Published Date: 24 March 2010

Address by Mr Low Kwok Mun, Executive Director (Insurance Supervision), Monetary Authority of Singapore at the 10th CEO Insurance Summit in Asia, 24 March 2010, The Regent Singapore

Distinguished Guests,
Ladies and Gentlemen,

Good morning. I am pleased to join you for this Insurance CEO Summit.  The theme for the Summit, “Doing business in a post-crisis world” is most appropriate as we emerge from the most severe financial crisis since the Great Depression.

Systemic importance

2   One of the clear reactions to the crisis has been the move by governments around the world to strengthen the financial system.  Much of the discussion has focussed on financial institutions that are considered systemically important.  The Financial Stability Board, or FSB, has specified three criteria for identifying systemically important financial institutions, namely size, substitutability and interconnectedness.  There are proposals for systemically important financial institutions to be subject to more stringent regulation and supervision, including the possibility of being required to maintain higher capital requirements.

3   This has generated much debate in identifying the systemically important financial institutions.  There is also much discussion amongst the insurance industry and regulators on whether insurance companies are systemically important.  The Geneva Association recently released a report analysing whether the insurance industry is of systemic importance.  The report identified the key activities insurance companies engage in, which include traditional insurance risk origination, managing investments, risk transfer and treasury functions, and selling credit protection.  Using the FSB criteria, the report concluded that core insurance and reinsurance activities do not pose a systemic risk to financial stability.  While this may be true for insurance companies that engage only in what I would call traditional insurance activities, I believe there are some additional considerations that require further evaluation.

Insurers’ importance to the economy

4   Perhaps it would be useful to consider the role played by insurance companies from three perspectives.  Firstly, insurers provide necessary insurance coverage for the conduct of economic activities.  Insurance companies assume the financial risks that individuals and corporations are not willing or able to bear alone.  Most economic agents rely on insurance to protect themselves against the various risks they face in their business activities.  Without insurance, these economic agents will most probably not be prepared to undertake their respective economic activities.

5   We are all too aware of examples where the absence of insurance cover caused certain critical economic activities to be suspended, resulting in the need for government intervention.  In the recent financial crisis, we witnessed the reduction of trade credit insurance as insurance companies turned cautious with the heightened default risk of many counterparties.  To avoid the collapse of trading activities which are critical to the functioning of the economy, governments stepped in to offer guarantees to their trading enterprises. 

6   Besides trade credit insurance, there were also instances in the past where construction activities were suspended and doctors stopped performing surgeries when insurance cover was no longer available following the collapse of a significant insurer.  There are also other examples where governments have intervened to ensure adequate insurance coverage for earthquake, windstorm and terrorism risks.  Therefore, while the failure of a significant insurance company resulting in the withdrawal of critical insurance cover will not necessarily pose a danger to the financial system as a whole, it could have significant impact on the smooth functioning of the economy. 

7   Secondly, insurance companies are significant investors in the capital markets.  Insurers receive premiums in advance of paying claims, and these are invested in productive assets, largely equities and bonds.  For example, in 2009, the UK insurance industry’s total investment assets amounted to £1.5 trillion, equivalent to 21% of the UK’s net worth.  In 2008, the members of the Association of British Insurers controlled 13.5% of the London stock market, compared with 13.0% by company pension funds, 3.5% by banks, 2.0% by unit trusts, and 10.0% by other financial institutions.  Any large withdrawal of investments by insurance companies due to concerns over their own financial positions could trigger a substantial fall in asset prices, resulting in write-downs of asset values by other financial institutions, including banks.  Even if it is not the trigger, it could well reinforce a downward spiral of asset prices in the capital markets.  This could potentially lead to financial instability if the financial health of banks is significantly compromised. 

8   Finally, as we are well aware, insurance companies do not engage only in traditional insurance or investment activities.  As noted in the Geneva Association’s report, insurance companies do engage in non-insurance activities, mostly through related companies.  These could either be regulated or unregulated activities.  Notable examples would include commercial and investment banking, credit extension either directly or in the form of derivatives, and other commercial activities such as property development and manufacturing.  Sometimes, such activities can be even more significant than their insurance operations.  Some of these activities have a material impact on the financial system and the real economy.  This was evident in the recent financial crisis where insurance companies writing large amounts of credit default swaps or mortgage insurance had contributed in one way or another to the build up of the credit bubble.  In this regard, you may be aware that the International Association of Insurance Supervisors has been working on strengthening the supervisory standards for group-wide supervision.  One of these initiatives is the development of supervisory guidance on the treatment of unregulated entities in group-wide supervision.

9   While it would be simplistic to conclude from these examples that the insurance industry is of systemic importance, it is clear that the insurance industry plays a significant role in the well-functioning of the financial system and the economy.  Therefore, regulators need to heed the lessons from the financial crisis by considering ways to strengthen the insurance industry.  Nevertheless, I would agree with calls from the industry that regulators should not over-react and apply the same broad brush of measures to both banks and insurance companies.  On the other hand, where the measures are equally useful for both banks and insurance companies, we should not disregard them in the belief that insurance companies were not responsible for the financial crisis.

MAS’ responses

10   In Singapore, we believe that our regulations have been adequately calibrated to the risks posed by the insurance industry to the well-functioning of our financial system and economy.  Insurance companies in Singapore have largely weathered the crisis well.  However, there are always lessons to be learnt from each crisis.  We are reviewing our risk-based capital requirements to assess if some adjustments may be necessary.  We have also fine-tuned the stress testing requirements for life insurers, and have introduced new stress test requirements for general insurers.  Nevertheless, the industry itself has a role to play in ensuring that prudent risk management policies and practices are in place.  It should not just rely on regulators to develop appropriate rules and regulations to foster a sound and stable financial system.

11   In this regard, MAS has been emphasising the importance of the Boards and senior management of financial institutions assuming primary responsibility for the prudent management of their respective institutions.  We have drawn lessons from the financial crisis and decided to further strengthen the corporate governance framework for financial institutions in Singapore.  Just last week, we issued a consultation paper on proposed enhancements to the corporate governance regulations and guidelines.

12   A key element of good corporate governance is the strength and quality of the Board,  coupled with sufficient independence within the Board to ensure that key decisions are made after due consideration has been given to the interests of all stakeholders, in particular, policyholders and depositors.  The key proposals, therefore, emphasise the need for the Boards of financial institutions to have the necessary skills and expertise to understand and manage the risks that their institutions are taking on.  Financial institutions should regularly review the skills-set of their Boards to ensure that they keep pace with the risk profile of the institution and the challenges from the risk landscape it operates in.  We have also proposed to strengthen the independence requirements of the Boards.  We can only put in place rules and requirements, but they would not be effective if the Boards and senior management do not take it upon themselves to ensure that their institutions are well equipped to manage the emerging risks in an increasingly challenging environment.


13   Much has been said of Asia being the engine of growth for the world economy in the next few decades.  While there is no doubt that Asia would grow from strength to strength in the coming years, there will still be risks and pitfalls along the way.  Financial institutions need to be mindful of the need to ensure that their risk management systems and processes keep pace with the growth of their businesses.  It is often difficult for institutions to resist following the rest of the pack and joining in the dance when the music is still playing.  However, it is incumbent on the Boards and senior management of individual financial institutions to ensure that they have put in place the appropriate risk management and control systems so that they will not be found wanting when the music stops.

14   On that note, I wish you a most fruitful conference with the wealth of knowledge that the many experienced speakers will be sharing with you over the next two days.