Keynote Address by Mr Ong Chong Tee, Deputy Managing Director, Monetary Authority of Singapore,At the 11th Singapore International Reinsurance Conference, Marina Bay Sands
Distinguished speakers, guests, ladies and gentlemen,
1. It gives me great pleasure to join you here at the 11th Singapore International Reinsurance Conference (“SIRC”). The SIRC has provided a useful biennial forum for international insurers, reinsurers and brokers to come together in an environment of frank exchanges and mutual learning. I am sure this year’s event will continue to foster interaction and sharing amongst all in the insurance and reinsurance fraternity.
2. In 2007, I had the privilege of speaking at this same conference. Back then, with the backdrop of a US sub-prime crisis, the conference theme was “Reinsurance: A Whole New World”. It was probably more than just fortuitous then, but in the four years since, many will probably feel that the global economic and financial order has entered a “whole new world”, or some may even say it is a “new abnormal”.
3. The theme for this year’s conference is “Asia’s Growth – Are we capitalizing on it?”
4. Much has been written about the uncertain global macroeconomic outlook in the foreseeable future. But yet, as this conference theme suggests, many remain excited by the prospects in Asia, and for good reason. Some have tagged this century as the Asian Century. The region’s long-term growth trajectory is expected to stay intact, driven by an increase in intra-regional trade, deeper cross-border production networks, large stock of savings, and a growing educated middle class spurring a continued brisk pace of urbanisation and consumption. There are good reasons to feel upbeat about Asia's prospects.
5. Some statistical projections will illustrate this positive outlook. The UN expects Asia’s population to grow by 5%, or 200 million more people, over the next 5 years, compared to 1.6% in the more developed parts of the world. The ADB estimates that about 1 billion people will be added to the 2.7 billion Asian middle class by 2030.1 The number of high net worth individuals2 in Asia has already exceeded that of Europe for the first time. Asia is urbanizing at a rapid pace, driving the need for infrastructure development. The UN expects six of the world’s ten most populous cities in 2015 to be in Asia, and a recent study by the ADB estimates that the total investment needs for national infrastructure development in Asia will require about US$8 trillion in infrastructure investments from 2010 to 2020. It is a rosy picture for Asian development, and Asia is expected to account for more than half of the world GDP by 2050, compared to just over a quarter currently.
6. It has been said that central bankers are the guys who take away the punch bowl just when the party gets started. So it will be amiss of me if I do not caution that the optimistic projections for Asia's growth does not mean growth paths are linear upward slopes all the time. Indeed, growth can be derailed by a myriad of risk factors, such as political upheavals, environmental issues and asset inflation or bubbles. Key factors include whether Asian savings and investments are deployed efficiently, and where capital is priced appropriately to risk. It is also important to recognize that while Asia’s growth is less synchronised to the developed economies than before, the region’s economies will not be insulated from protracted economic woes in the developed countries. The developed economies remain important end markets for finished products from Asia.
7. As Asian economies chart their course forward, the insurance and reinsurance sector will play important roles.
8. One role relates to the growing need for insurance in managing regional risks that accompany Asian growth. For example, insurance can support production of basics such as agricultural goods. Food security concerns have followed each time the agriculture industry strains to cope with demand in face of weather shocks. In 2010, adverse weather conditions in the form of drought and flood caused global grain production to decrease by an estimated 1.2%, instead of the needed 2.5% increase. This is of particular concern for Asia, which represents 66% of the global agricultural GDP.3 Insurance and reinsurance can be helpful tools to protect farm income and sustain production. A number of Asian governments already have in place public agriculture insurance schemes. Private sector capacity can complement these public sector efforts.
9. The second role is for insurance is to be the catalyst or enabler to support economic and social developments. Take the case of infrastructure funding. This requires significant investment, usually of a long term nature. The risk can be considerable without some form of government guarantee or insurance. Where long-term projects seek funding from the capital markets, insurance can offer investors’ protection on various fronts, ranging from natural disasters to political risks.
