Address by Mr Lee Boon Ngiap, Assistant Managing Director (Banking & Insurance), Monetary Authority of Singapore, at the 10th LIA Annual Luncheon on 2 March 2011
LIA President, Mr Tan Hak Leh
Ladies and Gentlemen,
1 Good afternoon. Thank you for inviting me to your Annual General Meeting Luncheon. May I congratulate Mr Tan Hak Leh on his election as the President of LIA, and Mr Neal Armstrong and Mr Simon Newman on being elected Deputy Presidents. I would also like to thank them for agreeing to take up the challenge of leading the industry over the next year.
2 The Singapore economy rebounded strongly last year with a record GDP growth of 14.5%. In line with this recovery, the life insurance industry turned in a strong performance. Total weighted new business premium grew 16% to $1.6bn, while total assets under management increased 10% to $120bn. The worst of the global financial crisis appears to be over and the life insurance industry looks poised for further growth this year.
3 But the financial landscape post-crisis appears no less challenging. While Asia is leading the global economic rebound, the advanced economies still face headwinds in their recovery. The US economy remains fragile despite two rounds of quantitative easing measures. There are still concerns over European sovereign debt problems. Economists are now warning of rising inflation in Asia. The recent spike in oil prices arising from developments in some MENA countries (Middle East and North Africa) adds to the uncertain environment.
4 While Singapore’s financial sector, including our insurers, has done well to emerge relatively unscathed from the global financial crisis, we should not become too comfortable and let our guard down. We need to remain vigilant in a post-crisis landscape which, while looking much more promising compared to 15 months ago, is still full of uncertainties. Indeed, amongst the international regulatory community, it is often said that the financial system is most vulnerable when it seems to be at its strongest. That is usually when financial institutions have a tendency to pursue overly aggressive growth plans, often without ensuring that governance and risk management practices keep pace. The crisis has showed that the failure to exercise effective governance and risk management during good times had damaging consequences for many institutions.
5 It has been said that we should not waste a crisis. Following the Asian financial crisis, many Asian countries made significant structural changes which enabled them to weather the recent crisis relatively well. In the same vein, there are many lessons that we can draw from the recent financial crisis to strengthen the resilience of our financial system and financial institutions. For the insurance industry, allow me to share two broad regulatory initiatives that we are focusing on - these are in the areas of enhancing corporate governance and raising market conduct standards.
Enhancing Corporate Governance
6 You will all be aware that MAS issued a set of enhanced corporate governance regulations and guidelines in December last year. The revised rules underscore the important role played by the Board and senior management in overseeing the soundness of their institutions. It places increased emphasis on the quality and effectiveness of the Board of directors in exercising risk management oversight of their institutions.
7 But having enhanced rules, by itself, can only go so far in encouraging good corporate governance in organisations. What matters most is for institutions to internalize the values, spirit and purpose behind the rules in the ethos and practices of the organisation. The Board and senior management must set the right tone from the top in this respect.
8 Let me cite an example where there is room for the Board and senior management of insurers to play a greater leadership role in setting the right tone for their organizations.
9 Stress testing for life insurers was first introduced in Singapore in 2005. Since then, MAS has undertaken a series of refinements to the stress testing parameters. Last year, we included a stress-to-failure exercise where life insurers were required to reverse-engineer a scenario that would likely result in their wind-up. This stress-to-failure scenario requires insurers to consider their business model and operating environment, and to identify the plausible and significant risks that they could be exposed to.
10 However, stress testing at some insurers was performed mainly as an isolated exercise by the risk function, with little interaction with business areas. At some institutions, the stress tests appeared to be performed merely as a number crunching exercise in response to regulatory requirements. They did not foster debate nor challenge prior assumptions such as the cost, risk and speed with which new capital resources could be raised, or which positions could be hedged or sold.
