Muhammad bin Ibrahim: Beyond borders - bridging new horizons in Asia
Pacific
Speech by Mr Muhammad bin Ibrahim, Deputy Governor of the Central Bank of Malaysia
(Bank Negara Malaysia), at the 5th Malaysia Insurance Summit "Beyond Borders: Bridging
New Horizons in Asia Pacific", Kuala Lumpur, 7 October 2015.
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I am delighted to join you today at the 2015 Malaysia Insurance Summit themed "Beyond
Borders: Bridging New Horizons in Asia Pacific". I understand that this is the fifth year the
Malaysian Insurance Institute has organised this event which brings together insurance and
takaful professionals from around the region and beyond to discuss key developments in the
industry.
Prospects of the Asia Pacific region
The world is undergoing rapid structural changes amidst a rapidly evolving Asia Pacific as an
important centre of growth. The International Monetary Fund has projected a growth of
5.6 per cent for the Asia and Pacific region in 2015 and 5.5 per cent in 2016, with the region
expected to remain the global growth leader over the medium term. Growth is primarily
driven by domestic demand of Asia's 4.3 billion inhabitants who account for 60 per cent of
the world's population. The region is also expected to be the strong driver of world insurance
growth, with its share of the global insurance market likely to rise to 40 per cent in the next
five years.
In the medium term, the region is expected to benefit from the deeper regional financial
integration agreed by the leaders of ASEAN and recently reported concluding of TPP
negotiation. These agreements would result in a more efficient allocation of regional savings
to meet the region's large investment needs which will support growth and consequently
financial well-being and soundness. The improved income arising from the economic
developments will spur greater demand for insurance services in the region and present
immense growth opportunities for the insurance and takaful industry.
The Asia Pacific region offers high growth prospects over the long term underpinned by
potential demand arising from structural changes and evolving risk exposure. This will have
the implication of increasing wealth and shifting preferences, but challenged by a rapidly
ageing population and frequent incidences of catastrophic events.
First, increasing wealth and shifting preferences in Asia Pacific
Rising incomes have increased the spending power and affluence of consumers in Asia
Pacific. GDP per capita for the region reached 15,242 US dollars as at end-2013, well above
the world average of 10,613 US dollars for the same period. Reflecting higher standards of
living and enhanced purchasing power, demand for insurance products in the region has
evolved to encompass a broader range of protection and investment solutions that are more
responsive to differing risk and return preferences.
This has also been Malaysia's experience, with the significant growth of investment-linked
insurance premiums over the last decade alone. Investment-linked insurance products now
account for more than 38 per cent of the domestic insurance market, almost equal to the
share of more traditional whole-life and term insurance products that had historically
dominated the market for many years.
Second, Asia is rapidly ageing
Improvements in living standards and life expectancy, combined with falling fertility rates,
contribute to a rapidly ageing population globally, including in Asia Pacific. Studies have
projected that the population of seniors, ages 65 and older, will grow the fastest in Africa
(296 per cent) between 2010 and 2050, followed by Asia and the Oceania countries (216 per
cent), while the population of young children below the age of 15 is projected to fall by 12 per
cent in Asia and Oceania. The share of the global population of people aged 65 and older
living in Asia should correspondingly rise from 54 per cent in 2010 to 61 per cent in 2050 with
the median age increasing from 29 to 40 over the same period. A United Nations study
estimates that by 2050, the older population in the region will triple in number to more than
1.26 billion. This demographic transition has far-reaching social and economic implications
as it exerts a significant strain on the social security systems, infrastructure and provision of
health care services of economies.
The limited capacity of Governments are constrained to meet these rising demands to care
for the elderly and the need to provide for the new demographics has increasingly become a
focus of attention. Rightly so. As a civilised society we should care for our seniors. Many
efforts are being initiated by economies to improve social and economic developments,
including strengthening social safety nets and improving health care systems. The insurance
industry has an important role to play in supporting such efforts through the provision of
welldesigned retirement security, private health and long-term care products.
In Malaysia, to encourage retirement savings, the Malaysian Government has provided tax
incentives to encourage the purchase of deferred annuity products which provide an income
stream during retirement. The Government has removed the 8 per cent tax which was
imposed on investment income on deferred annuity products. A tax relief of RM3000 was
also granted to encourage the purchase of deferred annuity products. Despite this, response
from the insurance industry is lethargic at best. The industry ought to improve product design
and delivery channel to benefit from the tax incentives given by the Government.
