A Safe, Vibrant and Purposeful Life Insurance Industry

Good afternoon, Dr Khoo Kah Siang, President of the Life Insurance Association, distinguished guests, ladies and gentlemen.
Thank you for inviting me to speak at the 2014 LIA Annual Luncheon.
I pondered over what to say in my speech. After all, I have been the Executive Director of Insurance Department in MAS for all of six months, the exact same period of time that I have been involved in insurance supervision at all.
I thought I would start by sharing with you what an ex-colleague said to me when he learnt that I was going to be the new head of Insurance Department. He said, “You will find your job very meaningful. Insurance has a deep impact on society and individuals; it is one area of finance that serves a truly useful purpose.”
It was a rather simple statement. On reflection, it captures what our entire purpose of insurance supervision should be - that insurers, and in the context of today’s speech, life insurers, continue to perform, and perform well, their important role in and for society.

Role of Life Insurance in and for Society

Let me touch on 4 important aspects of life insurance’s role in and for society.

First, it is a social protection mechanism.

Life insurance eases the financial burden caused by sudden misfortune or illness that can sometimes be the difference between financial security and destitution. In the case of health insurance, it provides access to healthcare that could have an even more direct impact on an individual’s quality of life. Life insurance complements the role of the State by providing a mechanism by which members of society come together to share and therefore mitigate the impact of loss to the unfortunate few.

Second, it provides savings and wealth management options.

Life insurers have also played an increasingly important role as providers of savings and wealth management products that help individuals and their families preserve, protect and grow their savings and plan for future financial needs.

Third, it promotes societal advancement and economic progress.

Life insurance has a far wider and more profound impact that derives from these two primary functions. When individuals no longer fear destitution from sudden misfortune, they can confidently make economic decisions such as buying a home, making a long-term financial investment, and investing in their children’s futures through, for example, higher education. Those of a more entrepreneurial mindset might start a business, rather than counting on an employer to provide for them and their families should misfortune strike. With prudent planning, individuals do not have to cut back excessively on spending in their retirement years. By providing stability to society, life insurance promotes societal advancement and economic progress.

Fourth, it is a source of ‘patient’ capital.

Life insurers also contribute towards economic growth and stability by providing long-term, or ‘patient’, capital. Life insurers are significant institutional investors in Singapore, providing financing to many sectors of the economy. In 2013, life insurance companies managed over SGD140 billion in assets, with the majority of these investments held in government and corporate debt securities. From our ongoing macro prudential surveillance, life and composite insurers hold about 10% of all outstanding Singapore corporate bond securities. Due to life insurers’ liability profile, they are well placed to invest in long-term projects such as infrastructure projects and can play a stabilising role in the economy.

Challenges for Life Insurers

What then are some of the challenges insurers face today that have an impact on how well they perform their role in society? Let me speak on this at 2 levels.
At the first level, the challenge is for life insurers to address urgent societal needs - those arising from, one, ageing, and two, affluence.

Ageing - The world is ageing and Singapore is no different. According to a recent United Nations report¹, the number of people aged 60 and above will more than double to over 2 billion in 2050, reaching 21.1 percent of the global population at that time. Closer to home, the recent Singapore Population-in-Brief 2013 publication showed that the old-age support ratio, computed as the ratio of citizens aged between 20 and 64 years to citizens aged 65 and above, has decreased rapidly, from 10.4 in 1990 to 8.4 in 2000, and down to 5.5 in 2013. The causes and implications of this trend are well-covered and I do not intend to rehearse them here. Suffice it to say that it presents an urgent societal challenge that life insurers are well placed to help address. We encourage insurers to design appropriate retirement, pension and healthcare products that can effectively meet the needs of an ageing population.

Affluence - Regional wealth is increasing rapidly among high net worth individuals and the middle class, with China and India being key drivers of this growth. According to a recent report by Ernst & Young², by 2030, two thirds of the world’s middle class will live in Asia Pacific. As Singapore grows in its role as a leading wealth management centre, the inflow of foreign funds into Singapore seeking wealth management solutions will also rise. This will create a demand for wealth protection and accumulation products that Singapore life insurers are well placed to meet. Life insurers should continue to design suitable and innovative products that meet the needs of these clients, both in Singapore and beyond.
At the second level, insurers face an increasingly challenging operating environment. I will highlight 3 points – cyber risk, volatile global financial markets, and regulatory change.

First, cyber risk. With rapid technological progress and the widespread use of the internet, cyber risk has emerged as a key risk for businesses including insurers. Instances of cyber attacks are on the rise globally, and hackers are becoming more sophisticated and better at penetrating systems and causing damage. The consequences of cyber-attacks can vary from website defacement, which are acts of mischief, to severe disruption of critical financial systems and theft of sensitive data.
In a borderless cyber world, Singapore insurers must be vigilant. Insurers must ensure that their technology risk management, security and internal controls keep pace with the fast increasing level of cyber risk. The best practices and IT security measures set out in the MAS Technology Risk Management Guidelines should be adopted where applicable. In addition, there should be processes to monitor, report and handle system anomalies and incidences.