11 MAS expects stress testing to form an integral part of the overall governance and risk management culture of insurers. Stress testing should be actionable, with results from stress testing analyses impacting decision-making at the appropriate management level, including the strategic business decisions of the Board and senior management. In the post-crisis landscape where increased volatility in financial markets looks set to stay, stress testing can be a powerful tool to help institutions focus on where the largest vulnerabilities of the firm lie. I urge the Board and senior management of insurers to step up their involvement in this area, as it critical to ensure that there is sufficient attention paid to measures that can be taken to mitigate or protect their firm from these risks.
12 Let me now turn to some of the recent regulatory developments on market conduct.
Representative Notification Framework
13 First, the Representative Notification Framework (RNF). Representatives constitute a vital artery of the financial advisory industry as they serve as the bridge between life insurers and customers. As such, only fit and proper individuals should be permitted to provide customers with financial advice.
14 To facilitate this, MAS launched the RNF in November 2010. Under the framework, customers can now verify on the public Register of Representatives, whether a person is authorised to provide financial advice, using the representative’s number. This helps to reduce the risk of the public dealing with unauthorised individuals. As it is necessary for customers to know the representative’s number before they can conduct checks on the public register, several insurers are in the process of incorporating the representative’s number in the business cards of representatives and other sales documents. However, this practice is still not prevalent in the industry and I would like to encourage all insurers to do this. As part of promoting financial literacy under the MoneySENSE programme, consumers are advised to ask for the representative’s number so that they can check that the representatives that they deal with are properly authorised.
15 Insurers, on their part, must ensure that they recruit and retain only fit and proper individuals by performing rigorous and independent checks. We issued a circular last month to provide the industry with guidance on what these checks should entail. We also reminded the Board and senior management that they have the responsibility to put in place clearly defined policies and procedures to ensure that all representatives are fit and proper.
16 Information on a person’s track record with previous employers is key to assessing whether the individual is fit and proper. However, we have received feedback that some financial institutions do not respond to reference check requests from other financial institutions. To ensure that only fit and proper persons are allowed to operate in the insurance industry, I urge all insurers to extend their full cooperation in providing meaningful and prompt responses to reference check requests.
Fair Dealing Outcomes
17 Next, I would like to touch on our follow-up work to the Fair Dealing Guidelines issued by MAS in April 2009. Last December, we issued a letter to the industry to share our key observations from a survey we conducted on selected financial institutions to gauge their progress in implementing the Fair Dealing Guidelines. I am glad to note that most financial institutions have taken positive steps to embed fair dealing into their business practices and to create greater awareness of the Fair Dealing Guidelines amongst their staff. However, the survey also revealed the need for greater involvement and leadership by the Board and senior management in devising a fair dealing strategy and embedding good market conduct practices as the way to do business.
18 We would like to see more financial institutions incorporating key performance indicators for achieving fair dealing outcomes in the remuneration of both their representatives as well as their senior executives. This is an important way to align the financial institutions’ interest with that of their customers and incentivize the sales staff and senior executives to deliver fair dealing outcomes to customers.
19 Market conduct remains a key supervisory focus for MAS, and we will continue to engage financial institutions, including insurers, to assess their progress in embedding fair dealing in their day-to-day dealings with customers.
Product Highlights Sheet
20 With improved market sentiments, consumers’ demand for investment-linked products has also recovered. In 2010, new business premiums for single premium investment-linked policies grew by 39% while that for regular premium investment-linked policies increased by 22%. To allow consumers to be better informed of the risks and costs of investing in different investment-linked sub-funds, insurers will be required to include a product highlights sheet for each sub-fund at the point of sale, similar to the requirements for unit trusts. Insurers will also be required to conduct an assessment of their customers' investment knowledge and experience. Of course, this does not negate the need for consumer education and we look forward to continuing our collaboration with LIA on this.
21 Let me now conclude. The insurance industry has weathered the financial crisis well and looks set to continue its good performance this year. But the environment is still highly uncertain and there are many challenges ahead of us. We must remain vigilant and work together to meet these challenges in order to raise the standards of governance, risk management and market conduct in the industry. We will continue to work closely with LIA and individual institutions to achieve this.
22 On that note, I wish you a successful year ahead. Thank you.