Zeti Akhtar Aziz: Insurance and reinsurance in the aftermath of the global
crisis
Keynote address by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the
21st Federation of Afro-Asian Insurance and Reinsurance Conference, Kuala Lumpur,
20 October 2009.
* * *
It is my great pleasure to be here today at the 21st Federation of Afro-Asian Insurance and
Reinsurance Conference in Kuala Lumpur. This Conference reinforces the cooperation
between the African and Asian region in the development of the insurance industry. The
theme of this year's conference, "the insurance and reinsurance environment in the aftermath
of the global financial and economic crisis", is indeed highly relevant as stabilization and
signs of recovery are emerging in the world economy. The crisis has tested the robustness
and resilience of financial systems around the world. The far reaching implications of the
financial crisis have shaken the foundations of the international financial system. The effects
of the crisis on the financial systems and the re-thinking by the international community on
the issues that have surfaced during the crisis will fundamentally change the future financial
landscape. This Conference provides an important platform to discuss the key issues faced
by the insurance and reinsurance industry, in particular, in the context of our two regions and
to discuss the potential to leverage on our respective relative strengths and the opportunities
that the new environment presents.
While several of the advanced economies will continue to be weighed down by weak growth
as the slow process of financial resolution continues and the high unemployment delays the
recovery process, emerging economies, in general, and Asia in particular, have shown a high
degree of resilience. The financial intermediation in most emerging economies have
remained undisrupted and have continued to support the domestic economic activity. While
the emerging economies are expected to lead the recovery process, there needs to be a
reassessment of the strategies for future growth. Over reliance on export orientation to the
traditional markets would increase the vulnerability to external developments.
Going forward, emerging economies now need to achieve a greater balance between
external-oriented development strategies and the strengthening of our domestic demand. In
Asia, domestic demand in most emerging economies are well supported by the positive
demographic structure, the rising income levels, and the broadening of affluence. This is
reinforced by the low levels of unemployment and inflation, and the continued access to
financing. This changing spending patterns in Asia have already led to the rise of a modern
retail sector across our region. In addition, high savings rates exceeding 30% of Gross
National Product for most countries in Asia, raises the potential for long-term sustainability of
domestic consumption spending. This trend has also supported increased intra-regional
trade, investment and tourism that is reinforcing the growth prospects in the region.
The evolving trends and encouraging growth prospects in our respective regions present
tremendous opportunities for the insurance and reinsurance industry. Of significance is that
the global insurance industry on the whole has remained resilient throughout the current
financial crisis. The overall aggregate financial position of insurers in the crisis affected
countries have continued to be strong, and generally not severely affected by liquidity
pressures or exposures in the credit derivatives markets. Earlier losses by insurers in
financial market activities had resulted in a shift to "back-to-basics" models, focusing on core
underwriting business instead of heavily relying on investments as the main source of
earnings. The industry had also benefited from the subsequent upturn in the pricing cycle
which has fortified the capital position of insurers and provided the support to maintaining
sound underwriting standards. These conditions have placed the industry on a much
stronger position to withstand the challenges emanating from this global financial turmoil.
Domestic and external conditions are however expected to remain volatile for some time.
Significant uncertainties will persist in the international financial markets and the broader
global economic conditions. These conditions will continue to pose significant challenges to
the insurance industry. In this environment, maintaining strong capital buffers and sound risk
management is even more imperative to ensuring the continued resilience of the insurance
industry. With the adoption of Solvency II in Europe and its influence on solvency regimes in
other jurisdictions, more countries, including Malaysia, have now moved to adopt more
riskaligned capital regimes. This needs to be reinforced by substantive improvements in risk
management practices, greater alignment between business strategy and risk, and greater
appreciation by boards and senior management of insurers on risk issues given the growing
complexity and increasing interconnectedness of financial markets and financial sector
players.
