Address by Mr Ng Nam Sin, Assistant Managing Director, Monetary Authority of Singapore, at 1st Asia Insurance Broker Summit on 25 Feb 2013
Ladies and Gentlemen,
1 A very good morning. It is my pleasure to join you today at the inaugural Asian Insurance Broker Summit. I would also like to take this opportunity to congratulate the Singapore Insurance Brokers’ Association (SIBA) on their 40th Anniversary, and I wish them many more good years to come.
The Evolving Asian Insurance and Risk Landscape
2 Since the Global Financial Crisis, the global insurance landscape has evolved significantly. There are three broad observations. (a) While many would argue that the traditional insurance activities did not contribute to systemic risks, regulators around the world are pushing ahead with regulatory reforms such as a movement towards a risk-based capital regime and Solvency II. (b) Secondly, the record natural catastrophes in 2011, which caught the insurance industry by surprise and inflicted the highest economic losses (US$370bn) and second largest insured losses (US$116bn) in history. (c) Thirdly, the low-interest rate environment which had impacted the asset side of insurers’ balance-sheet. As a result, underwriting profitability will continue to be eroded not only by the low interest-rate, but also from the persistent soft insurance rates and rising claims arising from catastrophe losses in 2011.
Opportunities in Asia
3 While Asia is not immune to the global economic slowdown, it is expected to continue to outperform advanced markets. According to a Swiss Re report, emerging Asia’s premium growth is expected to grow strongly at 8.3%1 per annum over the next decade, compared to only 2.6% in industrialized economies.
4 Insurance demand in Asia is expected to benefit from strong exposure growth, underpinned by three positive factors of: (i) a growing Asia; (ii) an under-insured Asia; and (iii) growing risk awareness and sophistication.
5 Specifically, life insurance is expected to grow 8.5%2 per annum (compared to 3.9% global average), driven by rising income and wealth, and aging demographics. This in turn increases the demand for savings products, longevity insurance, long-term care, mortality and disability protection products.
6 Non-life insurance is expected to grow 8.3% per annum (compared to 3.4% global average), driven by the growth of the middle class, urbanisation, increased industrialisation and trade flows, and investments in infrastructure projects. This has created a stronger demand in specialty insurance such as construction and engineering, trade credit, political risk, marine, and aviation.
7 Sustained growth in the primary insurance markets will support reinsurance growth in the region. This is driven by increasing demand for reinsurance to mitigate large and complex risks such as natural catastrophe risks, and the increasing need by insurers to seek capital relief from tightening solvency requirements using reinsurance as a risk transfer mechanism.
8 Despite rapid growth, Asia remains underinsured. Insurance penetration rates in developing Asian countries range from about 1-3%3, lagging behind the global average of 6.6%. According to a Marsh report4, corporations in Asia do not buy sufficient insurance cover due to a lack of risk awareness.
Role of Brokers
9 What do all these developments mean for insurance brokers? It is important to note that the role of brokers had also evolved over time to adapt to their clients’ needs:
Brokers as intermediaries
10 Traditionally, brokers are intermediaries who match the needs of their clients with suppliers of insurance and reinsurance. They do this by undertaking a holistic assessment of their clients’ risk and insurance needs, recommending the most appropriate insurance policy, and sourcing for the most suitable policies amongst the pool of insurers or reinsurers in the market.
Brokers as high-value service providers
11 In this new environment, intensifying competition and growing risk complexities have exerted pressures on brokers to provide a greater range of innovative and sophisticated advisory services. Today, brokers play a leading role to provide a wide range of risk management services. This includes dynamic financial analysis, risk management and actuarial consultancy, portfolio and financial modelling and catastrophe modelling.
Broking Industry Moving Forward
12 In Singapore, brokers remain the primary distribution channel in the insurance and reinsurance markets. In 2011, insurance intermediaries (such as brokers and agencies) accounted for 80% of the total gross written premiums in the non-life market5. Over the years, the insurance and reinsurance broker community here has also grown significantly. Today, we have close to 70 brokers, including 9 of the 10 global brokers which have significant operations here. The brokers have not only played a key role in supporting the insurance purchase programmes of Asian corporates and insurers, but also raised overall risk management standards. Many of them are also adding a specialist focus, and building up their research and analytical capabilities to support a growing and more sophisticated clientele.
13 Looking ahead, brokers are set to play a greater role in risk mitigation strategies. Allow me to highlight four observations:
14 First, managing larger and more complex risks. Some brokers have started to diversify into more innovative and sophisticated risk advisory services. To manage more complex and larger risk exposures and liabilities, such as longevity risks and natural catastrophe risks, traditional insurance solutions need to be complemented by innovative ways of hedging or alternative risk transfer to the capital markets.
15 We note that some first movers have expanded into capital management and capital market solutions, in the form of insurance securitisation, and merger and acquisition advice. By developing a risk and capital market structure early, these brokers would be in a good position to serve not just the insurance industry, but also corporates and governments.