10. Trade is another area where insurance can be a key enabler. I don't need to tell you the numbers relating to the rapid growth of intra-regional trade here in Asia. But not surprisingly, following the financial crisis in 2008/09, the International Credit Insurance & Surety Association observed “a significant increase in demand for trade credit insurance cover” post-crisis4 in a press report last year.
11. Rising affluence and aging demographics in some parts of Asia will also mean a growing need for life and health insurance products.
12. At the same time, authorities in South East Asia are also working together to improve market access. For example, ASEAN has committed to building the ASEAN Economic Community (“AEC”), a single market and production base by 2015. This will allow a smoother flow of goods, services, investments and capital across the ASEAN region. In financial services, members are working to progressively liberalize the insurance, banking and capital markets sectors through eleven packages of commitments under the ASEAN Framework Agreement on Services (“AFAS”). This will grant financial institutions in ASEAN better access to all regional markets and facilitate regional expansion.
13. Even as insurers and reinsurers seek to meet Asia’s protection and risk management needs, regulators and industry players will need to work together to understand and address more complex risks in an uncertain global economic environment.
14. Let me highlight a couple of areas.
15. The first area is the nature of Asian risks. I believe that more can be done to deepen our collective understanding of Asian risks so that we can quantify and price these correctly. For instance, there is possibly scope to build or strengthen catastrophe models for different types of natural disasters in the region. But this goes beyond catastrophe risks. A deeper understanding can extend to areas such as pandemic risks, mortality trends and so on. Even local business risks need to be better understood in the context of shifts in cross-border operations and changing patterns of the production chain. The rapid growth of Asia means that old assumptions of risks cannot simply be extrapolated from historical experiences. Insurers, reinsurers and brokers will have to keep up with the challenges of advising, managing and underwriting larger and more complex risks that cut across Asian geographies.
16. A second area where regulators and industry can develop deeper discussions and understanding is the one pertaining to insurance pricing and portfolio health of insurance assets.
17. There are some views that excess capacity and competition have continued to keep insurance rates low in many jurisdictions around the world. Some feel that this portends future challenges for the insurance sector as underwriting discipline and standards come under pressure. This is especially so at a time where incidences of costly natural disasters are high, compounded by volatility in financial markets that may impact the investment portfolios of insurers.
18. The prevailing low interest rate environment is likely to be a concern to many insurers, particularly life insurers if they have considerable guaranteed return products pegged at a higher rate. This might increase the temptation to look for yields in riskier or lower quality assets. Extended periods of low interest rates can also have an impact on insurers’ capital positions as the valuation of liabilities increase. Therefore, having a good asset liability management framework is important for insurers to mitigate the impact of interest rates on its asset and liabilities. Very often however, insurers find it difficult to adequately match their long term liabilities with assets of sufficient duration.
19. Let me now share on several areas that MAS is doing or looking into doing, given our roles of a financial regulator, central bank and as a market developer.
20. First, is in the area of the pool of long-term Singapore Dollar assets.
21. To date, the longest dated Singapore Government Securities (SGS) is of 20-year tenor. The availability of longer-dated bonds in the local market has been limited because of the infrequent long-dated corporate issuances and the illiquidity of these issues. To augment the pool of long duration Singapore Dollar assets, MAS will introduce a new 30-year benchmark in 2012. We hope that this will go some way to address insurers’ need for longer maturity SGS and also as a reference price benchmark for longer dated corporate issuances.
22. Another area is that of strengthening our regulatory regime.
23. You are all familiar with Solvency II in Europe. Many other jurisdictions are also currently reviewing their requirements with the intent to move to risk-based or risk-sensitive solvency regimes in line with IAIS standards. This will complement more risk-focused supervisory practices. In Singapore, we had introduced a risk based regulatory and supervisory regime in 2005. Given the market and regulatory developments over the last few years and the lessons from the global financial crisis, we will also embark on a review to enhance our framework, to take into account international standards and appropriate best practices.
