Jessica Chew Cheng Lian: The insurance broking sector - threshold of
an exciting but challenging future?
Keynote address by Ms Jessica Chew Cheng Lian, Assistant Governor of the Central Bank
of Malaysia (Bank Negara Malaysia), at the 3rd Asia Insurance Brokers' Summit, Kuala
Lumpur, 3 March 2015.
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It is my great pleasure to be a part of this 3rd Asia Insurance Brokers' Summit which is being
held for the first time in Malaysia. I would also like to take this opportunity to congratulate
MITBA as they celebrate 40 years in service of insurance and takaful brokers in Malaysia. In
that time, the domestic insurance industry has seen significant change - beginning with an
overhaul of the legal and regulatory framework when the industry was brought under the
regulatory oversight of Bank Negara Malaysia, followed by a series of successive reforms
that have served to strengthen the industry and promote its healthy development to first and
foremost meet the needs of individuals and businesses. This continues to be a journey that
the Bank and industry are committed to taking forward, mindful that as the Malaysian
economy is progressively transformed, so too will demands of the industry evolve.
Throughout this journey, associations like MITBA have played an important role in helping
members adjust to the changing environment, by providing a platform to examine issues,
make representations, communicate with stakeholders, and implement collective responses.
It must be recognised that many individual companies would have neither the resources nor
the inclination to pursue these actions on their own. Yet such actions can shape policy, be a
force for change, and build reputational capital and credibility with long lasting payoffs for the
industry at large.
As the broking and insurance community come together today, the questions that are being
asked will almost certainly include: What lies ahead for the insurance broking industry? What
are the key challenges that will face the industry? How will the landscape continue to
change? Where will new opportunities lie? Where will new threats come from? And
ultimately, how confident is the industry of its future?
I am sure these questions will all be addressed in some way over the course of this Summit.
A sampling of what has already been said and published on this subject would indicate that
insurance broking is at a crossroad of critical strategic business decisions that will have a
significant impact on its future prospects. We often hear this at different periods in time, and
each time there is a sense that this will be the defining moment for the industry. I would like
to suggest however, that this sense is more palpable in the current environment for a number
of reasons that I would like to explore this morning.
Let me begin with the Global Financial Crisis. While it is largely associated with a banking
crisis, its implications have spread far beyond the banking sector. The insurance industry
found itself in a position of having to defend its activities from being subjected to the same
fate of the wide-ranging regulatory reform that has consumed the banking sector following
the crisis. The loss of confidence in financial intermediaries has been particularly damaging.
Consumer confidence and trust in financial intermediaries have fallen to all-time lows and
continuing discoveries of misconduct have done little to restore confidence. Consumers are
unfortunately prone to painting all intermediaries with the same broad brush and asking
themselves how far they can trust their financial service providers.
As a result, conduct issues are coming under significant scrutiny globally, and the
expectation of professional conduct is no longer taken for granted by consumers and
regulators alike. This general shake-up of the industry that followed the crisis has meant that
insurance brokers, swept up in the tide, must confront the very basic ethos of their business.
They must make serving the real economic interests of businesses and helping individuals
secure their financial futures the heart of their business. They need to be concerned about
the social and environmental impact of the business decisions that they make. And they must
commit to providing a fair deal to their customers and building enduring long term
relationships. The environment has become far more unforgiving of anything less.
A second reason that insurance broking is at a critical crossroad is the accelerated pace of
change that is occurring in Asia and the business implications that this will have for the
region. Asia is the most dynamic and fastest growing region in the world today. The region
recorded economic growth of over 7 percent in the past decade, higher than global growth of
4 percent. The IMF's latest forecast projects growth for Asia at 6.4 and 6.2 percent in 2015
and 2016 respectively, in sharp contrast with anaemic growth in more advanced economies.
Reflecting its growing contribution to global growth, Asia accounted for approximately 28% of
the world's premiums, after Europe (35%) and North America (30%).1 Coupled with a high
population growth rate, there are projections that Asia will overtake North America as the
second largest contributor to world insurance premiums in several years.
