than fixed deposit rates.  This is because it is probably easier for the insurance adviser to close the deal given the consumer’s preference for savings products.  This consumer would be better advised to consider taking care of his protection needs first. He should only consider investment products if he has additional funds.
Reviewing the right incentive structure and business strategy

13   This brings me to the second important and related change that we must seek to bring about.  It is a well known fact that insurance is sold not bought.   Therefore, which insurance product a consumer purchases is largely determined by what product is being pushed to him by the insurance adviser.  In turn, the product which the insurance adviser would be more keen to push would naturally be determined by the amount of sales and thus the total commissions that he could hope to receive.

14   So, coupled with the consumers’ preference for savings-type products, the incentive structures designed by insurance companies for insurance advisers could further skew consumers’ choices towards savings-type products rather than protection plans. Life insurance companies should review their incentive structures to ensure that they do not inadvertently skew their insurance advisers’ preference towards selling savings products over protection products.  

15   Perhaps it is also opportune for insurance companies to re-think their business strategy.  Many insurers were caught out by a period of poor investment returns as a result of the slump in stock markets following the Asian financial crisis.  The current volatility in asset markets also suggests that the good performances of the past cannot be taken for granted.  It may therefore be worthwhile for insurance companies to reconsider whether to continue to focus on the investment management field or to leverage on their comparative advantage in managing insurance risks.   According to the NTU study, the amount of under-insurance among working adults in Singapore is estimated at S$578 bn.  This translates into significant business opportunities for insurance companies if this protection gap is to be met.  I am also given to understand that selling protection products is no less profitable to insurance companies than investment products.

Enhancing transparency in product disclosures

16   The final change that I think would go a long way in addressing the protection gap is improving transparency in product disclosures.  The way in which many insurance products are currently designed and marketed does not provide the consumer with any idea of the proportion of premiums paid that is used to purchase protection coverage.  Hence, he would not be in a position to decide whether he would want to increase his protection coverage given the amount of premiums he is prepared to pay. Policyholders may be lulled into a false sense of complacency that they have adequately covered their protection needs just because they have purchased an insurance product.  

17   Product disclosures should therefore be enhanced in order to distinguish clearly between the insurance and investment components and their respective costs. I understand that in markets such as the United Kingdom, there has been a massive growth in the sales of term insurance products, indicating consumer preference to distinguish between protection and investment products. 

18   MAS will continue to promote greater transparency in product disclosures in our insurance industry.  The participating fund review, which we undertook jointly with the LIA, is a good example.  There is much more we can do and we will continue to work with the industry on other initiatives, including the possibility of making product brochures and insurance contracts simpler for the layman. We can also improve the clarity of disclosure of the risks and benefits in brochures and product summaries.


19   To conclude, I would like to thank the LIA for working in close partnership with MAS to enhance the professional standards in Singapore’s insurance industry.  But there is much more we need to do if the industry is to continue playing its important role in ensuring that the insurance needs of Singaporeans are well taken care of.  It is a social responsibility that only the insurance industry can satisfactorily meet.  And there are clearly positive gains that the industry can achieve if it plays this role well.

20   Thank you for your attention and I wish you another successful year ahead.