24. I had earlier alluded to the need for the insurance industry to maintain strong balance sheets. Reinsurance can play an important role in the providing the capital support as well as to facilitate the diversification of risks, including large-scale disaster risks. Establishing good and effective reinsurance programmes with well-rated reinsurance counterparties must therefore be an important risk management and capital management strategy for many insurers.
25. Attaining contract certainty between the insurer and reinsurer secures the effectiveness of a reinsurance programme. Contract certainty ensures the finalisation of terms and conditions of the policy prior to inception of risk, and therefore serves to minimise ambiguity and disputes over claim and coverage. Currently, the insurance and broking industry in Singapore are working to enhance contract certainty practices in Singapore. Representatives from General Insurance Association (GIA), Singapore Reinsurers' Association (SRA), Reinsurance Brokers' Association of Singapore (RBAS), Lloyd’s, and Insurance Law Association of Singapore (ILAS) have formed a multi-sector workgroup to come up with guidelines and best practices to advance reinsurance contract certainty. MAS supports this initiative and will work with the industry to implement the new standards.
26. A third area that MAS will strengthen relates to our understanding of financial stability issues for the insurance industry. Some of you will know that globally, financial regulators are increasingly looking into the potential ramifications or spillovers that large risk events may have on their domestic insurance industry. This is in line with one of the IAIS core principles for regulators to identify, monitor and analyze market and financial developments as well as other environmental factors that may impact insurers and insurance markets.
27. The financial stability issues, to my mind, stem from two directions. One is how any financial or risk event from outside the insurance industry may negatively impact the insurance or reinsurance industries; the other is of course the potential contagion effects that may emanate from within the insurance sector which could negatively impact other parts of the financial sector or even the broader economy.
28. As part of this work, MAS has carried out a pilot study to examine Singapore insurers’ linkages with banks and other financial intermediaries, as well as to other economic agents. This work will shape our macroprudential surveillance framework for the insurance sector. But the work clearly has a cross-border element in terms of fully comprehending the network of linkages, including the reinsurance channel. This effort will be an important work-in-progress for regulators where international and regional collaboration will be important.
29. Finally, on industry development, allow me to say something on insurance research and talent development, an area where MAS is very focused on.
30. I have mentioned the need for the industry to consider how to collect reliable and quality Asia-specific data so as to develop robust pricing and risk models that are appropriate to this region. On this note, I am pleased that in Singapore, the Nanyang Technological University (“NTU”) has launched the Institute of Catastrophe Risk Management (“ICRM”) to study catastrophe risks in Asia. I am told that NTU has also collaborated with SCOR Re to set up the Insurance Risk and Finance Research Centre, which will focus on insurance research and dialogue for the Asia Pacific region. I welcome additional initiatives by other industry players or associations to deepen their research and analytics capabilities, and possibly collaborating with the academic institutions in Singapore.
31. A quality talent pool is critical to sustain long-term growth of any industry. MAS is committed to the area of talent development and we have worked alongside industry associations and indeed, specific firms in various manpower development programmes. Some notable schemes will be the Global Internship Programme (“GIP”) led by the General Insurance Association’s (“GIA”) and the Insurance Executive Scholarship Programme (“IESP”) led by the Singapore College of Insurance (“SCI”). The Financial Sector Development Fund (“FSDF”) also provides grants to support other education and training programmes for industry practitioners who seek to improve competencies of their people.
32. In conclusion, let me come back to the conference theme of capitalizing on Asia’s growth. There is no doubt that Asia is in an exciting phase of development with a promise of rising prosperity for its people; but it is not without challenges. The insurance and reinsurance industries will be an important component of that Asian development story. My colleagues and I will continue to engage many of you actively as you plan your strategies and manage your risks ahead.
33. Thank you all for your attention. I am sure that over the course of this conference, there will be a wealth of knowledge and insights to be shared, not least by the speaker after me. In the spirit of keeping an open and curious mind, I will end my remarks with the words of Steve Jobs, “Stay hungry, stay foolish”.
34. I wish you all a fruitful and successful conference. Thank you.