Published Date: 09 November 2009

Keynote Address by Ms Teo Swee Lian, Deputy Managing Director, Monetary Authority of Singapore, at The 10th Singapore International Reinsurance Conference

1   Good morning, ladies and gentlemen.

2   It gives me great pleasure to address you this morning at the 10th Singapore International Reinsurance Conference.  I would like to thank the organiser, the Singapore Reinsurance Association (“SRA”), the co-organisers, the Reinsurance Brokers' Association (Singapore), the Singapore College of Insurance, as well as Asia Insurance Review (“AIR”), for putting together this conference.  Practitioners and stakeholders will have an excellent opportunity to discuss the challenges facing reinsurance markets in today’s volatile economic environment. 

3   Let me also take this opportunity to congratulate the SRA on its 30th Anniversary this year.  SRA is an important partner to MAS both in growing the reinsurance industry and also in helping to strengthen professional standards in the industry.

4   In my remarks today, I will touch briefly on the impact of the financial crisis on the reinsurance industry, and offer my observations about the state of insurance in Asia and how reinsurers could play a much larger role.  I will also say a few words about changes to the international regulatory architecture and end with a reminder to continue to work together to build capabilities in writing insurance risk.

Emerging from the Financial Crisis

5   Since the last SIRC in 2007, the global economic and financial landscape has undergone dramatic changes.  The financial crisis exacted a heavy toll on global economic conditions.  This prompted a raft of some conventional and many less conventional policy actions by governments and central banks around the world.

6   These unprecedented measures have helped to stabilise financial markets and stimulated economic activity.  Indeed, the turnaround has been sharper and faster than expected.  In recent months, US equity markets have rebounded by more than 50%, after hitting 12-year lows in March this year.  The U.S. economy is out of recession and growth has returned to many countries in Europe as well. Asia, which was overall less badly hit than the west by this crisis, has also seen a significant rebound in exports and a boost in industrial production from inventory restocking.

7   While the indicators suggest that the worst may be over for the global economy, there are risks that should not be underestimated.  You know what they say about central bankers: they will look for a cloud in every silver lining.  So what are these risks? These include the continued weak labour markets in US and Europe, heavily-burdened fiscal positions in some countries, and overall a reduced ability for further decisive intervention by global financial authorities if needed.  We thus need to be vigilant and continue to monitor the situation closely.

8   What about the reinsurance industry?  How has it fared in the aftermath of the financial crisis, and what is the outlook going forward? 

9   Compared to other areas of the financial sector, the reinsurance industry has been fairly resilient in the financial crisis, though it was not totally unscathed.  The earlier part of the crisis eroded capital cushions at reinsurers and drove supply out of the industry.  In recent months, however, the easing of financial stability concerns has reversed that trend and solvency positions have rebounded sharply.  The top 40 reinsurers saw shareholder funds fall by about USD 49 billion between 2007 and 2008, but by the end of June 2009, this deficit had reduced by nearly half.

Asia and Reinsurance – Low Penetration in Insurance Coverage

10   With the effects from the financial crisis slowly abating, what are the opportunities available in the changed financial and economic landscape?

11   Much of the developed world is continuing to struggle from the effects of the economic shock and policyholders in these countries are expected to continue to exert pressure to contain insurance costs.  A recent report  noted that “several (US) states vulnerable to hurricanes, earthquakes and other disasters were opting to let their state disaster funds go without reinsurance, in most cases because these state governments are also grappling with budget deficits amid the economic downturn and are seeking to cut costs.”

12   Non-renewal or a reduction in catastrophe insurance coverage in developed markets would free up capacity for reinsurers to look for new business areas or less served regions to insure.  Where better to look, than at the immense potential that is in Asia?  Research by Swiss Re has shown that Asia’s share of the total market for insurance premiums is only about 22%, compared to 34% and 41% for the Americas and Europe, respectively.  In terms of premiums per capita, insurance premiums in Asia is only about USD 235 per capita, which lags significantly behind America and Europe at more than USD 1,500 and USD 2,000 per capita, respectively.

13   According to Swiss Re’s Sigma report published earlier this year, the number of catastrophes has risen in the last three decades.  Despite rising loss potential from natural disasters in Asia, excluding Japan and Australia, the places most at risk from natural catastrophes have extremely low insurance penetration compared to other parts of the world.  For 2008, of the 20 worst catastrophes in terms of number of victims, 16 occurred in Asia.  Out of these 16, only three had some insurance coverage. 

