'Singapore as a Centre for Insurance Risk Research in Asia Pacific' - Opening Address by Mr Ng Nam Sin at Insurance Risk and Resarch Conference on 25 Jun 2012
1 Good morning. I would like to thank the Insurance Risk and Finance Research Centre (IRFRC) for putting together this conference.
2 I would like to take this opportunity to share a few observations on the prospects of the Asian insurance industry, and, in keeping with the conference theme, the risks confronting the region today.
The Asian risk and insurance landscape
3 Asia offers immense growth opportunities for insurers. Although gross premiums in Asia ex Japan have increased by about 16% per annum from 2005-20101, Asia remains under-insured. According to Swiss Re, the emerging market penetration rate is about 3%, compared to about 9% in advanced economies. With a population that is rapidly growing in both size and affluence, Asia’s insurance needs will continue to increase for the foreseeable future.
4 As insurers prepare to tap on growth opportunities in the region, a keen understanding of risks facing Asia is of utmost importance. Specifically, I would like to highlight three key areas of risk.
5 The very first one is catastrophe risk. 2011 was the costliest year for the insurance industry in terms of catastrophe-related losses, which totalled an estimated US$110bn. The events in 2011 clearly highlighted the vulnerability of Asia to natural catastrophes. Of the string of natural catastrophes that wrecked the world, the three costliest events took place in Asia Pacific – the earthquake and tsunami in Japan, with insured losses estimated at US$35bn2, the floods in Thailand, with insured losses estimated at between US$15-20bn3, and the earthquakes in New Zealand with insured losses estimated at US$14bn4.
6 These recent events have also called in question previously held assumptions on catastrophe risk in Asia. For example, Thailand had previously not been viewed as a catastrophe-risk zone. Therefore, the scale of the floods and the knock-on effects of natural catastrophes on regional and global supply chains came as a big surprise. In 2011, floods in Thailand damaged more than 7000 industrial and manufacturing plants in 40 separate provinces5. This has affected countries with significant manufacturing capabilities in Thailand, most notably Japan. The majority of the insurance losses are therefore expected to come not only from property damage, but also from the business interruption claims arising from the impact to manufacturing and supply chains.
7 The Japanese earthquake and tsunami also disrupted global supply chains, such as in the automotive industry, where there was a global shortage of automotive parts due to the shutdown of Japanese production plants. Yet, some business interruption losses were found not to be covered under traditional business interruption policies as the losses did not arise from direct or physical damage from the company's plants or suppliers. These two examples evidence the need to re-evaluate the way we understand and manage catastrophe risks.
8 At the same time, asset values are increasing due to rapid urbanization and growing economic concentration in the region. According to the UN, Asia will account for 54% of all growth in the world’s urban population over the next four decades, and six of the world’s ten most populous cities in 2015 will be in Asia. There is therefore a need for better understanding of catastrophe risks and how to manage them.
9 The second is longevity risk. People in Asia are living longer. United Nations statistics show that the average life expectancy in Asia Pacific countries has increased by about 14-16 years over the last 3 decades. In more developed Asian economies, the population is also ageing. For example, in Singapore, the elderly currently makes up 10 per cent of the population but the rate of ageing is expected to rise six per cent each year from 2012 to 20206.
10 At the same time, there is a growing retirement security gap. Most state and corporate pension systems in Asia remain insufficiently developed or inadequate. The insurance sector has responded to the demand of individuals by offering innovative retirement products such as variable annuities, asset preservation products, reverse mortgages and inflation-linked bonds. While doing so, there is also a greater need to manage the new risks that they are taking on, which include some harder-to-manage and unpredictable risks such as volatile market risks and longevity risks. In addition, individual awareness and responsibility for retirement security remain low, and not all of these retirement risks can be transferred through the use of financial products.
11 There needs to be better understanding and awareness of the implications of increased longevity. This will equip individuals to better manage their retirement needs. It will also help insurers and governments alike to ensure that their schemes and product offerings are sustainable and adequate to support a longer-living and ageing population.
12 The third is macroeconomic and systemic risk. Companies are facing increased risks in recent years due to increasingly complex business environments and significant regulatory changes. In particular, a PriceWaterhouseCoopers report notes that “large scale expansions into new and unfamiliar markets and products, financial volatility, rapid technological advances, as well as frequent accounting standard changes have created unprecedented emerging risks for many organisations”. Much remains to be done, especially in strengthening risk management. Apart from responding to policy reforms at the macro-level, the 2008 global financial crisis also underscored the need for sound and integrated Enterprise Risk Management. Several institutions that failed were managing risks in ‘silos’, either by organisational structure or by risk types. A failure to take an integrated, enterprise-wide approach to risk exposures has led to excessive risk taking in a number of financial institutions.
13 Hence, a deeper understanding of the full facet of risks faced by Asian companies, and how various risks interact, is needed. This will enable companies to better manage their risks in an integrated manner, and also help insurers to develop more relevant risk management solutions.
The importance of research to the insurance industry
14 Let me move onto the importance of research to the insurance industry. As the Asian risk landscape continues to evolve, the ability of the industry to understand and manage risks needs to keep pace. Quality research will play an important role in enabling this. It will augment the pool of risk data and address gaps in our understanding of risks.
15 Due to the relative nascence of the Asian insurance market, comprehensive risk data on Asian risks is not yet widely available. The region needs to invest in establishing a solid foundation for boosting research capabilities in the region. Asian research institutes will play an important role in bringing together expertise from industry and academia to provide thought leadership on key issues for the region.
Singapore as a centre for insurance risk research in Asia Pacific
16 As a major insurance centre in the region, Singapore has seen forward-thinking industry players and academic institutions step up to strengthen insurance research here. In recent years, insurers have reinforced their in-house research and modelling capabilities, and participated in industry research institutions and partnered with academia to deliver research outcomes.
17 Notably, SCOR’s long-standing support for insurance risk research is evidenced through the establishment of the SCOR Global Risk Centre and centres of expertise in its various global hubs. We are pleased that SCOR has extended its global research efforts to its Singapore hub via the IRFRC. The partnership between SCOR Re and the Nanyang Business School (NBS) to establish the IRFRC is an example of how the industry and academia can work together. The IRFRC’s focus on Asia will help to provide much-needed insight on risk management and insurance issues in the region.
18 Specifically, the IRFRC can play a key role in three areas:
(i) Firstly, it can help to identify data and knowledge gaps, and solve practical problems faced by the industry.
(ii) Secondly, in the process of research, the IRFRC can also create new knowledge, and facilitate innovation in new products and services.
(iii) Lastly, the IRFRC can help to promote dialogue between academia and industry thought leaders on insurance risks.
19 I am pleased to note IRFRC’s accomplishments since its launch in March last year. The IRFRC has not only contributed to insurance publications and organised this inaugural conference, but has also embarked on two projects – the first on longevity risks in Asia Pacific and the second on exposure growth in India and China. We believe that the Centre will produce quality research outcomes as it continues to extend its research and dialogue on risk in Asia Pacific.
20 In conclusion, as insurers position themselves to tap Asian growth, a sound understanding of the evolving risk landscape in the region must be developed. To this end, research has an important role to play in providing thought leadership on Asian risk and risk management. Singapore, as a leading insurance centre, is well-placed to support these efforts.
21 On this note, I would like to congratulate SCOR and NBS on this inaugural conference. I wish all of you a productive and memorable time at this conference.
Footnotes: 1. Source : Swiss Re; 2. Source: Swiss Re; 3. Source: Lloyd’s of London; 4. Source: Swiss Re; 5. Source: Aon Benfield; 6. Source: Channel News Asia