Mohd Razif bin Abd Kadir: Unlocking opportunities
Opening address by Mr Mohd Razif bin Abd Kadir, Deputy Governor of the Central Bank of
Malaysia, at the 10th ASEAN Insurance Regulators Meeting and 33rd ASEAN Insurance
Council Meeting, Kuala Lumpur, 15 November 2007.
* * *
It is my great pleasure to be here today at the 10th ASEAN Insurance Regulators meeting
and the 33rd ASEAN Insurance Council Meeting in Kuala Lumpur. Let me first extend a
warm welcome and "Selamat Datang" to all the delegates from abroad as well as to fellow
Malaysians here today. During this " ̃Visit Malaysia Year" which is also the year of Malaysia's
50th Anniversary celebrations of our independence, I do hope that our foreign delegates will
make time to enjoy Malaysia's diverse culture and the many unique sights, sounds and
flavours.
I am indeed honoured to be officiating the opening of the 10th ASEAN Insurance Regulators
Meeting and the 33rd ASEAN Insurance Council Meeting. I understand that several fruitful
meetings and exchange of ideas have already taken place yesterday, and several meetings
have been outlined over the next two days to discuss various matters, revolving around the
theme towards moving the ASEAN insurance industry forward.
The ASEAN region has recorded significant growth with member countries growing at an
average rate of 6% in 2006. ASEAN countries have grown stronger and our trade and
cooperation have expanded further. Building on these existing strong linkages, ASEAN is
expected to further progress in deepening and broadening its economic pie within ASEAN
and in the region.
The ASEAN region as a group accounted for approximately 8.3% of Asia's total GDP in
recent years and generated around 22% of Asia's total export, placing the region second
behind China, Asia's largest exporter. In 2006, ASEAN foreign direct investment rose by 27%
to reach USD52 billion and total exports increased by 16.5% to reach USD758.04 billion.
Trade among ASEAN countries has also increased tremendously. In fact for Malaysia , our
trade with the ASEAN region comprised about 25% of our total trade. As we move towards
AFTA and the removal of tariffs, the economic integration between countries in the region will
deepen further.
The encouraging economic growth prospects of ASEAN present tremendous growth
potential and opportunities for the ASEAN insurance market. This increases the need to
accelerate the development of insurance markets in the region to support the explosive
growth in trade within ASEAN. Over time, the aim should be to achieve a better balance
between reliance on foreign insurance markets and the domestic insurance markets within
ASEAN to support economic activity. This will contribute towards achieving greater risk
diversification, while at the same time, reaping more benefits for ASEAN economies from
increasing economic integration.
ASEAN currently has a total population of 568 million, and a large proportion comprising of a
young workforce in the middle income group. The changing priorities and lifestyles of this
new generation, growing wealth and increasing proportion of middle income population will
also support continued and further growth in demand for investment-linked and wealth
management products. As a result, the insurance industry has, and will continue to, expand
its role beyond merely providing protection products. Against this backdrop, prospects for
increasing the insurance penetration rate in our economies are clearly positive. However, this
will hinge on the ability of the industry to respond to these changing demographics and
dynamics in the financial system. In 2006, the insurance premiums averaged 2.95% of GDP
in South East Asia as compared with 8.8% in the U.S. or 16.5% in the U.K. Compared to the
banking sector, the insurance industry remains relatively less developed and commands a
significantly smaller percentage of the total financial assets of the region's financial system.
To tap these opportunities, appropriate strategies, new thinking and approaches will be
required. In this regard, a significant development has been the evolution of alternative
distribution mechanisms for insurance products and services in the region, notably through
bancassurance. Indeed, bancassurance has developed in a number of ASEAN markets into
a viable alternative distribution approach to the traditional agency force. Perhaps, in those
markets where the insurance distribution channels through agency force have yet to be firmly
established, bancassurance could provide a quantum leap to allow insurers to rapidly widen
their outreach by tapping into an established banking network and client base. Worldwide,
insurers have been successfully leveraging on bancassurance to gain a foothold in markets
with low insurance penetration and a limited variety of distribution channels. Bancassurance
can increase market penetration given the relatively higher level of public confidence in
dealings with banks. For the banks and insurers, capitalising on synergies derived from
tapping into the banks' extensive customer base to offer consumers comprehensive financial
solutions while optimising on the branch network have proven to be highly successful
strategies towards mutually improving productivity and profitability.
In Malaysia, bancassurance constitutes a significant feature of Malaysia's financial
landscape, and continues to develop rapidly in terms of market reach and operational
sophistication. These developments have contributed towards significantly raising the
nation's insurance penetration level and enhancing the competitive structure of the insurance
industry.
In addition to bancassurance, the Internet is emerging as a promising medium for insurers
to advertise products and service policyholders. With the rapid technological
advancements and increasing consumer demands for more efficient delivery of products and
services, it offers the potential for insurers to target a wider market, improve client service
and conduct business seamlessly across borders.
