Speeches

BEYOND 2000 -- IMPLICATIONS FOR THE ASIAN INSURANCE & REINSURANCE MARKETS EXHIBITION CENTRE ON THURSDAY, 9 SEP 99 AT 9.OO AM

Distinguished guests, ladies and gentlemen,

1 I am happy to be able to join you this morning at the 5th Singapore International Reinsurance Conference. May I also welcome to Singapore all our foreign visitors who have come specially for this conference.

Changing Landscape
2 The global insurance market has undergone dramatic changes in the last decade. The exposure to US liability risks in the mid-80s and the spate of natural catastrophe losses in the period of late 80s to early 90s resulted in the withdrawal of many players from the market and a shortage of capacity.Overnight, a new reinsurance marketplace in Bermuda came into the picture, mainly to offer coverage for large catastrophe risks shunned by the traditional markets. While Bermuda-based reinsurers raised their market share of global premiums from base zero to 5%, Lloyd's of London, which had since undergone a major shake-up, saw its market share being eroded.

3 The volume of premiums ceded also shrank as a result of consolidation amongst the direct insurers as they pay more emphasis on quality, efficiency and margins. This presented opportunities for strongly capitalised players. At the same time, a shift from proportional to excess of loss reinsurance programmes also resulted in higher levels of capital adequacy requirements. Consolidation became a dominant theme in the reinsurance industry as well, with top global reinsurers becoming mega reinsurance groups through mergers and acquisitions.

4 Insurers are also faced with the problem of shrinking demand for the traditional forms of insurance products, as buyers become more discerning and sophisticated. Buyers now pay greater emphasis on holistic risk management, higher retention levels and look beyond standard old-formula products. In response to rising consumer expectations, insurers have increasingly been more willing to tailor their products, especially for the larger and more complex risks.

5 Financial deregulation and the benefits of consolidation and size have led to a wave of mergers and acquisitions among financial institutions. These mergers are also taking place across hitherto segregated financial industries. For instance, Citigroup now combines commercial banking, investment banking and insurance under one umbrella. These trends have changed the way insurance is viewed. At the retail level, insurance activities are increasingly linked to traditional banking services through the concept of bancassurance. The blurring of boundaries will predictably result in lower prices, more insurability and greater product variety. Institutional clients are also tapping into the capital markets to look for alternative coverage through securitisations and insurance derivatives. Besides traditional competitors, insurers now have to compete with new players such as mutual funds and investment banks. Goldman Sachs, for instance, was the co-lead manager with Swiss Re for Tokio Marine's securitisation deal 2 years ago.

Singapore's Vision
6 As the markets in the US and Europe become more mature, attention has shifted to Asia. International insurers start to look elsewhere for new market opportunities and to balance their global risk concentrations. Many countries in Asia, including China and India, remain relatively untapped with low penetration. Some Asian marketshave begun the process of liberalisation. There is greater awareness and better appreciation of risk management. These developments make Asia an attractive market for global insurers.

7 Within Asia, Singapore has already established itself as an important insurance hub. We have close to 160 direct insurers, reinsurers and captives operating here, and are home to a rich mix of insurance intermediaries such as brokers, reinsurance brokers, captive managers and risk management companies. However, the dynamics in the global arena are moving so quickly. We have to continually anticipate and adapt to emerging trends and ever-rising demands. Let me now share with you some thoughts on how we hope to meet these challenges.

8 In many respects, Singapore is well-positioned to be a leading reinsurance centre in Asia. Currently, there are a total of 48 reinsurers in Singapore. Of these, 20 of the world's top 25 reinsurance groups, who collectively control close to 80% of the world reinsurance market, are represented in Singapore. These international players are in Singapore not only for the domestic business but also mainly for market opportunities in the region. In 1998, total premiums of the insurance industry amounted to $7.8b. Premiums attributable to the reinsurers amounted to $1bn, out of which about 80% were sourced from offshore markets. Reinsurance premiums' average compound growth of 10% per annum for the last 10 years is comparable to global industry figures.

9 However, more work needs to be done. For instance, Singapore-based reinsurers account for only 9% of Asian (ex-Japan) general insurance risks ceded abroad, the bulk of which still flows out of Asia to other centres in Europe and the US. We are confident that Singapore can take on a bigger role as a reinsurance hub. Our strategy will involve four components.

