Muhammad bin Ibrahim: Insurance supervision - looking beyond
Keynote address by Mr Muhammad bin Ibrahim, Governor of the Central Bank of Malaysia (Bank
Negara Malaysia), at the 24th International Association of Insurance Supervisors (IAIS) Annual
Conference 2017 "Insurance Supervision: Looking Beyond", Kuala Lumpur, 2 November 2017.
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Welcome to Kuala Lumpur. We are delighted to host the 24th IAIS Annual Conference. The last
time this conference was held in Southeast Asia was 14 years ago.
Bank Negara Malaysia has a very long and productive association with the IAIS. Not long after the
IAIS was established in 1994, a new insurance legislation was enacted in Malaysia. This was a
watershed event, changing the course for development of the industry. A deep and
comprehensive reform was instituted and the course was set to modernise the insurance sector
in Malaysia.
I recall how useful the Insurance Core Principles and other IAIS standards were in helping to
shape our regulatory approach and supervisory practices. As a market with a long history of
global insurers operating within our borders, we also benefited from arrangements that enabled
us to better supervise cross-border activities.
These arrangements have continued to strengthen over time, culminating most recently, in the
IAIS Multilateral Memorandum of Understanding.
We are therefore delighted to host this event in Southeast Asia, where the deepening of
insurance markets remains key to support economic risk management and broader
development goals for this region.
Looking beyond...
This brings me to the theme of this conference, "Looking beyond". It is an interesting theme. It is
even more interesting if we look at the insurance industry from a broader perspective, from the
angle of economic development. Beyond issues of safety and soundness, my experience
suggests that we ought to have a keen interest in the development of an effective and efficient
insurance market, that serves the advancement of broader goals, from the provision of
healthcare, to building resilience against natural disasters, supporting trade, enhancing social
security and providing the opportunity for people to improve their livelihood.
Insurance is a great invention, one of those inventions that touches people's lives. Long before
"big data" became in vogue, insurers have effectively used data to turn unknowns into knowns,
and perils and hazards into opportunities. The concept of pooling funds to assist the unfortunate
and those faced with adverse situations is a very noble idea.
From air travel to the launching of satellites, insurance innovations have enabled many of
mankind's greatest feats, propelling civilisation forward. Innovations in micro-insurance have
helped protect our most vulnerable communities from devastation. Today, drones are being used
to inspect property damage claims, and machine learning to detect fraud. Indeed, the industry
has enabled trade to flourish, serving as the bedrock of modern economies.
Despite these remarkable developments, the world continues to face immense economic,
environmental and social challenges. The effects of climate change are real, leaving horrific
damage and destruction. Economic losses in the aftermath of this year's hurricane season in the
Gulf of Mexico is estimated to reach up to $265 billion. Events that we once thought to be
implausible or highly unlikely, have become the "new normal".
In many parts of the world, health care costs continue to rise, and many face uncertain futures
as public sector safety nets and government finances come under increasing strain. Against this
backdrop, financial inclusion for the underserved segments remains an elusive goal.
For the insurance industry, this raises important issues. Two issues come to my mind. First is
on the industry's role in addressing a few of the challenges facing our economies and society.
And second, the manner in which regulation and supervision can adapt to support broader
economic and social development.
In addressing these issues, I shall attempt to advocate the idea that a rethinking in approach is
an imperative. New paradigms are needed to anchor business and public policy to the realities of
the future. I will touch on three of them: competitive, stability and ethical paradigms.
A new competitive paradigm
In an increasingly interconnected world, traditional models of competition deserve a re-think.
Network effects will become more important, both in increasing the value of insurance products
and services, and to better manage risks. Rather than see the competitive landscape through a
zero-sum lens, co-operative competition or "co-opetition" can result in synergistic benefits.
The example of Hewlett- Packard (HP) clearly illustrates this idea. Just one year after the
company started operating its direct cargo trains linking China and Europe, it made the bold
decision to allow other producers on-board, giving up what was seen as a significant competitive
advantage at the time. But the results were astonishing. By doing so, it was able to increase the
frequency of departures which allowed it to move its products more quickly to Europe. Today,
HP's Europe-bound trains depart daily from China, with the higher frequency working to its own
advantage.
