H.E. Dr Lim Hong Hin, Deputy General Secretary of ASEAN for the AEC

Mr Vincent Kwo, Chairman, ASEAN Insurance Council

Ladies and Gentlemen

ASEAN Economic Community 2015

I am delighted to join you this morning.

2.   Seven years ago, the leaders of ASEAN articulated a bold vision¹.  Building on earlier progress in regional trade liberalisation and integration, ASEAN partners committed ourselves to become an ASEAN Economic Community (AEC) by 2015. With a population of over 600 million and combined GDP of US$ 2.4 trillion, the single market will be more populous than the US, and produce more output than Brazil, Russia and India. It is also a market of enormous potential, benefiting from consumer demand from a growing middle class, increasing urbanisation, expanding regional and international linkages and market reforms.

3.   More importantly, the AEC promises to be a significant boost to national incomes and people’s living standards in every ASEAN nation. Research studies have shown economic gains from steady integration of ASEAN economies. The full implementation of the AEC is projected to raise the group’s income by 5.3%, and by 11.6% if further gains from ASEAN’s FTAs with other major economies are included.² 

4.   Economic integration and trade liberalisation therefore lie at the heart of the ASEAN agenda. ASEAN governments have been working hard to follow through commitments on domestic restructuring and market liberalisation. With 2015 mere months away, I am happy to note that we have achieved substantial progress in implementing the AEC Blueprint, Over 82% of the key deliverables targeted for completion by 2013 have been implemented.³  Intra-ASEAN trade topped US$600 billion in 2013 and accounted for the highest share of total trade among ASEAN states.

5.   There are still significant developmental benefits to be reaped from closer co-operation, particularly in the financial services. Within the financial services, the need to better develop and integrate our insurance markets is taking on greater urgency. As ASEAN economies develop, cities expand and populations prosper, we have more at stake: more at stake not just in each other’s success, but also more at stake should things go wrong. As we have witnessed in the past decade, our shared prosperity has become increasingly vulnerable to natural calamities and external shocks. Yet we have not correspondingly taken up better protection for the economic assets at risk. 

Mind the Gap: Under-insurance a Risk to ASEAN Economies

6.   There are three main reasons for the widening protection gap in ASEAN.

7.   First, Asia is vulnerable to the increasing incidence and severity of natural catastrophes. Due to their location along the Pacific Ring of Fire, countries like Indonesia, Japan, the Philippines, and Taiwan are vulnerable to seismic risk. As littoral states with long coastlines, these countries are further exposed to the secondary risk of tsunamis. Over land, changes in global climate are  creating extreme and unpredictable weather phenomena – precipitating floods or droughts when monsoon rains come down too hard, too little or too late.  Extreme weather conditions are not only a bane of agriculture, which remains a major economic activity in many ASEAN countries, but can also be severely disruptive to global manufacturing and supply chains that keep ASEAN’s factories humming.

8.   In the past three years alone, Asia has suffered three major catastrophes - the Tohoku earthquake and tsunami in Japan, floods in Thailand and the Super Typhoon Haiyan over the Philippines. Economic losses resulting from natural catastrophes are a severe financial strain, and deal a disproportionately hard blow to emerging economies. In Japan, the total damage from the earthquake is estimated to be about US$210 billion or 3.6% of the country’s GDP; in Thailand, losses from the floods amounted to US$ 30 billion or almost 9% of its GDP.⁴ 

9.   Second, increasing economic, trade and investment linkages between ASEAN and the rest of the world expose the region to risks of adverse developments outside our immediate neighbourhood. For example, many production lines in Southeast Asia are dependent on the supply of critical industrial materials and components from countries like Japan. The 2011 earthquake and tsunami in Japan led to a 48% plunge in Japan’s automotive component production in March 2011. The manufacturing disruption in Japan quickly rippled through to the Philippines, Thailand and Indonesia, knocking production off by as much as 24% within a few months.⁵  

10.  Third and most importantly, ASEAN economies are underinsured. Despite potentially devastating threats to economic growth and livelihoods in the event of natural calamity, ASEAN’s insurance penetration rate⁶ of barely 3.4% in 2013 is only about half the global average of 6.3%.⁷  Even this low figure overstates ASEAN’s insurance protection against economic losses. The penetration rate for non-life insurance is under 1%, or one third the global average of 2.8%⁸ and there is a dearth of reinsurance and specialty insurance cover for large complex risks such as catastrophe risks. Meanwhile, growing urbanisation concentrates more and more economic assets in expanding cities, dramatically raising the lives and economic assets at risk in a catastrophe.