The establishment of the ASEAN Economic Community at the end of 2015 will create a
single large market and production base with freer flow of goods, services, investment,
skilled labour, and capital; opening up huge opportunities for business growth from a
combined GDP of over USD2 trillion and population of 600 million people. Services have also
become a more important component of trade across the region. This has obvious strategic
implications for the insurance broking sector to capture the significant growth opportunities
that will emerge. It is therefore not surprising to find that more companies already have, or
are developing, ASEAN-oriented strategies to position themselves for an integrated ASEAN
environment. These companies are quickly internalising new economic realities which call for
a fundamental re-orientation of business and operating models. A clearly defined and
wellexecuted strategy for capturing new growth opportunities in the region is more than likely at
this critical juncture to reap significant payoffs over the next few decades.
A third reason that this period is significant for the insurance broking sector is the intensity of
focus that is now being directed at the effects of climate change. Globally, catastrophes are
increasing in frequency and intensity. The cost of catastrophes is estimated to have risen by
USD870 billion in real terms between 1980 and 2011. In 2013 alone, global economic losses
due to natural catastrophes amounted to USD131 billion. Only about a quarter of this was
insured. According to a report released last week by the United Nation Economic and Social
Commission for Asia and Pacific, more than half of the world's 226 natural catastrophes last
year occurred in the Asia and Pacific region. Floods account for about 40% of the natural
hazards affecting the region. Some 80 million people were affected by natural disasters, with
economic losses tallying up to nearly USD60 billion. The region was found to be largely
unprepared in its response to widespread floods and landslides. Despite the recurring nature
of these events, only a fraction of properties and assets are fully protected against risks.
The question that is being asked with increasing urgency is "How can the financial sector
play a more significant role in supporting disaster risk reduction strategies?" Along with this
focus has been a growing call for actors in the financial sector to do more to reduce
vulnerabilities to climate and disaster risks, including through better analytics, professional
advice, providing or supporting effective risk mitigation solutions, and by conducting their
business in a socially and environmentally responsible manner. Going forward, society will
be more demanding of financial service providers, including brokers, to discharge these
responsibilities with much greater diligence, and those that do not are likely to bear more
severe consequences.
The fourth reason that insurance broking is finding itself at a critical crossroad is a more
obvious one - the technology revolution. This phenomenon is hardly new and we continue to
experience new technological revolutions at an unrelenting pace. The challenge is in
understanding and anticipating how evolutions such as aggregator capabilities,
internetbased insurance, and big data are impacting insurance broking business models.
So far, brokers appear to be taking some comfort in views expressed that technology is
having the biggest impact on the more commoditised market for personal insurance lines,
while brokers will continue to retain their share in the corporate insurance placements. While
this may be a legitimate view, technology will nevertheless have an important impact on the
kind of services that brokers are offering their corporate clients and what clients are prepared
to pay for such services. In many emerging markets, the technology revolution is starting to
gain more traction in the delivery of financial services, including insurance, following greater
stability in internet connections, advancements in security and payments infrastructure and
strengthened data protection frameworks in these markets. Correspondingly, brokers need to
strategically review the strength of their value propositions in this changing environment and
actively seek to lift their own services by leveraging on technology.
These four reasons are just a few that should prompt the insurance broking community to
reevaluate their business and operating strategies going forward. All of them - the fallout from
the global financial crisis, Asia's growth trajectory, the focus on climate risk, and more
entrenched technological revolution in the delivery of financial services - are converging to
re-define expectations, possibilities and risks in the insurance broking sector in a profound
way that will determine if a firm will thrive or be marginalised in the coming decade.
Going forward, brokers will be expected to play a far more significant role in delivering
innovation and choice by developing deep knowledge of the industries that their clients
operate in, and working with insurance providers to bring new products into the market that
are meeting the changing needs of businesses. Brokers will be called on to provide expertise
and advice in managing a more complex set of risks that will include environmental,
geopolitical, supply chain and cyber risks in a more interconnected global and regional
economy. In other words, the traditional information function of brokers will expand
significantly.