While planning for effective distribution channels may become the key differentiating factor in
the growing region today, one must not overlook the implications of the changing demands of
the general public. The ageing of the population is an issue of increasing importance in the
developing world. All across Asia , the number of people aged 65 and above is expected to
grow dramatically over the next 50 years. For the region as a whole, the population in this
age group will increase by 314 % from 207 million in 2000 to 857 million in 2050. Many
nations are finding it increasingly difficult to provide adequately for the needs of their aged
through state-provided social security. Faced with such prospects, planning for retirement
has become more important, both for individuals as well as public policy to ensure
sustainable financing and management of retirement and healthcare needs in the long term.
In this context, the development of deep financial markets among ASEAN countries is
critical. One of the significant challenges currently facing the insurance industry in this region
has been the shortage of long term assets that match the duration of insurance liabilities.
While the bond markets in several ASEAN economies have been extensively developed over
the last decade, longer-dated papers remain scarce in most countries. This has been a key
impediment to the development of private pension products needed to meet the increasing
demand for channels through which the population can save for retirement. While there are
significant efforts being made to further develop the longer end of the bond market, the
and
engagement between the industry, regulators and Government needs to be maintained
intensified further to take this agenda forward. This is critical both for the management of
risks in the industry, and to support sustainable growth in the longer term.
Another untapped segment of the market is the takaful sector in view of the fact that Muslims
constitute more than 40% of the population in ASEAN, mainly in Malaysia , Indonesia and
Brunei . Globally, the Muslim population accounts for about 24% of the total population. This
has supported the growth of the takaful market in recent years as an alternative to
conventional insurance. The global takaful market is expected to grow between 15 and 20
per cent per annum. Based on the market penetration level which is at 6.8% in Malaysia and
less than 5% in many Muslim countries, this represents significant market potential for the
future growth of takaful business.
The expansion of insurance markets in ASEAN will need to be reinforced by further
consumer education to increase awareness among the public on the importance of
longterm financial planning as well as to equip them to evaluate product features and make
informed decisions. The insurers must recognise that it is an important responsibility on their
part not just to ensure that adequate information is provided to the consumers, but that
consumers are suitably advised in the sales process. This includes ensuring that information
about insurance products is presented in a manner that is meaningful and easily understood
by consumers. This distinction between quantity and quality is important. In this respect, we
should learn from the unsatisfactory outcomes that have emerged in some of the more
developed markets where product disclosures can run into 60-page documents, which no
one can reasonably expect an average consumer to read, let alone understand. Ultimately,
the purpose of disclosures must be to help consumers understand the risks associated with
different product options. In this context, more information is not necessarily better. The
quality of information and financial capability of consumers must be enhanced in tandem with
improved disclosures. Of course, increasing product innovations also need to be matched by
strong risk and portfolio management capabilities critical to ensure the long-term
sustainability and viability of the products offered in the market as well as the financial
soundness of insurance companies.
The operating landscape in which we operate has also changed significantly. Convergence
in financial services has blurred the boundaries between insurance, banking and capital
market activities. In this environment, financial sector regulation and supervision has
become significantly more challenging. The increasing linkages between insurance and the
banking systems as well as capital markets have increased the importance of achieving a
harmonised regulatory approach and standard across sectors to minimise possibilities of
regulatory arbitrage between different types of institutions. Under such environment, the
approach towards regulatory and supervisory framework also has to evolve in tandem with
the change in the environment.
Recognising these dynamic changes, Bank Negara Malaysia took efforts to strengthen our
regulatory and supervisory capabilities as well as sharpen our focus. The organisational
structure for the regulatory and supervisory functions within the Bank were realigned in
November 2006 to move from the previous institutional based approach, to one that
integrates the Bank's regulatory functions for the different financial sectors under its purview
along functional lines. The new functional based, cross-sector regulatory structure allows us
to modernise the regulatory framework for both the insurance and banking sectors at a more
equal pace. The increased synergies created will enable the Bank to apply the best
regulatory practices in both the banking sector to the insurance sectors. Under the new
structure, the Bank is able to leverage on the more advanced developments in either sector
to enhance the regulatory framework for both sectors, simultaneously if possible. At the
same time, it allows us to develop and train our personnel to be better equipped in the
constantly changing operating environment. These efforts, will promote a more consistent
regulatory regime for both the banking and insurance sectors.
A positive side effect that can accrue from this move is the enhancement of public
confidence on the insurance sector which augurs well towards increasing the level of
insurance penetration. Achieving a more integrated approach to cross-sector regulation was
relatively easy in Malaysia as Bank Negara is the single regulator for both the banking and
insurance industries. In other countries, greater coordination and collaboration between
separate regulatory agencies can similarly contribute towards a more consistent approach to
regulation and supervision across sectors in dealing with similar risks.