10 First, we would like to urge reinsurers with operations in Singapore to consider expanding the local branches' scope and underwriting authority, and book more offshore business in Singapore. In this respect, we would like especially to see them underwrite more big-ticket items such as marine, financial guarantee, energy, aviation, and liability risks from around Asia. The MAS would continue to enhance Singapore's operating environment to make it more conducive and competitive. A tax exemption scheme for offshore marine hull insurance and amendments to the financial guarantee insurance regulations have already been put in place. Reinsurers here are encouraged to use these incentives. At the same time, the MAS would gather feedback from leading players in the private sector, such as the insurance sub-committee of the Financial Centre Advisory Group (FCAG). These are useful platforms for the industry to surface and suggest ideas to increase business opportunities for all.

11 Besides cultivating existing players, we would continue to attract internationally reputable and financially strong new players into the Singapore reinsurance market. These players will help to build up a dynamic and competitive industry, and introduce greater innovation through specialised products and total risk solutions.

12 As their Asian operations expand, there is a need for a central location from which to better manage their business operations in the region. In this respect, we are pleased to note that six leading insurance companies have been awarded the Operational Headquarters or OHQ status to-date. Key expertise with regionalfunctions such as underwriting and risk management are located in the OHQs, thus contributing to the capability of their Asian operations.

13 Second, in the area of product innovation, Singapore-based reinsurers should respond to market developments and be innovative in tailoring reinsurance programmes to meet their clients' needs by taking a holistic approach to risk management. In the last few years, there has been a proliferation of novel, non-traditional Alternative Risk Transfer (ART) products in the US, Europe, Japan and Australia. These products give buyers of insurance an alternative source of risk coverage and protection. As primary insurers become more sophisticated, innovative risk financing solutions such as financial reinsurance and risk securitisation would gain acceptance. Thus reinsurers would have to integrate financial expertise with their core competence of risk analysis to design programmes which are palatable to their clients' appetites.

14 The MAS has recently released guidelines on the application of risk transfer rules, accounting treatment and disclosure requirements pertaining to financial reinsurance. This is to capitalise on the growing popularity of financial reinsurance as a significant component in insurers' approach to total risk management. The application of financial reinsurance, which represents a combination of risk transfer and risk financing, could provide additional flexibility and liquidity to an insurer's risk management portfolio.

15 In the area of risk securitisation, which only came about in the last 2 to 3 years, deals were mainly from the US, Europe, and to some extent Japan. For instance, Tokio Marine was the first Japanese insurer who turned to the world's capital markets to lay off its earthquake risks - through a bond issue - to investors who are willing to take these risks for higher returns. The global insurance industry is increasingly turning to the capital markets to complement traditional coverage, where insurers package catastrophe risks in the form of securities that insurers and investors can trade in the capital markets and insurance derivative exchanges. As a leading insurance hub in Asia, Singapore would monitor developments in the area of risk securitisation closely and position itself to play a more significant role.

16 Third, our players must acknowledge, and proactively react to the advent of latest developments in IT. We would like to see more applications in IT to take advantage of Singapore's well-developed business infrastructure in the communications and IT industries. Singapore, with its high IT-literacy, is the ideal test-bed to drive initiatives such as electronic placement of risks through e-commerce networks linking brokers, reinsurers and buyers. IT can also be used to streamline back-office operations.

17 Lastly, to support anticipated growth and meet our development objectives, there is a need to build up a pool of insurance professionals in Singapore. The total workforce employed by the insurance industry in 1998 is close to 7,000. Reinsurers accounted for more than 700, or 11% of the industry's workforce. 51% of them are graduates or have professional qualifications, compared to only 30% ten years ago. Currently, the Nanyang Technological University offers tertiary modules in actuarial science and insurance. Our polytechnics and the Singapore College of Insurance also offer courses and industry-oriented professional qualifications to ensure thatwe maintain a high level of professionalism in the industry. We would continue to support and upgrade the skills base of the industry through training grants such as the Financial Sector Development Fund and the Initiatives for New Technology Scheme for Insurers.

Conclusion
18 The global financial markets are changing rapidly and the insurance industry must rise to the challenge. Mega-mergers and consolidation are changing the competitive landscape and blurring the lines of financial products. Global excess capacity and advancements in IT will continue to drive competition. On top of that, the Asian insurance markets have also had to deal with the problems that accompanied the recent regional financial crisis.

19 These challenges open up new opportunities. Many parts of Asia are still relatively untapped and are at varying degrees of liberalisation.The concept of risk management is beginning to take root in Asia and this presents new opportunities.We are confident that Singapore is well-positioned to work with existing as well as new players in order to harness these opportunities and challenges in Asia.

20 I wish you a stimulating and successful conference.