Jacqueline Loh: Managing risks in an uncertain world
Keynote address by Ms Jacqueline Loh, Deputy Managing Director of the Monetary Authority
of Singapore, at the 13th Singapore International Reinsurance Conference, Singapore,
3 November 2015.
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Opening
Distinguished guests, ladies and gentlemen, good morning.
It is my pleasure to join you today at the 13th Singapore International Reinsurance Conference.
I believe the theme of this year's conference, "Managing Risks in an Uncertain World", is one
which will resonate with many of you, as insurers, reinsurers and brokers alike navigate the
crosscurrents in the reinsurance industry, in search of profitable growth and better returns.
In keeping with the conference theme, I would like to share a few observations on how the
Singapore insurance industry can capitalise on the opportunities created by new risks, new
client segments, and new markets in Asia.
Too much capital finding too little risks
Those of you who attended the recent Monte Carlo Rendezvous would have discussed
extensively the challenging conditions in the current reinsurance market, which some have
warned would be the "new reality", or the "new normal". We have seen how structural
responses - winning market share from competitors, and bulking up through acquisition of
rivals - are largely built on a zero sum game. This becomes a problem when the pie is not
growing, as could be the case if the industry does not innovate and create uncontested space.
Indeed, the combination of sluggish economic growth globally and continuous expansion of
alternative capital have led to too much insurance capital finding too little risks. These include
traditional risks like property and casualty risks. At the same time, the insurance sector is
struggling to find solutions for new and emerging risks. This confluence of structural changes
across demand, intermediation and the supply side of the insurance value chain is an
unprecedented phenomenon.
But the outlook is not for all grey skies ahead. The challenges also present a unique set of
profitable growth prospects for the industry, particularly here in Asia.
Asia's changing risk landscape
The Asian risk landscape is changing rapidly, with demand for insurance services projected to
grow especially quickly in emerging Asia as incomes rise, life expectancy increases, and
Asians become more aware of catastrophic risks. Asia currently accounts for 28% of the global
insurance market, and premiums in the region are expected to double by 2020, with more than
US$1.3 trillion generated.
So why is excess capacity not being deployed in Asia which faces the greatest need?
Many of Asia's risks, ranging from marine, to property catastrophe insurance, to directors and
officers liability, are actually insurable and traditional risks.
Yet, Asia continues to remain severely underinsured. Many of these insurable risks are often
not well understood or well developed in this region, due to a lack of risk awareness, insufficient
data and nascent insurance markets. The insurance protection gap is widening inexorably:
• Close to half of the world's most underinsured countries are in Asia, and of these, half
are in Southeast Asia.
• In the past two decades, Asia has borne 50% of the estimated global economic cost
of natural catastrophes. Yet, less than 5% of all disaster losses in Asia are insured,
compared to 40% in developed nations.
• The 2008 Sichuan Earthquake is a case in point. Less than 1% of the total economic
costs of US$125 billion were insured. The disaster further left governments and
taxpayers with a hefty reconstruction bill of almost US$150 billion after the event.
Going forward, it will also no longer be sufficient to just focus on traditional risks. As Asia
continues to grow and become more digitally-connected, new and emerging risks will arise and
we should be proactive in adapting to these needs.
I would therefore like to challenge the industry to:
• raise insurance penetration of traditional risks and find innovative ways to cast the net
wider to cover more insureds, and
• develop innovative and meaningful risk transfer products for new and emerging risks.
Specifically, I would like to highlight 3 key growth drivers for insurers and reinsurers today:
• New and emerging risks
• New capital
• New technology and innovation.
New and emerging risks
The rapidly changing global landscape has given rise to new and emerging risks which are
mostly intangible, such as cyber, liability, supply chain and reputation.
Cyber risk is the new catastrophe, estimated to cost the global economy between US$300bn
- US$1 trillion annually. This is much higher compared to the average annual cost of natural
disasters at US$200bn. More than just the burden of cost, cyber risks often bring about much
embarrassment and reputational damage to the company and its clients.
However, cyber risks are not adequately prepared for and their associated costs and impact
under-estimated:
• A large majority of businesses believe that cyber risks are still not fully understood,
and that risk readiness for cyber risk may have been "vastly overstated".
• Challenges exist around the quantification and pricing of cyber risks and their
accumulation effects.
Yet such risks are the most likely to occur and carry the greatest potential impact on operation,
with the leading risks in terms of impact and likelihood being:
• Reputational damage from a sensitive data breach (impact on organisation's
resiliency - 79%; likelihood 79%)
• Failure in a main IT data centre (59%; 77%)
• Disruption of online services due to a cyber attack (58%; 77%).
Cyber risks thus present an enormous potential for insurance players - not just to capitalise
on this insufficiently tapped space, but more importantly, to play a vital risk management role
for the wider society:
• Increasing awareness of cyber exposures, as well as the forces of regulatory change,
will underpin the rapid growth of cyber insurance. It is estimated that the cyber
insurance market will grow 30% per annum to US$20 billion in annual premiums by
2025.