14   With rapid economic development in Asia, the number of people living in cities is projected to grow exponentially.  The United Nations had estimated that more than half of all Asians will be living in cities by 2030.  Would the current pace of infrastructural expansion be sufficient, or would these cities be more vulnerable to natural and other man-made disasters?  According to figures from the Centre for Research on the Epidemiology of Disasters (“CRED”)’s Annual Disaster Statistical Review 2008, Asia continued to be the most affected continent from natural disasters, with an average of about 40% of all reported natural disasters globally, and more than 80% of all reported victims, between 2000 and 2008.  As Asian countries develop, more investments in disaster risk reduction measures would be necessary so as to protect development gains.

15   The massive earthquake in China’s Sichuan province on May 12 last year killed approximately 88,000 people, and was responsible for nearly USD 85 billion of economic losses.  However, it was estimated that the insured life and non-life losses amounted to a modest USD 750 million.

16   The Sichuan earthquake was not the only large catastrophe to hit Asia last year.  There were nearly 130 catastrophe events in Asia in 2008, ranging from natural disasters like floods and typhoons to man-made ones like fires and explosions.  However, the insurance industry was largely unaffected.  According to recent data from Munich Re, natural catastrophes in 2008 triggered estimated global losses of some USD 200 billion, and Asia’s share was more than half at USD 118 billion.  In terms of insurance coverage, the amount that was covered was USD 45 billion, and Asia’s share was approximately USD 2.25 billion or only 5%.

17   The catastrophes in 2008 were unfortunately followed by more devastating typhoons and floods across many countries in Asia and another massive earthquake, this time in Indonesia. 

18   Whilst large domestic or multinational companies often buy earthquake coverage for high-value commercial property, such insurance is rarely purchased by small and medium-sized enterprises, and is nearly non-existent for residential property.  In most of Asia's developing countries, it will take years or even decades for the insured markets to grow sufficiently and absorb a meaningful portion of catastrophe losses.

19   There are many challenges to Asia being better insured for catastrophes.  First is a lack of awareness among the general population about its benefits even though this risk awareness is growing, particularly after the 2004 tsunami and the 2008 Sichuan earthquake.  Another problem is affordability.  Besides this, there is a shortage of good historical loss data for the region, and also a need for better risk mitigation, such as the building of coastal defences in flood-prone areas.

20   These challenges actually represent good opportunities for innovation, where reinsurers can use market-based solutions to develop affordable insurance coverage for the masses.  Some examples of such interesting solutions include micro-insurance for emerging market economies and the setting up of catastrophe pools.  Micro-insurance, or insurance for small values typically less than USD100, do not use an adjuster, and this helps make such insurance widely affordable.  There are also efforts by public sector agencies to fill gaps, particularly in the area of insurance against natural catastrophe risks.  Besides setting up an insurance pool for earthquakes to share risk between private insurance companies and the government, there has even been the successful issuance of state-backed catastrophe bonds in Asia.

21   In the area of research and collection of historical loss data, Australia’s Insurance Council has also recently coordinated the development of a National Flood Information Database.  This would enable insurers to assess, select and price residential flood risk, which was previously excluded from insurance due to difficulties in assessing the exposure.

22   In Singapore I am happy to note that there are efforts by local research institutes to collect data and study catastrophes.  These include the Centre for Hazards Research, and the Earth Observatory, which were set up in the last two years.  Nanyang Technological University (“NTU”) is also looking to launch major research projects relating to catastrophe risk management.  The insurance industry should consider forging partnerships with these institutes and leverage on their efforts to increase their understanding of the catastrophe risks in the region. 

A More Balanced Portfolio by Including Asia

23   Despite the uncertainties from the financial crisis, the long term potential for Asia continues to be positive as the fundamentals for Asia remain sound.  Asia’s economic growth prospects and rising affluence over the medium and long term will result in increasing demand for insurance, particularly for asset protection and insurance coverage across a wide range of personal and commercial lines.  Despite the current environment, economic growth is projected to top 10% annually, with insurance growth happening at an even faster pace.

24   What does this mean for international reinsurers?  Besides the obvious enhancement in revenues, another attraction is Asia’s potential to be a key element in diversifying and balancing a portfolio of insurance risk which currently typically comprises predominantly risks from America or Europe. 

25   According to Aon Benfield’s 2008 Annual Global Climate and Catastrophe Report, China would likely overtake the US and Europe to become the country with the most insurance cover for natural catastrophes.  This means that insurers would have an opportunity to diversify their catastrophe risk by adding Asian perils to their portfolios.   When the coverage for natural catastrophes in China and India become more proportionate to their share of the global economic losses from such catastrophes, US and Europe will benefit from lower relative catastrophe insurance and reinsurance costs.