16 Second, using technology to create new risk solutions. Brokers are leveraging more on data and analytics to enhance risk assessment and modeling. We have seen growing interest by clients to analyse real-time placement trades with a view to make more strategic and informed decisions about the best insurance policy, and also interest from insurers who wants to leverage on brokers’ risk assessment and modeling expertise to enhance the underwriting capabilities. It is therefore critical for brokers to acquire and deepen the exposure data pool, and invest in new analytics technologies.
17 To deepen the data pool, the more developed insurance markets in the developed economies in the West have well established data collection platforms such as the US Insurance Statistical Office and US Federal Emergency Management Agency which collects flood data. The Climate Corporation provides crop insurance by leveraging on Amazon’s cloud computing platform to analyze 10 trillion weather simulation data points. Comparatively, there is relatively less data on Asian risks where insurance is more nascent. In Singapore, we have started to augment the data pool through the establishment of insurance risk research institutes such as the Institute of Catastrophe Risk Management (ICRM), and Asia Risk Centre (ARC), which will collect exposure data for key Asian perils such as floods and earthquakes, and undertake research studies on the impact and modeling of catastrophic risks.
18 Third, creating awareness. One reason for the low penetration rates in Asia is a lack of risk awareness. In particular, it was observed that businesses sometimes choose to under-insure or not insure, based on the perceived cost of the premium without full consideration of the cover provided, or decide that they have the balance sheet strength to retain these risks. Often, businesses do not realize the magnitude of risk they are keeping on their books by opting not to fully insure their assets.
19 However, the recent spate of natural catastrophes in the region has keenly highlighted the importance of risk mitigation through insurance6. Mindsets have begun to shift following these events. As a result, some countries have established national catastrophe pools to enhance their financial resilience to disaster risks. In addition to such national efforts, the insurance community has also been working to increase risk awareness, through client education initiatives and partnering governments and businesses to design viable risk mitigating solutions.
20 Fourth, investing in talent. According to the 2011 Lloyd’s Risk Index, talent and skills shortages is one of the top three risks facing the insurance industry globally7. As brokers are in the business of providing deep expertise in risk modeling and risk management, it is critical for the industry to upskill their technical capabilities.
21 It is important for all stakeholders involved to start addressing this issue sooner, as it takes a long time to train individuals up to a sufficient level of competency. Based on industry feedback, it takes around 3 years to train an entry-level insurance professional, 7 years for specialization and 9 years for leadership8.
22 To support the manpower needs of Singapore’s insurance industry, the Government and industry have taken steps to build a robust talent development infrastructure. At the pre-employment stage, the local Universities have actuarial science and risk management programmes to prepare undergraduates for entry into the insurance industry. To profile insurance as a career of choice for young talents, the broking industry has participated in a number of industry-wide initiatives such as the General Insurance Association’s Global Internship Programme and the Singapore College of Insurance’s Insurance Executive Scholarship Programme. To raise the level of competencies within the industry, the Institute of Banking and Finance (IBF) had established the Financial Industry Competency Standards (FICS) framework across major industry segments including the general and life insurance sectors. This serves as a structured competency framework for specific job roles such as underwriting and claims management, and complements the wide range of training programmes and professional qualifications in the market.
23 Singapore has established itself as a leading re/insurance hub in Asia-Pacific. Its diversity can be seen from the presence of many of the world’s top names in insurance/re-insurance, insurance broking, captive management, risk advisory and analytics. Apart from traditional property and casualty coverage, there are also increasingly more insurers offering specialized lines such as trade credit and political risk insurance, aviation, marine, energy, terrorism and professional indemnity. More than half of the insurance business is derived offshore, reflecting Singapore’s position as a regional insurance hub.
24 The broking industry will have to adjust to changes in the new global landscape. Singapore, as major insurance hub in Asia, will similarly have to keep pace with these changes and at the same time create a conducive and competitive environment for the insurance industry to grow. It can thus serve as a good base for brokers and insurance players to formulate relevant business models and strategies to serve markets in the region.
25 On this note, I wish you a most productive and fruitful discussion at this conference. Thank you.
1 Swiss Re Sigma No 5/2011
2 Swiss Re Sigma No 5/2011
3 Swiss Re Sigma 03/2012, World Insurance in 2011
4 “Closing the Gap: Underinsurance in Asia’s Industrial Sector”, Marsh, April 2012
5 Insurance Intelligence Centre Database, Timetric
6 Insured losses for the two major catastrophes in Asia in 2011 – the Tohoku earthquake/tsunami and the Thai floods – were a fraction of economic loss; just 17% in Japan and about 50% in Thailand.
7 Lloyd’s Risk Index 2011, with Economist Intelligence Unit, Jan 2012
8 Singapore College of Insurance