While consistency in regulatory and supervisory approaches will contribute towards overall
financial stability and increased regulatory as well as business efficiency, it is important to
appreciate the fundamental differences between different market players. As someone put it,
notwithstanding current trends in financial conglomeration, banks will always be banks, and
insurers will always be insurers. As such, the risks stemming from the liability side of an
insurance company is far more significant than the asset side, while the reverse is generally
true for banks. While some dimensions of this are changing, such differences must be
properly catered for in the regulatory framework as well as in insurers' own internal risk
management practices.
Human intellectual capital plays a pivotal role in driving the industry's future and
competitiveness. The environment of increasing complexity in financial services that is
accompanied by increasingly sophisticated consumer expectation place new demands on
the skill sets and competencies of regulators and industry professionals. Adoption of the
highest standards of professionalism and integrity is essential in generating public
confidence in the insurance industry. It is therefore critical for us to continuously invest in
human capital as the pace of progression for the insurance industry would to a large
extent depend upon the capability of those working in the industry - their skill set,
expertise and competency.
Unfortunately for all of us, similar to other emerging economies, there is a scarcity of
qualified and well trained personnel to meet the growing and increasingly complex needs of
the industry. Therefore human capital development should not be viewed as an expense but
as an investment for the future. Without such investment, our insurance industries will not be
able to quickly make the leap forward and we risk losing the opportunities to players from
more sophisticated economies that are ready on the sides to take advantage of our
inadequacies.
On this note, I am pleased to note that in the short span since its establishment in December
2004, the ASEAN Insurance Training and Research Institute, or AITRI, has successfully
conducted technical training and seminars on insurance for over 200 insurance regulators,
supervisors and practitioners to date. AITRI has also received recognition from international
organisations such as the International Association of Insurance Supervisors and First
Initiative for the training programmes that were conducted. Despite its limited capacity and
funding, AITRI has continued to serve as the regional network centre for insurance education
and research, providing opportunities for regulators to meet, learn and share experiences. I
wish to urge ASEAN countries to leverage on AITRI as the regional platform for greater
interaction and collaboration and continue to provide support to enable the institute to
expand and play the role expected of it.
In addition to building capacity within our own respective economies, there is great potential
for the ASEAN insurance industry to increase our competitiveness as a region in order to
retain a greater share of the insurance business particularly in reinsurance and
underwriting of large, specialised risk which traditionally flows out of the region. In order to
increase our capacity and expertise to underwrite such risks, greater collaboration in the form
of technical assistance and information sharing are important. Great value can be derived
from the pooling of experiences and resources to develop our own probability models
which will enable us to better price risks based on the unique characteristics of our region.
Through such collaboration, the ability for the insurance industries in ASEAN to underwrite
and reinsure risks to serve the needs of the ASEAN businesses and individuals can be
significantly enhanced. In this regard, I would like to encourage the industry to work
together with the regulators to explore ideas to build our capabilities and capacities as well
as enhance our competitiveness towards developing a robust insurance industry in the
region.
To further support the development of ASEAN's insurance industry, initiatives to harmonise
should continue to remain as an important agenda. Exchange
standards across countries
of information on insurance development and statistics among regulators would enable
members to benchmark on their current progress and leverage on each others' experiences
to advance forward. A more systematic and structured information sharing mechanism
though a regional centre can serve as a catalyst for the development of insurance and
reinsurance business among ASEAN members. The mechanism could form a core
infrastructure for the region to build on its insurance data, enable trend analysis and support
product pricing that better reflects the region claims experience and pricing environment.
These initiatives should be further supported by efforts to mutually recognise insurance
coverage across borders to facilitate trade and transfer of goods between our countries.
This is an important area that should continue to be focused on by the practitioners and
authorities in our shared vision towards developing ASEAN as an integrated economic
region.
Another important element is for the regional insurance industry, as institutional investors, to
play an important role to help foster the development of the regional capital and bond
by investing in the regional securities. This should go along efforts towards
market
diversifying the risk in the financial systems from becoming overly reliant on the banking
system to fund the growing member economies.
The South East Asia region is developing at a rapid pace and changes in the global
economic and financial environment are driving us to continuously adopt new strategies and
approaches. To quickly respond to these demands, enhanced regional cooperation is the
key foundation towards achieving greater collective growth and economic prosperity.
I'm confident that the gathering of regulators and industry practitioners at this 10th ASEAN
Insurance Regulators Meeting and 33 rd ASEAN Insurance Council Meeting will see further
concrete steps taken towards promoting cooperation and building strong, stable and
competitive insurance industries within ASEAN. I wish all of you a fruitful and stimulating
meeting in the coming day.
On this note, I declare the 10th ASEAN Insurance Regulators and the 33rd ASEAN
Insurance Council meeting opened.