26   Even as we see immense opportunities in Asia for the reinsurance industry to play a greater role, we want to encourage reinsurers to continue to set high standards for themselves and invest adequately in risk management.  A recent report by Ernst & Young highlighted that an enterprise-wide approach to risk management is important for future success.  Insurers with the right asset protection mechanisms in place emerged the strongest in the downturn.  While we encourage reinsurers to look for more opportunities in Asia and hence continue to diversify globally, we should, of course, acknowledge that the cross-border nature of financial institutions has become a topic of hot debate in this financial crisis.  Let me turn now to some developments in the international regulatory space on this subject.

International Regulatory Responses to Improve the Regulatory Architecture

27   The International Association of Insurance Supervisors (“IAIS”) has embarked on several initiatives to improve insurance regulators’ supervisory tools and practices, drawing from lessons learnt from the financial crisis.  One key focus of this work is the move towards an improved standard of supervisory practice that will facilitate effective supervision of cross-border activities and greater supervisory cooperation.  These are particularly important for the supervision of reinsurers given that reinsurance business is largely conducted on a global basis.
28   The IAIS has set up the Insurance Groups and Cross Sectoral Issues Subcommittee (“IGSC”) whose responsibility is to develop standards on Group-wide Supervision.  These standards will apply to groups whose main activity is insurance.  The standards will be complemented with guidance to assist supervisors in identifying the linkages and inter relationships between the various components of a group. 

29   The IGSC was also tasked in June of this year to develop papers on cross border supervision and crisis management of troubled internationally active insurance entities.  This work will draw from the Financial Stability Forum (“FSF”) Principles on cross border cooperation on crisis management and will be suitably adapted for the insurance sector.  The IAIS has also issued a guidance paper on the use of supervisory colleges in group-wide supervision last month.  All of these demonstrate IAIS’ adaptability to the evolving financial environment and its commitment to ensure that supervisory tools for insurance supervisors are continuously updated.

30   MAS is an active member of the IAIS and its various sub-committees.  We support the work of the IAIS in enhancing the standards for group-wide supervision of insurance groups.  We have also participated in supervisory colleges hosted by supervisors of international insurance groups in our support of greater supervisory cooperation amongst insurance regulators.

Building up Capabilities in Insurance Risk

31   While the opportunities in Asia are immense, both the economic and regulatory environments are also evolving.  Reinsurers would need to assess their competitive advantages, ensure that they put in place a credible risk management framework, and execute a well-developed business strategy.  They should also not ignore the need to attract, retain and deepen their talent pool, so that they can stay competitive. 

32   Allow me to share with you two industry-level initiatives in Singapore to develop the local talent pool.  You may already be aware of the General Insurance Association’s Global Internship Programme (“GIP”) which was launched in 2008 to offer 200 top undergraduates and selected postgraduates internships within the insurance and reinsurance industry over five years.  This initiative is now in its second year, and has garnered very positive responses from both host companies and the participating interns.

33   Another talent development initiative, the Insurance Executive Scholarship Program (“IESP”), was launched earlier this year.  Led by the Singapore College of Insurance, the IESP is an initiative to recruit and develop manpower at the graduate level through a 3-year structured career and development programme.  This is a part-time work-study programme that allows fresh graduates to attain their ACII  qualification by the end of the first year, whilst at the same time working at their sponsoring institutions from the insurance or reinsurance industry.

34   On MAS’ part, we are also firmly committed to developing and growing the insurance sector talent pool.  We have introduced a Financial Training Scheme (“FTS”) which provides financial support to bear the costs of locally-based as well as overseas executive programmes and attachments in specialised areas.  We have also launched a Finance Scholarship Programme (“FSP”) that will co-fund masters programmes in disciplines such as actuarial science and risk management.  I strongly encourage industry professionals and industry associations to tap into these schemes, to enhance the capabilities of your own staff.  You should take the lead in developing the talent pool, by raising awareness amongst the young and bright, and attract some of them into the interesting and challenging insurance industry.


35   In conclusion, while the reinsurance industry has been relatively unaffected by the financial turmoil, opportunities to grow in more traditional markets have become more constrained.  Given Asia’s low penetration in insurance coverage, there will be many more business opportunities here, both to develop innovative solutions that would help emerging countries reduce the financial impact of unexpected events, as well as to offer diversification benefits to insurers and reinsurers.  You should seize the initiative to assess how they can participate in Asia’s growth, while making sure that risks are properly identified, assessed and managed.

36   MAS will continue to work with industry to facilitate a conducive operating environment.  We will also continue to participate actively and support the work of the international standard setting bodies in developing supervisory tools that will enhance the effectiveness of supervision of insurance groups, both domestically as well as internationally.

37   On this note, I wish you all a successful conference, and to our overseas speakers and delegates, a pleasant and fruitful stay in Singapore.  Thank you.