With the more challenging economic conditions that are confronting our societies, there is
also a broader educational imperative that needs to be met. The industry should come
together to aggressively raise awareness on the importance of retirement planning, and to
help consumers understand and purchase retirement products. I believe more opportunities
can be tapped if the industry could collectively work on this matter. The need is urgent. It is
time for the industry to come together and make a more significant impact through
wellplanned investments in product design, risk management and to support consumer
education in retirement planning solutions.
Third, catastrophic events in Asia Pacific is rising.
The region is also confronted by an increasing frequency and severity of catastrophic events.
Eight of the 10 countries in the world with the highest annual natural catastrophe losses as a
percentage of GDP are located in Asia. Over the last 20 years, natural catastrophe losses
suffered by Asia accounted for almost half of the world's estimated economic losses from
natural disasters, yet only 7.6 per cent of such economic losses in Asia were insured
compared to 67 per cent in the United States for example. These significant protection gaps
that are prevalent across most of Asia and expose the vulnerability of the population and
economies of the region to hardship due to loss of lives and damage to properties following a
catastrophic event.
The poor are most severely affected. While some countries have implemented disaster-risk
insurance schemes or provide Government assistance to alleviate such losses, others
continue to be exposed. In response to this challenge, more is being done among developing
economies, including under public-private sector partnerships, to develop and increase
access to affordable micro protection plans as a means of helping millions of people cope in
the most difficult times.
Strategies to seize opportunities in the new horizon
Allow me now to turn to some of the key strategic imperatives for the industry going forward.
First and foremost is the building of strategic and quality human capital. Human capital can
be likened to the indispensable crew that you need for your ship to sail. Shortage of quality
talent is one of the most important risks facing organisations globally today and the insurance
industry is no exception. The Malaysian Insurance Institute, like many other insurance
training institutes around the world, ought to expand investments in personnel with the
relevant skills and knowledge in particular the ability to adapt and innovate.
In today's environment, training needs to be continuously changed, in some cases
overhauled, to maintain its quality and relevance. Central to this is the industry's
collaboration with and support for training institutes. The experience of practitioners who are
experts in their field would enrich training programmer considerably. In this regard, the Bank
welcomes the efforts of the industry and the Malaysian Insurance Institute to build bridges
with academia through practical collaborations that aim to create a ready pool of productive
talent. New approaches and programmes could be tailored against proven methodology
implemented by some graduate schools. On the part of Bank Negara Malaysia, the recently
established Financial Sector Talent Council is collaborating closely with key members of the
financial industry to identify issues surrounding talent gaps and formulate innovative
proposals to address such gaps.
Another important area is to raise the professional standards of the industry that reflects the
highest standards of professional conduct, knowledge and competence. In this regard, the
grand design of the industry, the Financial Sector Blueprint, clearly emphasized on the need
to develop talents across all levels of an institution, spanning from the entry level to senior
management and the board of directors. Indeed, a holistic talent development and
management is a good example of an initiative that combine art with science which a
visionary institution must be able to master to achieve its goals.
The second imperative is the ability of the industry to effectively leverage on technology to
build strong, innovative and competitive businesses. This includes developing a deep
understanding of how changes in technology impact people's lives and transforming how
consumers and investors behave and view the value proposition of businesses. For instance,
mobile phone penetration in Asia alone makes up 52 per cent of total global penetration. The
highly developed telecom markets of Asia with 3.6 billion people across Asia having mobile
phones spread across a diverse range of markets, capitalising on mobile data/wireless
broadband services would mostly likely chart the way of the future.
Growth across Asia in high speed access to the internet by mobile wireless devices has been
largely driven by highly competitive markets combined with a general population who are
prepared to embrace new mobile technologies. As consumers embrace the digital era,
insurers will need to rethink their distribution strategies and partner relationships as digital
and remote options are rapidly replacing commonplace functions and tasks. Digital
technology can be deployed effectively to accommodate customers' priorities in ways that
would promote customer support and loyalty whilst significantly enhancing the consumer
experience and satisfaction.
In many ways, the human capital and technology imperatives share characteristics that are
borderless. We are living in a globalised world, with significantly greater capital and labour
mobility than in any other period in history. For multinational organisations, this enables ideas
and innovations to transcend borders and be more easily replicated to great positive effect,
to grow successful businesses and transform the economies in which they operate. This is
where foreign partners of local entities with international presence have enormous potential
to make a significant contribution to the development of local economies.