• Companies are increasingly focusing on cyber security issues. 63% of boards today
actively address computer and information security, up from 33% in 2012. The sharp
increase is likely driven by the recent high-profile and well-publicized cyber incidents.
• Governments are also gearing up to address the problem. There is a trend towards
stringent data protection regimes that are backed by increasing levels of liabilities
such as more notifications and significant fines for data breaches. US, Hong Kong,
Singapore and Australia are among those already enforcing, or looking at, new laws,
while the European Union is looking to harmonise pan-European data protection laws
across the EU member states.
As technology and the users - or abusers - of technology get smarter, the extent of and impact
from cyber breaches will correspondingly rise. Businesses must prepare for this new era of
cyber risks with cyber insurance as a critical component in a comprehensive risk management
strategy.
To further the development of cyber insurance in Singapore, the MAS is supporting the Cyber
Risk Test-bed project. This will promote both the demand for and supply of insurance
coverage, as well as tackle the difficulties that arise when nurturing new and emerging lines:
• On the supply side, a lack of loss and claims data that underpins an effective and
accurate risk pricing model.
• On the demand side, a lack of awareness as cyber risk is new and emerging, and
exposures are therefore difficult to understand and quantify.
• Finally, insufficient technical expertise to underwrite such complex risks.
Led by the NTU-Insurance Risk and Financial Research Centre (IRFRC) in collaboration with
the Agency for Science, Technology and Research (A*STAR), the insurance industry and
corporates, the industry-wide cyber insurance test-bed project seeks to address the limits of
insurability of cyber risks in three ways.
• First, the common data sharing platform encourages pooling of not just insurers'
claims data, but also corporates' potential loss data simulated through hypothetical
events.
• Second, it helps corporates understand their potential exposures and losses.
• Third, the players on the platform can come together to establish industry standards
on clear-cut definitions of cyber risks, coverage limits and terms and conditions.
Today, I am very pleased to announce SCOR as the first founding member to join the Cyber
Risk Test-bed Alliance. We remain in close discussions with a number of insurance players,
and look forward to the industry's active participation on this strategic project.
New capital
The second opportunity is in new capital. New or alternative capital continues to increase its
share in the global reinsurance industry, as alternative risk transfer solutions in the form of
insurance-linked securities (ILS) such as catastrophe bonds, collateralised reinsurance and
sidecars, among others, gain acceptance.
Alternative capital grew 6% in the first half of 2015 to US$68 billion, while traditional capacity
fell by 3% to US$497 billion.
While the influx of alternative capital may have led to excess capacity, softening rates and
narrowing of profit margins, this same capital has the potential to unlock opportunities for
insurers to access new products and markets.
As I mentioned earlier, Asia, in particular, is especially attractive to insurers and reinsurers:
• Alternative capital, when deployed to markets in need of risk capital for protection
against losses, will allow insurers and reinsurers to underwrite more risks and better
serve society's needs.
• As countries in Asia look to strengthen resilience to potentially debilitating events like
catastrophes, it is not unexpected that alternative risk transfer mechanisms, such as
catastrophe bonds and government pools, will increasingly feature as regional
insurers leverage alternative sources of risk capital to complement traditional
reinsurance.
The management of catastrophe risks in Asia-Pacific is a priority for insurance players as well
as governments in the region. A research by Lloyd's has shown that a 1% rise in insurance
penetration translates to a 22% reduction in taxpayers' contribution following a disaster.
In order to expand the insurability of catastrophe risks in the region and bridge the protection
gap, an innovative public-private partnership ("PPP") approach is needed. To do this, the MAS
is supporting a Natural Catastrophe Data Analytics Exchange (NAT CAT DAX) for Asia Pacific.
Led by the NTU Institute for Catastrophe Risk Management (ICRM) in collaboration with
A*STAR and the industry, this common data analytics platform will enable industry to pool
insurable claims data. More importantly, this platform will unlock new economic exposure and
loss datasets through the use of new technologies such as satellites, remote sensors and
drones. With a comprehensive and integrated economic and insurance database, this will form
a strong data backbone for the industry to not only underwrite traditional reinsurance better,
but also catalyse new product innovation, such as government pools, and alternative risk
transfer products, which will push the boundaries of insurability further.
Today, it gives me great pleasure to announce the formation of the Nat Cat DAX Alliance, in
collaboration with pioneer industry founding members Mitsui Sumitomo Insurance Group,
Renaissance Re, RMS and Aon. I urge the industry to be a part of this collaborative initiative,
as we partner together to increase the availability of quality data, enhance the underwriting
process, and spur collective market analytics and innovation.