Closing the Insurance Gap through Awareness, Capacity Building, Co-operation and Liberalisation

11.  The role of insurance as a risk transfer tool cannot be overestimated. Chronic private underinsurance means that most of the financial burden wrought by natural disasters has to be borne by the public sector. Sometimes, this is inevitable.  But as the costs of risk events escalate, the Asian Development Bank has warned that “the gap between economic and insured losses can be so severe that it may outstrip the government’s ability to act as an insurer of last resort.”⁹  In contrast, a cross-country study of recent natural catastrophes has found that an increase in insurance penetration of just 1% point can reduce the fiscal burden on taxpayers by 22%.¹⁰ 

12.  The persistent low and inadequate insurance penetration rate in ASEAN is a result of both demand and supply side challenges. On the demand side, there is a lack of risk awareness and understanding about how insurance works. On the supply side, a paucity of data and expertise present valuation challenges. Furthermore, the current fragmented and under-developed insurance markets in ASEAN constrain data sharing and the capacity of domestic insurers to pool and to underwrite risks. Closing the insurance gap therefore, requires us to work on both the demand and supply side issues through raising awareness, building capacity, fostering regional cooperation through public-private partnerships (PPPs) and liberalising markets.

13.  First, raising risk and insurance awareness on the demand side. The insurance industry can take the lead in generating greater awareness of the need for insurance against key risks. Insurers can share risk management advice, engage governments, businesses and individuals on risk solutions and disseminate relevant information on insurance protection. In Singapore, conferences such as the Institute of Catastrophe Risk Management Symposium provide a forum for insurers to share their research and expertise. Another industry-led effort is the Pan-Asia Risk and Insurance Management Association (“PARIMA”). This is an association of risk managers which aims to strengthen risk management capacity of corporates through training programmes and industry dialogues.

14.  Second, building capacity on the supply side. ASEAN’s pressing need for insurance protection creates tremendous business opportunities for insurers. To tap on this growth potential, the insurance industry needs to build up its risk assessment expertise and underwriting capacity, particularly in the area of specialty insurance like catastrophe insurance and reinsurance. Compared to developed markets, historical data about natural disasters are lacking in Asia and what limited data that are available could be outdated due to the rapid pace of economic development. The insurance industry also faces a shortage of professionals with a good understanding of Asian risks. In Singapore, industry players and risk modelling agencies have ramped up their analytics and modelling capabilities significantly over the past few years.  This is supported by scientific research undertaken by academic institutions in Singapore, such as the NTU Institute of Catastrophe Risk Management, the NUS Centre of Hazards Research and the Earth Observatory of Singapore. 

15.  Third, bringing together the buy-side and sell-side in Public-Private Partnerships (PPP) to address large and complex risks. PPPs can facilitate the collection of high quality and standardised data on risk exposures. This in turn supports the private insurance market in the development more robust risk pricing models and innovative risk financing solutions, and hence enhances the effectiveness of risk transfer. The involvement of the private sector insurers allows the public sector to focus on risk reduction efforts such as designing better physical building codes, regulations and tax, to enhance overall risk resilience.

16.  In the spirit of public-private cooperation, the insurance industry in Singapore formed the Natural Catastrophe Risk Working Group in 2013. This is a tripartite group comprising industry, the regulator as well as academic stakeholders to recommend policies and initiatives to deepen the industry’s underwriting capacity and expertise in Singapore’s catastrophe insurance market. One of the initiatives being explored is the establishment of a Natural Catastrophe Data Analytics Exchange. The Exchange will aggregate data from both private and public sectors for the purpose of modelling risks and catalysing innovative disaster risk financing solutions for the region. We invite other governments, regulators and industry partners in the region to work with us on this initiative.