The notion of co-opetition is not entirely foreign to the world of insurance. Insurance
marketplaces such as Lloyd's of London have long operated arrangements that deliver
advantages from pooling risks and information. In Malaysia, market mechanisms exist to move
reinsurance documentation more efficiently between market participants, and to share
information on fraud.
The emergence of new technologies will take this further. Open application programming
interfaces, or APIs, enable insurers to provide and obtain access to information that will
significantly alter the operational process of insurers. But access to information would require a
network of service providers who are willing to share data and information, without giving away
one's competitive edge. Investments in infrastructure, especially in ICT is very expensive. By
pooling funds to build shared infrastructure, the burden becomes more manageable. More
investments in IT will enable new possibilities to expand insurance reach, improve efficiency and
increase effectiveness.
Not long ago, the natural instinct would be to resist these forces of change. More than ever,
corporations' fortunes and survival are now more closely linked. New realities require new
paradigms. Co-opetition. How we cope with the new realities will depend on our ability to re-set
our minds and leverage on networks to create value; at the customer, the firm, and at the system
levels.
There is enormous potential in re-defining strategies in competition and cooperation. Imagine the
possibilities that could be achieved with strategic investments in shared infrastructure and the
ability to share data securely across individuals and entities. We could significantly reduce costs,
improve access, deliver superior customer experience which was previously not possible, with
the network of shared information, better management and improved resilience against risks.
A new paradigm on stability
It has been 10 years since the global financial crisis. The global insurance industry is now on
stronger and more stable foundation. Industry leaders and supervisors may be satisfied with
what was achieved since then, but there is certainly no room for complacency.
Achieving stability objectives will become more challenging as the complexities of risk
identification increase. We know that insurance companies can create systemic risks, even
though we may differ in our views over the intensity of such risks. There is a 'constructive
tension', arising from the need to significantly strengthen regulation and supervision while
balancing the need for growth, development and innovation.
In a world characterised by fierce competition, complex product offerings and evolving
customers' needs, there is always the risk of administering excessive and complicated
regulations. This could lead to unintended consequences that can make the financial system
less, rather than more stable. In a dynamic world, regulation and supervision should be agile,
pragmatic and dynamic and able to respond to changing conditions in a timely manner. A bit of
uncertainty ought to be tolerated. But at the same time, we should not hesitate to reverse course
should a particular rule prove to be ineffective. Rules are never meant to remain relevant in
perpetuity. It never does. It always run its course. It is from this perspective that regulators must
have the courage to change course.
In addition, from another perspective, the importance of proportionate regulation and supervision
cannot be overstated. This is an area where I think we must continue to work in developing and
refining the approaches to proportionality and support more inclusive insurance markets. In the
larger scheme of things, as regulators we cannot ignore the broader objectives of supporting
economic growth and improving the overall welfare of society.
Equally important, with environmental, social and governance considerations, becoming an
important criterion and increasingly adopted by investors, the ethics and sustainability of insurers'
activities will be important factors in creating shareholder value. Consumer welfare and wider
social impacts alongside profits will constitute key metrics by which performance is measured.
This is only appropriate, as maintaining public's trust and confidence is a good business
strategy.
The idea here, is not to view the insurance industry's stability in isolation, but to be seen within
the wider context of preserving social and economic value of insurance systems.
A new paradigm on ethics
Technological advances and scientific breakthroughs have opened new possibilities to operate
and deliver products to customers. Technological innovations will make customers better off but
insurers on the hand, may be confronted with some fundamental ethical issues. For insurance
companies, this requires a rethinking of professional and ethical standards. Thus, a need for a
new paradigm on ethics.
For example, with greater ability to aggregate and analyse more data from multiple sources,
questions arise on the extent insurers should consider using genetic and social preferences in
underwriting. Or whether it is acceptable to commit someone to a long-term financial undertaking
when they may not fully comprehend the implications of their choices even though insurers might
truly believe it is 'good' for them. And then, there is always the dilemma and trade-offs in directing
more resources toward social impact investments, in cases where it lowers risk-adjusted
returns for policyholders.
As advancements in technology brings about various unknowns and a blurring of business lines,
professional and ethical standards need to be embedded into our DNA to ensure the integrity of
our industry. When it comes to ethical values and conduct, we must move beyond conceptual
discussions to practical applications. Time and effort must be undertaken to raise the standards
of competence and developing well-defined codes of behaviour. This should take into account an
insurer's legal and professional obligations, the wider impact on society, issues of equity and
fairness, and preservation of virtues such as honesty and compassion.