An area that will grow in importance for brokers is the SME sector. SMEs are a significant
part of economies in Asia, driving growth and employment. In Malaysia, SMEs account for
about one-third of Malaysia's GDP and 59% of employment. Within five years, the
contribution of SMEs to GDP is targeted to increase to 41%. Their importance to the
economy however, remains disconnected with the extent to which these businesses are
effectively managing their risks through insurance solutions. A significant majority of small
businesses continue to be either not insured, or have inadequate insurance to secure the
prospects of survival following business disruptions due to a natural disaster or other event.
Among the most important reasons for this are cost and products offered by insurance
providers that fail to reflect the specific risks that SMEs face. This is more acute for
businesses at the lower end of the spectrum that operate with tight margins, have limited
resources dedicated to formal risk management programs and are more vulnerable to
business disruptions. There is substantial scope in the region for brokers to better
understand the risk profiles of SMEs - specifically how they are affected by loss events and
what it would take for them to recover - and to work with insurance providers to lower the
costs of insurance through innovative solutions and better data.
A key focus of Bank Negara Malaysia in the coming years will be to provide an enabling
environment for insurance brokers in Malaysia to develop the technical, financial and
operational capacity that will enable them to effectively support businesses in both
mainstream and niche areas under the new economic landscape. In this connection, the
Bank will be introducing new measures to foster greater competition, and expand
opportunities for brokers to forge strategic partnerships for long term growth. This will include
specific measures with respect to foreign participation in the insurance and takaful broking
industry in line with the recommendation of the Bank's Financial Sector Blueprint 2011 -
2020. The Bank expects to make further announcements on this in due course.
The evolution of insurance broking also raises important questions for managing conflicts of
interest. Insurance brokers are often well placed to offer a broad range of services that may
go beyond advising on and securing insurance solutions. These include an expanded role in
risk consulting and management, the administration of employee benefit schemes, and
claims handling services provided for a fee. The diversification into a broader range of
activities however increases the potential for conflicts to arise between the interests of clients
in a traditional broking context, and that of the broker which may seek to protect relationships
with insurers that it has dealings with in a different context. Brokers engaged in risk
consulting activities may also have strong incentives to increase commission revenue by
inappropriately influencing clients to purchase more insurance than they need or which do
little to provide meaningful protection.
In Malaysia, these issues are coming into greater focus with growing demand for
valueadded services that brokers can provide. We do not believe that disclosures alone are
sufficient to mitigate the risk of conflicts. We have presently required brokers to limit the
revenue earned from these activities to 20% of total revenue in the previous financial year.
We are also insisting on strengthened procedures and controls within brokers to manage
conflicts. And we are asking brokers that engage in additional activities to demonstrate to us
that their core broking responsibilities have not been compromised - including in terms of the
adequacy of competent resources performing core broking functions, the quality of
infrastructure supporting core broking activities and the outcomes produced for broking
clients.
This is also a time for the industry to come together collectively to raise the bar on standards
of professional ethics and conduct that must be demonstrated towards clients. Such a code
needs to clearly address new business realities and changing expectations of the industry.
And it should have credibility by ensuring swift and effective mechanisms for addressing
complaints on breaches and the ability of the profession to act against errant members. In
Malaysia, avenues for customers to address disputes with insurance brokers are being
enhanced with establishment of a Financial Ombudsman Scheme that will include insurance
and takaful brokers as members of the Scheme in the later part of this year.
In closing, the insurance broking sector finds itself today at the threshold of an exciting, but
also challenging, new era in which solutions of the past are unlikely to be adequate for the
demands of the future. The stakes are higher, and the time is ripe for insurance broking in
this region to do its part to contribute to sustainable growth.
Thank you very much and I wish you all very constructive and enlightening discussions
ahead.