New technology and innovation
Just as new disruptive technologies like 3D printing, autonomous vehicles, and the Internet of
Things have emerged in various sectors of the economy, such technologies will similarly
surface in the insurance industry. This will have an impact on all parts of the insurance value
chain - product design, underwriting and distribution.
• Product design - While there is tremendous scope for enhancements in product
design, the advent of new technologies and innovation could even render some
existing offerings obsolete. For example, autonomous cars and their safety elements
could leave some motor insurance products out-dated, if not irrelevant, over the next
couple of decades.
• Underwriting - With big data and smart analytics, underwriting models will likely
evolve to become more predictive and personalised, such as through the use of
telematics to price motor premiums according to driving behaviour, or the use of
wearables for a customised health protection plan. Data analytics is not new to the
insurance sector, which has had decades of experience working with and analysing
large amounts of internal data such as loss histories. This will now be boosted through
the insurers' ability to incorporate external third-party data sources, such as
government statistics on health, worker-safety, and energy data, in their underwriting
and pricing of risks.
• Distribution - Mobile technologies are influencing financial buying decisions, including
the way consumers purchase insurance. This will have a predominantly big impact on
Generation Z, a "mobile first" and "mobile only" generation.
Technology and innovation will be a differentiator for the insurance industry, and a key enabler
for insurers to access previously untapped risks and businesses.
Singapore as a smart financial centre
Singapore needs to position ourselves for this new future too. We have embarked on a national
Smart Nation initiative, which seeks to harness info-communication technology, networks and
data to support better living, create more opportunities, and support stronger communities. The
Government will put in place the infrastructure, policies, ecosystem and capabilities to enable
a Smart Nation, but we also need industries and citizens to work with us to explore and
experiment with new solutions. And if these solutions can work here, we hope that they can
also be relevant to other parts of the world.
In line with our national vision to be a Smart Nation, MAS is also seeking to create a Smart
Financial Centre, one where technology and innovation are used to increase efficiency, create
new opportunities, manage risks better, and improve lives.
The MAS will pursue this with the industry on two complementary fronts - a calibrated
regulatory approach conducive to innovation while fostering security, twinned with
development initiatives to augment the Fintech ecosystem here.
On the regulatory front, financial institutions like yourselves are free to launch new
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ideas without first seeking MAS' approval, so long as you are satisfied with your own
due diligence. We are also encouraging a "sandbox" approach for you to launch your
innovative products within controlled boundaries.
• On the development front, we have launched a Financial Sector Technology &
Innovation scheme to provide financial support, and will work closely with the industry
and educational institutes to build competencies in Fintech and innovation.
The insurance industry is well placed to take the lead in making Singapore a Smart Financial
Centre, given the industry's fertile ground for innovation and the application of technology.
The cluster of innovation labs that have steadily been hubbed here over the years is a reflection
of this. We are proud to be home to Aon's Analytics and Innovation Centre and MetLife's
recently launched LumenLab. To be unveiled later this year in Singapore are AIA's EDGE Lab,
Aviva's Digital Garage and AXA's Data Innovation Lab.
This dynamic mix of insurance brokers, life insurers and composite insurers bear testament to
the vibrant and conducive innovation ecosystem here, supported by a strong Fintech
community of start-ups and research institutes. Besides improving the efficiency of the
insurance sector, I am heartened that they are actively exploring opportunities brought about
by new technologies. This is an important step towards unlocking untapped insurance
solutions and markets, and will go a long way in managing risks in this uncertain environment.
To reinforce this Fintech ecosystem and as part of our broader efforts to modernise the
insurance marketplace, we are supporting the establishment of an electronic reinsurance
trading platform to enhance the efficiency of trading risks electronically.
New risk management and insurance major
As the industry seeks out profitable growth and new horizons, it is critical that the right talent
and skills are available to support this.
In the face of new and emerging risks, as insurance roles evolve and become more complex,
different and deeper skillsets will be essential. Skillsets will also need to be widened as
technology and financial services converge.
To this end, I am glad to announce that the Nanyang Technological University will be launching
the Risk Management and Insurance major next year.
Beginning in August 2016, this new Insurance major will be structured as a major specialisation
under the NTU Business Degree. It is expected to produce 50 new graduates every year
starting from 2018, providing a strong and sustainable talent pipeline to support industry
growth. Alongside a robust curriculum, the students will get to build up their research, analytical
and modelling capabilities, through working on research projects like the Nat Cat DAX and
Cyber Risk Test-bed.
Conclusion
Insurance will continue to increase its relevance in an uncertain world. In these times of new
risks, capital and technology, it is not sufficient to rely on a red ocean strategy. We need to
open new horizons, and open them together. MAS will be a partner of the Singapore insurance
industry as you forge a blue ocean strategy, manage risks and capitalise on the opportunities
in the new reality.
Thank you, and I wish all of you a successful conference and a productive time at the SIRC
and in Singapore.