Distinguished guests, ladies and gentlemen, good morning. And to the organizers of the 17th EAAC, thank you for the welcome invitation to speak this morning.

1 Over the past 15 years, the world has witnessed several major risk events – the 9/11 terrorist attacks, the global financial crisis, and the natural catastrophes in 2011, to name a few. The far-reaching impacts of these events on the economic, social and business environment spurred government officials, regulators and industry leaders to set new expectations for risk management. For the financial services industry in particular, global regulatory reforms are proceeding on a scale and at a pace that we have never seen before.

2 In this new financial landscape, actuaries are increasingly being called upon by their employers and clients, as well as by financial regulators, to take on greater responsibilities in risk management. This morning, I would like to share my observations on a few key areas where actuaries are increasingly making more significant contributions in their organisations. I will also touch on a couple of areas where the profession will play an important role in global regulatory reforms for the insurance industry.

Evolving Role of Actuaries

3 Let me begin with the evolving role of actuaries in their organisations.

4 In Singapore and many other jurisdictions, actuaries are uniquely recognised in legislation related to insurers. This statutory role comes with prescribed responsibilities – traditionally, this includes the valuation of policy liabilities, ensuring appropriate pricing of products and certifying the adequacy of reserves to meet future claims. But in recent years, in response to regulatory requirements and market developments, the role of the actuary has expanded beyond these traditional roles to encompass a much broader involvement in the overall risk management. Allow me to cite three related examples.

5 First, actuaries are increasingly being looked upon to devise better ways of building stress tests. The depth and duration of the global financial crisis and the impact of recent catastrophic events were far more severe than was indicated by stress testing results of many financial institutions. We need better ways of designing stress tests with multi-factor scenarios that are sufficiently extreme to constitute a tail event. Effective stress tests need to provide forward-looking assessments of risk and overcome limitations of models and historical data. As a result of your training, skills and experience, the actuarial profession is particularly well-placed to contribute in this respect.

6 Second, the spectrum of risks which actuaries focused on has expanded from just insurance risks to cover other risk types such as regulatory, market, credit, operational and strategic risks.

7 The failure of many financial institutions to comprehensively identify and manage risks in their organisations has been well-documented in the aftermath of the financial crisis. In response, many regulators have introduced requirements for insurers to establish a robust Enterprise Risk Management (ERM) framework that addresses all relevant and material risks. The design of an effective ERM framework would benefit from inputs, not just from traditional risk managers, but from other professionals who can bring their unique blend of skills to help their organisations go beyond addressing individual risks to cover the identification and management of complex interdependencies between key risks. In this respect, the actuarial function is playing an increasingly pro-active role, and in some cases, taking the lead, in shaping the ERM framework in their organisations.

8 Third, the actuarial function is increasingly playing a more strategic role within organisations.

9 A desired outcome of ERM is that decisions regarding risk management, strategic planning and capital allocation can be coordinated for maximum financial efficiency, without endangering the capacity of the insurer to meet its commitment to policyholders. As actuarial methods, assumptions and data deployed in the ERM process affect an insurer’s strategic and capital planning, actuarial work is now increasing its influence on the business strategy of their organisations. Surveys have shown that insurers that make progress in key areas of ERM are more likely to see improvements in business performance. This means that the traditional relationship of the actuarial function with insurers’ Board and senior management is also changing. Rather than being viewed as just a “control” function, insurers are realising that good actuarial inputs also contribute to sharpening business strategies.

10 Based on MAS’ own observations in our supervision of the insurance industry in Singapore, the better managed insurers are those that leverage on their actuarial function to go beyond merely ensuring regulatory compliance. Insurers which have not fully tapped this source of expertise in their organisations would do well to do so to improve their resilience and business performance.

Contribution to Prudential Regulation

11 Next, let me touch on two areas where actuaries have much to contribute in global regulatory reforms for the insurance industry. These are in the areas of designing risk-based capital frameworks and macro-prudential regulation.

12 First, the design of risk-based capital frameworks. The International Association of Insurance Supervisors (“IAIS”) announced a week ago its commitment to develop by 2016 and fully implement by 2019 the first ever risk-based global insurance capital standard. We are familiar with the EU Directive on Solvency II. Closer to home, many Asian jurisdictions, including Singapore, are also in the midst of revising their own risk-based capital standards for insurers.

13 The move by the IAIS to commit to a global capital standard for insurers is a timely one. As the IAIS aptly puts it, “the business of insurance is global, and global issues demand global responses”. When fully developed and implemented, it will go a long way towards achieving the IAIS mission of promoting effective and globally consistent supervision of the insurance industry. There will be transitional issues as jurisdictions make changes in their own capital frameworks to comply with the IAIS global standards. But to the extent that the capital frameworks in major insurance jurisdictions are already broadly consistent with the principles on capital adequacy as espoused in the IAIS Insurance Core Principles, the transitional issues should be manageable.

14 Significant efforts and resources will be needed to develop a global insurance capital standard. We need a standard that will safeguard the resilience of insurers to shocks and at the same time, is sensitive to practical business considerations. We should look to avoid the unintended consequences that have plagued some of the proposed global rules in the other sectors. The actuarial community will have a big part to play in devising this global standard. Indeed, in the development of MAS’ own risk-based capital framework for insurers, we benefited significantly from the valuable feedback and suggestions from the Singapore Actuarial Society. In fact, I note that as early as 2004, a working group of the International Actuarial Association (“IAA”) had published a comprehensive paper with proposals to assist in the development of a global framework for insurer solvency assessment.

15 Finally, let me say something about approaches to macro-prudential regulation for the insurance market. It is well accepted that traditional insurance activities did not generate nor amplify systemic risk within the financial system during the global financial crisis. But actuaries I think, would be amongst the first to caution that a benign record in the past is no guarantee that the insurance sector will not be a source of systemic risk in the future. Moreover, we need to bear in mind the huge intervention by the authorities to stem the escalation of systemic risks in the last few years, including massive injections of liquidity by central banks. The resilience of the insurance business model could have been more severely stressed by second order effects in the absence of these large scale policy actions.

16 So like the banking sector, there is a need to develop macro-prudential surveillance techniques and tools relevant for the insurance sector. To this end, the IAIS has developed a framework for macro-prudential policy and surveillance in insurance. The actuarial community has also played its part, with the IAA publishing a paper earlier this year to provide actuaries with the background to address conditions and tools to identify, assess, monitor and mitigate systemic risks in global insurance market operations. The actuarial profession has much to offer as we insurance regulators step up our efforts to enhance macro-prudential approaches for the insurance industry.

Conclusion

17 Let me now briefly conclude. I came across a comment in an actuarial trade publication, a statement which sums it up: “Wherever there is risk, there are opportunities for actuaries.” The risk management deficiencies highlighted by the global financial crisis and recent tail events have raised the bar in all areas of risk management. Actuaries are equipped with specialised skills to help their stakeholders prepare in the present for uncertainties of future contingent events. In the riskier new financial landscape, actuaries have a tremendous opportunity to add value and expand their influence.

18 On that note, I wish you all a rewarding and fruitful conference. Thank you.