Speech by Mr Tharman Shanmugaratnam, Minister for Finance, at the NTUC Income Day Dinner, 23 October 2008, 7.00pm at Raffles City Convention Centre24 Oct 2008
Ladies and Gentlemen, Good evening.
Let me begin by congratulating NTUC Income and all its people on its 38th anniversary.
2. NTUC Income has not only come a long way since its inception in 1970 but has been instrumental in changing the insurance landscape in Singapore. When NTUC Income was formed, only three percent of the population was insured. Many Singaporeans in the lower income group could not afford the cost of insurance then and the major international insurers were not interested in investing in this mass market.
3. NTUC Income has become a leading composite insurer - a key player in the industry and a familiar household name in Singapore. One of Income's key achievements has been making insurance accessible and affordable to the masses by offering low premium and competitively priced insurance policies to Singaporeans. Well done!
4. Today NTUC Income continues to play a key social role - making essential insurance affordable, accessible and sustainable. However, Income like others in the industry will have to keep up with the demands of a changing and uncertain financial environment, as well as with the changing needs and aspirations of Singaporeans. To stay in the lead and remain a commercially-viable social enterprise, Income will have to stay focused on achieving the highest standards of governance and professionalism, and keep building on the trust of its customers.
A Few Lessons from the Current Financial Crisis
5. We live in a time of crisis, both in the global financial markets and increasingly now in the global economy. We in Singapore will weather the crisis, because our financial institutions are strong, confidence in our system remains intact, and the Government is able to respond when necessary to defend the system - as we did when we issued a full Government guarantee for all deposits in the banking system last week. But we must remain alert and vigilant, as significant risks remain in global finance and we have to expect shocks from time to time.
Health of the Insurance Industry in Singapore
6. Our insurers have not escaped unscathed, as equity values have fallen and credit spreads have increased across the board. However, they have operated within sound prudential rules. Insurers in Singapore have generally reduced their exposures to the equity markets since the experience of the Asian financial crisis. In addition, the implementation of the MAS' risk-based capital framework in 2005 has meant that insurers now maintain capital commensurate with the risks of their asset and insurance portfolios. Insurers are required to ensure that the value of assets in their insurance funds continue to meet their liabilities to policyholders. This is why, despite the significant fall in stock and corporate bond prices since the beginning of this year, all the insurers continue to meet the necessary regulatory requirements. Singapore's insurance industry has remained financially sound amidst the storm.
7. However, we must use this crisis to learn and revise practices that can be improved. There will be many lessons that come out of this crisis, and the more readily we identify and absorb them the stronger we will be as we emerge from the crisis. I will highlight a few lessons which are already clear, and which are of relevance to the insurance industry. They are in fact simple lessons, which have always been understood, but which many institutions lost sight of at a time of exuberance in the financial markets.
Focus on Core Expertise
8. First, insurers should focus on their core areas of expertise. This is perhaps one of the clear lessons from the AIG crisis. AIG's problems came about as a result of its significant venture into credit derivatives and other structured finance activities which were not within its core insurance activities. It earned high returns, but they came with much higher risks than it knew and that it was capable of managing. As we all know, its financial products arm eventually incurred significant losses as a result of these activities, threatening the solvency of the entire group. Fortunately, in Singapore, AIG's insurance arms, AIA and American Home Assurance, have limited exposure to the deterioration in global credit markets and continue to meet all regulatory requirements.
9. The broader lesson is about sticking to what you know, and to manage the risks of your core business. While insurers are in the business of taking risk, their expertise lie in underwriting event risks. They have built up expertise and many years of data to model risks from natural catastrophes, accidents and mortality.
10. Life insurers manage both mortality as well as longevity risks. In addition, they invest in a wide range of assets in order to generate the returns needed to meet the expected payouts from the products they sell. Managing investment risks is therefore a key task in any life insurer's operations. In particular, given the long-term nature of their liabilities, life insurers should ensure that their investment portfolios are sufficiently well diversified with a long-term focus in order to weather short-term market volatilities. It would not be prudent for life insurers to enter into high risk activities that could yield high returns in the short-term but threaten their long-term viability.
Boards have to Focus on Risk Management
11. There is a related lesson that also needs restating and highlighting. The global financial turmoil highlights the importance of Boards and senior management in the task of risk management. They play the key roles in ensuring a culture and an environment of sound risk management within a firm.
12. The current market volatilities have highlighted the importance of stress tests and the need for insurers to consider a wide range of possible scenarios that may affect their current and future financial positions. Boards and senior management should embrace stress testing as part of their governance of the institutions under their charge and not merely to satisfy a regulatory requirement. They must understand the assumptions underlying stress tests, ask probing questions and take proactive steps to develop and assess alternative strategies for mitigating the institution's risks.
Maintain the Trust of Customers
13. Third, and just as important, is the importance of winning the trust of customers by helping to educate them on their needs and by serving their interests squarely and transparently.
14. Besides banks, insurers have the duty to ensure that the products they sell meet the needs of the customers. Insurers in Singapore have indeed done much to enhance the professionalism of their sales agents. In times like these when confidence in many markets has been shaken, the need for insurers and their agents to continue to uphold the highest standards of professionalism cannot be overstated.
15. Insurers play an important role in meeting the long-term protection and retirement needs of the public. Products such as term-life and health insurance provide the necessary protection to an individual and his dependents should any unforeseen disaster befall him. Many individuals may not appreciate the need for such products until it is too late. Insurers and their sales advisers therefore have a duty to educate consumers and recommend those products that meet the financial and protection needs of the individual consumer, depending on which stage of life he is at.
16. In Singapore, products such as participating policies and investment-linked policies appear to be more attractive to consumers because they provide a return on the investment. But depending on the circumstances of the individual, the life protection cover in these products may not be sufficient. Ins urers should therefore explain the various options available to the consumer clearly and squarely, so that he can make an informed choice.
17. The MAS has been working with the life insurance industry to enhance disclosure to policyholders. The new disclosure requirements on the management of the par fund which were implemented last year go some way to enhancing policyholders' understanding of how individual insurers manage their par funds and the considerations involved in bonus declarations. In addition, requirements for point-of-sale and post-sale disclosures have been enhanced to provide policyholders with a better understanding of the features of the product and the performance of the participating fund during the tenure of their participating policies.
18. We have made good progress, and should press ahead. We must be leaders in this front. Well-informed customers will ultimately be in the interests of the industry. MAS will continue to work with the insurance industry to enhance transparency and disclosure. But the industry should also take the initiative to promote greater transparency in the sales process by making clearer the risks of each product and assessing the suitability and the needs of the customer before recommending any particular product.
19. INCOME has responded well to these challenges. I note that it has taken steps to focus its resources on its core insurance activities. In addition, it has strengthened its risk management systems with the establishment of the Risk and Compliance Committee under the Board. It has also invested in building up professional managerial systems for its critical functions, and put much effort to attract and retain quality staff. It is building up a top quality team, without whom even the best systems would be ineffective.
20. NTUC Income has come a long way, and been through ups and downs. I am confident that its spirit of resilience will not be withered by the current economic turmoil. I urge the Board and management to continue to build a culture of rigour and discipline, as they focus on the company's transformation, look ahead to many more years of growth, and to serving Singaporeans well.
21. Once again, I wish NTUC Income a happy 38th anniversary. Have a wonderful evening.