Insurance (Amendment) Bill 2011Second Reading Speech by Mr Lim Hng Kiang, Minister for Trade & Industry and Deputy Chairman, Monetary Authority of Singapore
1 Mr Speaker Sir, on behalf of the Senior Minister, I beg to move that the Bill be now read a second time.
2 The House has just debated on the Deposit Insurance and Policy Owners’ Protection Schemes Bill (“DI-PPF Bill”), which will, among other things, strengthen protection to policy owners in the event of a failure of an insurer. In conjunction with the DI-PPF Bill, the Insurance (Amendment) Bill 2011 will amend the Insurance Act (Cap 142) to enhance MAS’ powers in relation to the resolution of a failing insurer. This will reinforce protection to policy owners.
3 While MAS seeks to promote and preserve stability in the financial system through high standards of licensing, regulation and supervision, it does not aim to prevent the failures of all financial institutions. Such a "zero-failure" regime is neither feasible nor desirable as it leads to considerable moral hazard and places an excessive regulatory burden on our financial institutions. When dealing with an insurer in distress, a private sector resolution option is often preferred by regulators. In the event that this is not possible, what is of utmost importance is the ability of the regulator to be able to take action quickly to protect the interests of the policy owners.
4 The Bill will align the resolution powers in the Insurance Act (“IA”) with that in the Banking Act (“BA”), providing MAS with a broader range of resolution options in dealing with a failing insurer. The Bill will also strengthen MAS’ ability to make arrangements so far as reasonably practicable for securing continuity in insurance coverage when an insurer fails.
5 In addition, the Bill will amend the priority ranking of liabilities where an insurer becomes insolvent or is unable to meet its obligations, and remove the requirement for insurers to maintain a statutory deposit with MAS.
6 In preparing this Bill, MAS has consulted the industry and the public on the policy positions as well as on the draft Bill. The feedback received was carefully considered and has been incorporated into the Bill where practicable and consonant with its regulatory objectives.
7 Mr Speaker Sir, I will now touch on the key features of the framework for the resolution of an insurer.
INSURANCE RESOLUTION FRAMEWORK
Powers for insurance resolution – pre-liquidation
8 In the event that an insurer gets into financial difficulties, the existing IA allows MAS to direct the insurer to stop issuing or renewing policies to protect existing policy owners from any further deterioration of the insurer’s financial strength. To achieve the objective of securing continuity in insurance coverage where reasonably practicable, MAS or the insurer may search for potential buyers for the business.
9 In order to facilitate the transfer of policies from a failing insurer, MAS will have the power to direct such a transfer and at the same time, a moratorium will be imposed automatically on any applications to wind up the insurer or commence legal proceedings against the insurer. This will widen the options available to MAS in seeking to secure continuity in insurance coverage for policy owners of a failing insurer. Continuity in coverage is especially important in respect of life policies as they tend to be long-term. An early termination could cause substantial loss due to surrender penalties or the inability of the life assured to take up new insurance cover because of advanced age or deteriorating health.
10 In the case where an insurer is voluntarily transferring its assets and liabilities, such a scheme will have to be approved by MAS before submission to the High Court for confirmation. This provides MAS the opportunity to check that proper due diligence has been exercised when determining the appropriate amount of assets to be transferred.
11 To facilitate the smooth transfer of assets and prevent such transfers from being subsequently unwound, any claw-back mechanism available in the Companies Act (“CA”) will not apply to transfers of assets that have been directed or approved by MAS.
12 The Bill also empowers MAS, with the approval of the Minister-in-charge of MAS, to make a determination on the transfer of share ownership of a Singapore incorporated insurer. This could be either through a compulsory restructuring of the share capital or a sale of existing shares to other investors. Before these powers can be exercised, MAS has to consider the interests of policy owners of both the transferor and transferee. The affected parties will be given a right to be heard prior to the Minister's approval of such a transfer, except where it is not practicable or desirable to do so.
Powers for insurance resolution – post-liquidation
13 Where an insurer has gone into liquidation, no person may be appointed as liquidator of an insurer registered under the IA without MAS’ approval. To secure the continuity of insurance coverage, a liquidator of a failed insurer must either seek to sell or transfer the portfolios of the insurer or continue the business of the insurer until the portfolios are transferred.
Amendment to the Priority Ranking of Liabilities
14 To be equitable to all insurers that have contributed to the Policy Owners’ Protection (“PPF”) Scheme, the priority of claims following the insolvency of an insurer will be conferred first to outstanding levies due from the failed insurer to the PPF Scheme. This is followed by payment or funding, as the case may be, that comes from the PPF Scheme for the policy liabilities of the failed insurer that are covered by the Scheme. This priority ranking also serves to strengthen the on-going viability of the PPF Scheme. Priority will next be accorded to policy liabilities not covered by the PPF Scheme. Of the policy liabilities not covered by the PPF Scheme, policy liabilities in respect of direct policies will be granted priority over policy liabilities in respect of reinsurance policies.
REMOVAL OF STATUTORY DEPOSIT REQUIREMENT
15 The requirement for registered insurers to maintain a statutory deposit of S$500,000 with MAS will be removed. The statutory deposit, first established when the IA was enacted in 1963, was intended to provide some security for policy owners if an insurer were to be wound up, and to defray potential costs incurred in winding up an insurer’s business. This statutory deposit acted as a capital buffer, which is no longer relevant with the introduction of the Risk-Based Capital Framework for insurers in 2005. With the enhancements to the PPF Scheme, there is also no longer a need for a statutory deposit as a means of providing security for policy owners.
16 Mr Speaker Sir, the framework for the resolution of insurers contained in this Bill will enable MAS to act swiftly when dealing with a failing or failed insurer, so as to protect policy owners and maintain stability in the financial system. It will also enable the continuity of insurance coverage as far as reasonably practicable for policy owners.
17 Mr Speaker Sir, I beg to move.