17.  Fourth, maximising the benefits from insurance through greater market opening and liberalisation. As risk exposures grow in scale, size and complexities, it would exceed the capacity of individual states to underwrite the risks confronting their communities and economies. Furthermore, given the highly specialised nature of insurance, it is not always possible for domestic markets to develop the full range of insurance capacity, expertise and products and needed to serve the needs of the economy.  The insurance business is premised on the law of large numbers and risk pooling. The wider the distribution of risks, the safer and more cost-effective the cover. Where gaps exist, it is useful to allow cross-border provision of insurance services, where appropriate.  This combination of higher capital efficiency and better risk aggregation can lead to more diversified risk portfolios and larger economies of scale, and in turn reduce the cost of insurance protection to governments, to businesses as well as to consumers.  

18.  In this regard, let me suggest three broad lines of insurance that we can prioritise for insurance development and liberalisation.

•               Maritime, Aviation and Transport (MAT) insurance.  International trade is vital to ASEAN economies. Exports are a key contributor to economic growth. ASEAN has a combined trade to GDP ratio of 100%, with several member countries reporting ratios well above 100%.¹¹  Trade in turn relies heavily on key modes of transportation that facilitates cross-border trade in goods and services. Therefore MAT insurance serves a critical function by providing important protection against transportation related risks, thus safeguarding regional and international trade flows.

•               Catastrophe insurance.  Catastrophe insurance can strengthen ASEAN’s financial resilience against the growing frequency and severity of natural catastrophes in several ways. 

o              First, catastrophe insurance provides protection for the growing asset values at risks, particularly in heavily exposed regions such as large urban centres located at or near geologically active zones. 

o              Second, catastrophe insurance lowers the financial burden of disaster relief and reconstruction on governments and taxpayers. More specifically, catastrophe insurance helps to secure emergency liquidity in the immediate aftermath of a catastrophe, helping affected economies rebound quickly from natural calamities.

•               Reinsurance.  As ASEAN economies develop, member countries will face growing and complex exposures to a plethora of risks: from natural catastrophes, weather and agriculture, health and longevity, pandemics, war and terrorism risks, to cyber and financial market risks. The small size of our individual national insurance markets constrains the capacity available to domestic insurers to reinsure themselves, and results in higher reinsurance premiums. On the other hand, a free and open market can maximise the benefits of reinsurance through the diversification of risks across the region and better utilisation of available capital. This results in lower reinsurance premiums for recipient countries utilising risk transfer mechanisms for large and complex risks.

19.The development and liberalisation of the insurance markets will benefit greatly from regulatory harmonisation. Achieving greater consistency in the regulatory frameworks within ASEAN will give markets participants greater clarity and assurance on the provision of cross-border insurance services and give consumers more confidence in taking up insurance protection. Conversely, disparities in regulatory standards across ASEAN members stymie the development of competitive insurance markets, raise the cost of cross-border services and ultimately hinder ASEAN integration. I understand there is a regulatory panel discussion later today and look forward to views from the regulatory community on how best to achieve regulatory coherence and harmonisation, recognising that ASEAN markets are at different stages of development.

Towards an Integrated Insurance Market

20.  In conclusion, the AEC vision is a comprehensive one. It encompasses not only the free movement of goods, but also of services, capital, investment and skilled labour. ASEAN has to press on with our effort to free up trade in services, including the financial services, which underpin the free movement of capital and investments. The success of the AEC will raise the international profile of ASEAN as an attractive market, investment destination and asset class. Years of economic progress have given us cause for optimism but we need not look far in space or time to be reminded of ever-present threats to economic prosperity – be they natural calamities, geo-political risks or international financial volatility. Effective risk assessment, management and transfer are necessary to insure our economic achievements and the best way forward is to take concrete steps to pool our strengths and expertise together in an integrated ASEAN insurance market.

21.  Market participants have a stake and a role in ASEAN financial integration. The insurance industry can provide important feedback by pointing out how markets can be made more open, seamless and efficient for businesses to serve their customers better, and by bringing our attention to developmental blind spots and kinks in our co-operation and integration.

22.  Today’s conference is therefore a very timely and valuable forum bringing together insurance practitioners, regulators, policymakers and think tanks from across the region to come up with an action plan to close the insurance gap in ASEAN.

23.  On this note, I wish everyone a fruitful discussion. Thank you.