These issues I raised are delicate issues that can involve complex ethical choices. It will test the
values of corporations, its people, its leadership.
Specific issues for regulation and supervision
Let me mention a few words on specific challenges for regulation and supervision in the future
that is before us. First, the lifespan of regulations is getting shorter and shorter, with new areas of
risk emerging faster than regulators can write new rules. Second, and adding to the
complication, potential threats are also creeping in from beyond the traditional regulatory
perimeter. This can be both from non-traditional players, or unfamiliar business models or
technologies. Third, we may have to simply accept that we may never fully grasp or understand
emerging risks facing the industry, in a timely manner.
Allow me to offer some reflections on these issues. First, we need a better and effective
approach to collate intelligence, including from non-traditional sources. Technological
advancement offers additional opportunities. There is clearly vast potential on the use of big data
and machine learning to improve risk identification and assessments. Last year, the US SEC
successfully charged a bank for failing to adequately train its representatives in the sale of certain
complex debt instruments, using custom analytics.
Tools were developed to sift through millions of trading records, a task that would have been
impractical with traditional investigative techniques. I conjure that supervisory arrangements to
share information across agencies and borders had also assisted in expanding and
strengthening the investigation effectiveness.
Second, we need broader toolkits that allow for more targeted and proportionate interventions.
Several are worth mentioning. Good progress has been made in recovery and resolution
planning that ensures large financial institutions can be unwound in an orderly fashion without
threatening broader stability. In Malaysia, the takaful and insurance protection system
complements supervision through differentiated premiums that create strong incentives for
insurers to maintain prudent risk profiles. And different enforcement approaches, such as
enforceable undertakings, can be an effective way to tailor supervisory responses to risks at the
institutional level.
Third, we need to recognise that regulation is as much an art as it is a science. Experience
suggest that authorities should prioritise rules that are appropriate for their jurisdictions, and at
the same time, allow room for regulatory and supervisory discretion to respond to emerging and
specific risks. This is important if we are to reconcile and balance the trade offs between the
practical limitations that regulators face, the desire to avoid excessive regulation, and the need
for authorities to act to mitigate risks.
The exercise of regulatory discretion should be subjected to appropriate rigour and
accountability. And it should be supported by a stronger focus to develop regulatory
experts, rather than just more regulations. This requires deep knowledge of the industry, but also
wisdom and discernment. In the current state of constant change, building the capacity of
supervisors is one of the most critical priorities to guard against threats to stability without
impeding growth and innovation.
Finally, we need to create room for experimentation. While rules are not meant to restrict
innovation, they often have the effect of doing so. This might end up leaving customers worse off,
and insurers exposed to higher business risks than necessary or appropriate. When faced with
the stark choice of doing nothing and risking harm to public interests, or writing rules to control
something that we do not yet fully understand, it is only sensible to experiment and learn from it.
This point is also crucial, when technology offers so much potential to increase financial
inclusion. Platform-based solutions and insure-tech companies are opening up insurance
access to large segments of the population at a fraction of previous costs. To fully benefit from
such possibilities, some regulators have adopted "regulatory sandboxes" to test solutions and
design regulations that are appropriate. There will no doubt be other approaches taken to
experiment and innovate. And when things do not work, we must be prepared to change tactics
and strategy.
Conclusion
Over the last few decades, the global regulatory community has come together to build stronger
supervisory systems and more resilient markets. Insurers have built extensive networks in their
pursuit of growth. Now is the time to build on these foundations and further strengthen them, with
a renewed commitment and focus on increasing the utility and impact of insurance.
In a journey of many twists and turns, the IAIS has been incredibly fortunate to have Secretary
General Yoshihiro Kawai at its helm, leading the IAIS through a large part of the journey, 14 years
in total. While the road ahead remains challenging, I am confident that under the able leadership
of Secretary General-designate Jonathan Dixon who succeeds him, the IAIS will no doubt
continue to strengthen its important role in building stronger insurance systems that work for all.
On that note, allow me once again to warmly welcome you to Malaysia, and to an engaging and
productive conference ahead.
Thank you.