As international entities that actively operate in more developed insurance markets, foreign
insurers should bring new and proven systems, technology and experiences which can
enhance their domestic operations and benefit the wider economy of the host country. This is
the fundamental value of foreign direct investments. We know of successful cases in Europe
where digitisation has been transformational, where a higher adoption of straight-through
processing, paperless documentation, usage of customer analytics and electronic payments
have all led to improved efficiency and higher service value for insurers. The same can and
should be replicated in this region, with the presence of foreign global insurers driving this
process.
Major developments in Malaysia - Liberalisation of the life and general insurance
sectors
On the home front, two major developments are taking place; (i) the introduction of the Life
Insurance and Family Takaful Framework and (ii) liberalisation of the Fire and Motor Tariffs.
Both these initiatives will allow the industry greater operational flexibility to innovate, while
ensuring that consumers' interests remain adequately protected. Our goal remains
unchanged - to ensure Malaysians have the opportunity to avail themselves of efficient and
effective means to manage risks with insurance and takaful solutions that are appropriate for
their circumstances. For the life insurance and family takaful sector, the focus remains to
increase the penetration level, as measured by the number of policies in force per
population, from 56 per cent currently to 75 per cent by 2020. This is envisaged in the
Economic Transformation Programme and this target is certainly achievable. Product
innovation remains key to achieve this target, particularly in the micro-insurance and
microtakaful space which would expand the reach to the underserved segments of society.
In the non-life or general insurance space, a more market-driven pricing structure will be
introduced for motor and fire insurance. This will also pave the way for the development of
products that can be more responsive to consumer and business needs in the two most
dominant lines of business in the Malaysian general insurance sector.
Importantly, this development will be critically dependent on insurance and takaful
companies building strong internal underwriting and risk pricing practices to ensure the
sustainability of the business, particularly in the highly competitive motor insurance segment.
Let me re-emphasis the importance this development to our market and the criticality to
remove the current market distortions that undermine the long term sustainability of motor
insurance.
The industry cannot afford to take a short term view; it must keep its sights on building the
foundations for operating in a more diverse and mature market, with stronger value
propositions for consumers. Presently, with the high volume of vehicles referred to by the
industry, the Malaysian Motor Insurance Pool has a life of its own and I was told the MMIP is
the 9th largest general insurer in Malaysia. This was never the intent. Let's revert to its
original mandate as a mechanism to insure the highest risks motor vehicles.
In tandem with these developments, insurers and takaful operators must be fully accountable
for the conduct of their intermediaries in ensuring that customers receive proper advice and
quality service throughout the duration of the policy. It is important that adequate training is
provided and the right remuneration and incentive structure is implemented to promote a
committed and professional agency force.
With this expectation there is increased demand for a full time and professional agency force.
Conduct issues are viewed seriously by the Bank and we are fully committed to the
responsibility entrusted to the Bank to effectively enforce regulatory requirements on fair
conduct towards consumers.
The Financial Services Act provides the Bank with explicit and expanded enforcement
powers which include monetary and non-monetary actions. In addition to private and public
reprimand as well as direction to make restitution to aggrieved parties. As a result of
supervisory interventions by the Bank, more than RM30 million in premiums were refunded
to the affected policyholders due to mis-selling practices in the sale of life insurance products
in the past.
The Bank had also directed insurers to refund the premiums in more than 700,000 cases
involving the forced purchase of personal accident policies. In addition, insurers have been
directed to modify or withdraw misleading advertisements, make call backs to consumers to
confirm the products purchased without adhering to proper disclosure practices, as well as
strengthen internal controls over sales and marketing practices with respect to
bancassurance products.
The enforcement measures undertaken signals the Bank's low level of tolerance for
misconduct. It also serves to remind the industry of the Bank's expectation for common
complaints and grouses against the industry such as delay in claim settlement and mis
selling practices by agents to be completely eliminated or at the very least reduced
significantly.
Conclusion
The period ahead for the Asia Pacific region presents new risks, challenges and
opportunities for the insurance and takaful industries. In facing them, we need a visionary
industry and creative solutions that will lift our economic potential and improve lives of our
people. Such solutions must be built on the strongest foundations the strength of our
technical capability, our financial strength and our uncompromising stance towards
professional ethics and standards. With these foundations firmly in place, the industry can
bridge new horizons and expand beyond traditional borders.