Address by Mr Lee Boon Ngiap, Assistant Managing Director,Monetary Authority of Singapore,at the General Insurance Association of SingaporeAnnual General Meeting Luncheon,27 March 2012, Intercontinental Hotel, Singapore
GIA President, Mr Derek Teo
Ladies and Gentlemen,
1 Thank you for inviting me to your Annual General Meeting Luncheon. May I congratulate Mr Derek Teo on your re-election as President of GIA, as well as the other newly-elected management committee members. I would also like to thank them for agreeing to take up the challenge of leading the industry over the next year.
2 This afternoon, I will start off by recapping some of the major achievements of GIA, before outlining some of the immediate challenges facing the general insurance industry.
3 Under the leadership of its management committee, GIA has accomplished much in the past few years.
4 I would like to commend GIA for its pro-active approach in strengthening the self-regulatory framework for general insurance agents. GIA’s Agents’ Registration Board has put in much efforts to improve the standards of general insurance agents through initiatives such as the Trade Specific Agent Schemes. An industry working group formed by the GIA is now finalising a Telemarketing Code of Practice for general insurers. These initiatives will continue to raise the competency and professional standards of the general insurance industry, and provide consumers with better quality advice and higher service standards. These augur well for the development of the industry.
5 Over the past year, GIA has been active in educating consumers on general insurance products. One example is the travel insurance seminar jointly organized by GIA with the National Association of Travel Agents Singapore and the Consumers Association of Singapore. The seminar provided a useful platform for the industry to share insights and knowledge on how consumers can purchase the right type of travel insurance for their needs. GIA was also involved in the revamp of the Moneysense website, and had made contributions to the publications on the website. I am glad to note that GIA will continue such efforts to educate consumers on the specific risks and considerations when buying general insurance products.
6 GIA has also made active contributions to an industry-led working group that is looking to enhance reinsurance contract certainty practices in Singapore. Together with the Singapore Reinsurance Association, Reinsurance Brokers Association, Lloyd’s and Insurance Law Association of Singapore, the working group is finalising guidelines and best practices to secure contract certainty. The guidelines will highlight the need for reinsurers and brokers to provide cedants with their signed copy of the contract. It will also require both parties to ensure that there is no ambiguity in the terms and conditions of the contract prior to risk inception. This will minimise potential disputes over claims and coverage. MAS views this as a very important initiative and will work with the industry on a smooth implementation of these new guidelines and best practices.
7 On the talent development front, GIA, with the Regional Development Committee, have contributed significantly through its Global Internship Program (GIP). According to Lloyd’s Risk Index 2011, “talent and skills shortage” was identified as one of the top three risks facing the insurance industry in the Asia Pacific region. GIA’s efforts in helping to build the talent pipeline is crucial. I would like to encourage GIA to continue to explore talent initiatives to support the industry’s needs in more specialised risk areas as well as actuarial and leadership development. MAS will continue to work with GIA to explore the possibility of expanding the depth and breadth of the GIP to better cater to the growing needs of the industry.
8 GIA should be proud of these achievements, which has contributed much to the development of the general insurance industry in Singapore. There is much more work in the years ahead as the industry faces important challenges in a riskier and more difficult market. Allow me to share my thoughts on two of these immediate challenges.
9 First, let me congratulate the industry for reporting underwriting profits in all lines of domestic business last year. In particular, the motor business registered its first underwriting profit in six years. The last time the industry managed to turn a profit in the highly competitive motor business was in 2004 and 2005, after more than a decade of losses. But stiff competition set in immediately and many insurers started compromising on underwriting and pricing discipline in pursuit of market share. Problems with fraudulent and inflated claims also started to plague the motor insurance business. This resulted in the industry reporting record underwriting losses of $168 million in 2008, with losses in each subsequent year until last year.
10 GIA, through its introduction of the Motor Claims Framework in 2008, and active participation in the Motor Insurance Task Force, has contributed to measures to minimise fraudulent and inflated claims. These efforts are commendable and MAS is committed to working together with GIA and other relevant stakeholders to combat this problem. But such measures alone will not sustain the profitability of the motor business if insurers do not exercise underwriting and pricing discipline.
11 While competitive premium rates may benefit consumers, they are not sustainable if they are achieved without regard to sound underwriting and pricing. Eventually, insurers will suffer losses which become too great to bear and some will exit the business, leaving consumers with fewer choices. Those that remain will be forced to raise premium rates sharply, and complaints from unhappy motorists can be expected to follow. Ultimately, this is detrimental to consumers and the insurance industry. We have seen this episode played out before in the domestic motor insurance market. The challenge for the industry therefore is to take heed of the lessons learnt and maintain your underwriting and pricing discipline this time round. It is in the interest of both consumers and insurers that all of you only pursue business strategies that are sustainable and not sacrifice prudence for potential short-term gains.
12 The second challenge for the industry that I would like to touch on is the need to keep pace with global regulatory reforms. Much has been said and written about the weaknesses in regulations and business practices that caused the global financial crisis. The insurance business model enabled the majority of insurers to withstand the financial crisis better than other financial institutions. Nevertheless, there are corporate governance, capital adequacy and risk management lessons from the crisis that are applicable to the insurance industry. Let me share the regulatory initiatives in these areas that MAS is focusing on this year.
13 First, one lesson from the crisis is that good corporate governance matters. The failure by Boards to exercise effective risk management oversight had damaging consequences for many institutions. To raise the corporate governance standards of the insurance industry, MAS recently issued a consultation paper proposing to extend the Insurance Corporate Governance Regulations to all locally-incorporated insurers. We intend to make it mandatory for all locally-incorporated general insurers to meet minimum corporate governance requirements, which will be calibrated to take into account the significance of an insurer’s operations. Insurers’ compliance with the Corporate Governance Regulations will be assessed as part of MAS’ ongoing supervisory programme.
14 Second, MAS will shortly issue a consultation paper to propose enhancements to our capital framework for insurance companies. Singapore was among the first in Asia to introduce a risk-based capital (RBC) framework for insurance companies back in 2005. Our proposed enhancement aims to improve the comprehensiveness of risk-coverage and the risk-sensitivity of the framework, while ensuring that the proposals are practical and takes into account market realities. Unlike in banking, there is no common global capital standard for insurance companies. So a review of our RBC framework is a major undertaking requiring both a fundamental analysis of the appropriateness of our existing framework as well as a comparative study of the insurance capital frameworks in other jurisdictions. I look forward to receiving feedback from GIA and its members when our consultation paper is issued.
15 Third, MAS’ efforts to improve risk management standards in the industry will continue apace. MAS issued a set of guidelines on risk management practices for insurance companies in 2007. The guidelines spell out sound risk management practices for each core activity such as product development, pricing and underwriting. MAS will add to these guidelines with additional rules on enterprise risk management (ERM). The ERM standards will go beyond addressing risks in each core activity to also cover MAS’ expectations on how insurers identify and manage interdependencies between key risks, and how this is translated into strategic management actions and capital planning.
16 In conclusion, let me once again thank GIA for its good work in raising the standards of general insurance agents, educating and empowering consumers, assisting MAS in our regulatory work, and developing talent for the industry. But there is no room for complacency. The insurance environment has become more volatile in recent years, and consumers are increasingly more sophisticated and demanding. So the industry must enhance its ability to operate in a riskier environment, and service standards must continue to improve. MAS will continue to work closely with GIA to promote a sound and dynamic general insurance industry in Singapore. We have enjoyed a very good working relationship over the years and we look forward to continuing this partnership in the years ahead.
17 Thank you.