Second, volatile global financial markets. Volatile financial markets can adversely impact the profit & loss and balance sheet results for Singapore life insurers, who are large investors in domestic and foreign securities. In particular, rising interest rates will have a negative impact on the mark-to-market value of insurers’ fixed income holdings, leading to a reversal of the unrealized gains that have boosted insurers’ accounting capital over the last few years. In the longer-term, however, rising interest rates is beneficial for life insurers as new investments in bonds can be entered into at higher yields.
Insurers should ensure that their Financial Risk Management and Asset Liability Management capabilities and reporting systems are well-developed.  This will enable insurers to navigate the volatile financial environment without materially affecting their underlying business. In particular, life insurers who closely match their asset and liabilities can immunize themselves from some of the volatility or downside risks from financial markets.

Third, regulatory change will be a way of life for the foreseeable future. The 2008 Global Financial Crisis demonstrated the interconnectedness of the global financial industry, and how distress in a particular jurisdiction can very quickly spread to other parts of the world. Government bailouts of some large financial institutions, mainly banks, but also one insurer, have led to efforts to identify systemically important financial institutions (SIFIs) for more intensive supervision, including higher capital requirements. While banks have been the main subjects of these regulatory initiatives, the insurance industry has also come under the spotlight. The first list of globally systemically important insurers, or G-SIIs, was published in July 2013. On the global front, there is important work being done on group capital standards for insurers, including the Basic Capital Requirements (BCRs) and High Loss Absorbency (HLA) for G-SIIs, and the Insurance Capital Standards (ICS) for Internationally Active Insurance Groups (IAIGs).
At the same time, many insurance regulators are revamping their solvency regimes. Singapore, too, is in the midst of revising our own Risk Based Capital (RBC) framework.
These reforms are necessary to ensure that regulations continue to be ‘fit-for-purpose’, and adequately address risks, both at the institution, and the system levels. In addition, the importance of sound market conduct practices cannot be overstated – indeed, without this, the very purpose that life insurance serves in society will be called into question. It is thus important that the insurance industry is fully on board for these changes and position itself for the new and more demanding regulatory environment.
We encourage insurers to keep abreast of the latest regulatory developments, continue to engage MAS through constructive dialogue and feedback to our consultation papers, and put in place the necessary human and system resources to ensure a seamless transition to the new environment.

Regulatory Initiatives in 2014

On that note, let me now touch briefly on 3 key regulatory initiatives for the Singapore Insurance Industry - RBC2, Enterprise Risk Management (ERM) and Financial Advisory Industry Review (FAIR).

RBC2
First, RBC2. MAS will issue a second Consultation Paper and the first Quantitative Impact Study (QIS) specifications by the end of Q1 2014. The consultation paper will detail some revised proposals as well as the risk calibration methodology and factors. One key revision will be the introduction of a Matching Adjustment, which will provide some relief from short-term volatility in the value of bond holdings due to movements in credit spreads. This recognises that insurers with long-term liabilities are able to hold their bonds to maturity.
The consultation will be open for 3 months, and insurers will be requested to submit the results of the QIS over this period.
This is a major project and we fully intend to take on board your feedback. By working collaboratively, we will be able to develop an RBC2 framework that is effective, robust and suitably tailored to the Singapore insurance industry’s own unique characteristics.
I would also like to assure you that the implementation schedule will be practical and realistic. We intend to give sufficient preparation time to insurers, and will work closely with you to ensure a smooth transition from RBC to RBC2.

ERM
Next, ERM. The regulatory requirements for insurers to identify and manage material risks and their interdependencies, and take these into consideration in their business strategies and capital planning, have taken effect on 1 January 2014. You will expect the MAS supervisory teams to engage you in discussion on your Own Risk and Solvency Assessments (ORSA) as part of our ongoing supervision of insurers. Beyond compliance, we hope that senior management and boards of our insurers will find the ERM process and ORSA reports useful in forming a prospective and holistic view of the risk profile, strategy and capital needs of the company.

FAIR
Finally, FAIR. It is now almost 2 years since the review was first announced at LIA’s 50th Anniversary Gala Dinner in 2012. It is fair to say that the life insurance industry has been very supportive of the objectives underpinning the review.
As we move into the implementation phase, MAS values the ongoing collaboration with LIA on the initiatives being rolled out, in particular the web aggregator, the direct distribution channel for basic insurance products as well as the balanced scorecard framework. Let us work together to enhance the quality of advice and the distribution of financial products with the ultimate goal of improving the financial preparedness of Singaporeans.

Conclusion

Let me conclude by congratulating LIA for its achievements in the past year. Apart from coping well with a slew of regulatory changes, LIA held a successful Life Insurance Week in October 2013 to encourage Singaporeans to assume a more proactive role in financial planning. LIA also supported the 10th Anniversary of MoneySENSE and offered valuable inputs to the Singapore Government’s talks with the US Treasury on the Inter-Governmental Agreement for the Foreign Account Tax Compliance Act (FATCA) in 2013.
In addition, LIA continues to partner MAS in developing talent for the insurance sector, including devising the new Insurance Industry Talent Development Framework.   This comprehensive framework comprises talent development programmes targeted at both pre-employment and continuing employment levels across different seniorities and job functions in the insurance industry. We hope to see more insurers making use of these programmes to invest in talent development. By collective effort, we can build a deep and strong talent and leadership pool, to support sustainable industry growth.

Ladies and gentlemen, the future inevitably holds some challenges and uncertainties for the life insurance industry. As we navigate through these waters, it is important to remain anchored to our purpose and committed to our long-term goal – a safe, vibrant, and purposeful industry that benefits society.

Thank you.

______________________________________

¹ “World Population Ageing Report 2013”, United Nations, 2013

² “Hitting the sweet spot - The growth of the middle class in emerging markets”, Ernst & Young, April 2013