The insurance industry has progressed significantly over the years and is well-positioned to
supporting both the recovery process and future growth potential of the economy. As
emerging economies rebalance with greater emphasis on private consumption, the social
safety net will need to be strengthened, with insurance and pensions now having a greater
role. An ageing population will also become an issue in the future. Globally, the number of
the aged population that is aged 65 and above is expected to grow dramatically by 2050.
Such rapid growth will have major economic and social consequences in many countries.
Many nations are finding it increasingly difficult to provide adequately for this segment of the
population through state-provided social security. Planning for retirement has therefore
become essential both for individuals as well as public policy to ensure sustainable financing
to meet retirement and healthcare needs in the long term. An enhanced social safety net
would foster greater security in addition to reducing the need for significant precautionary
savings. This would in turn promote increased consumption spending.
Prospects for higher insurance penetration rate in the region continue to remain positive. In
2008, insurance premiums accounted for 5.95% of Gross Domestic Product (GDP) in Asia
and 3.57% of GDP in Africa compared to 7.29% in America and 7.46% in Europe. The
changing priorities of the growing population in the region, largely comprising of a young
workforce in the middle income group, have also enhanced the demand for investment-linked
and wealth management products. These opportunities require strategies to increase the
accessibility of insurance products. Worldwide, insurers have successfully leveraged on
bancassurance and internet channels to enhance insurance penetration. In Malaysia,
insurers can now freely enter into bancassurance arrangements with banking institutions and
extend their branch network based on the liberalisation measures announced in April this
year.
In the more recent period, the role of insurance becomes increasingly more important, with
the increasing frequency of catastrophies that have been associated with global climate
change and pandemics. According to a recent study, economic losses caused by natural and
man-made catastrophes around the world in 2008 amounted to USD269 billion. Asia
accounted for the top five worst catastrophes in terms of fatalities in 2008. The recent natural
disasters in Southeast Asia and the Pacific Islands have also resulted in major destructions.
Public-private partnership between Government and the insurance industry in providing
appropriate insurance schemes and developing risk mitigating mechanisms are needed to
cope with these losses. Greater collaborative efforts among industry players in the region in
the form of technical assistance and pooling of resources will increase capacity and expertise
to underwrite such risks. Through such collaboration, the ability for the insurance industry to
underwrite and reinsure risks based on the requirements of the region can be significantly
enhanced.
The growth of the takaful sector has also been commendable over these recent few years.
Between 2004 and 2007, the average annual growth rate of the global takaful industry is
estimated at 25%, compared to 10.3% for conventional insurance. With the proliferation of
players and products, and the rapid pace of development of the sukuk market, Malaysia's
takaful sector experienced an average annual growth of 20% from 2003 to 2008. Today, the
takaful industry accounts for 11.5% of the overall insurance premiums. Takaful companies in
Malaysia have also ventured into international markets to expand their business. This
positive outlook is expected to continue with the impending entry of new takaful players as
well as from the increased participation of international industry players in the takaful market.
Of importance is that the industry is well supported by a robust legal and regulatory
framework that upholds Shariah principles.
In the aftermath of the global financial crisis there has also been a rethinking of the
regulatory structure of the financial system. The crisis has exposed serious shortcomings in
the supervisory architecture. Increased consideration is being given to a more integrated
approach to the prudential regulation of the insurance industry together with the other
segments of the financial sector. With the growing significance of the insurance industry, this
would result in more consistent prudential standards for regulation. In addition, there has
been an ongoing convergence in the financial sector as traditional boundaries continue to be
eroded by changes in institutional structures, shifting legal barriers and product innovations.
The proliferation of conglomerate arrangements have also increased the need for more
consistent regulatory approaches across industry boundaries to reduce the prospect of
regulatory arbitrage and inefficiencies.
France and Germany have recently made announcements on the consideration to place the
supervisory responsibility of the insurance sector with the Central Bank. This has however,
drawn some resistance from insurers on grounds that" the concentration of responsibilities
would create new conflicts of interest for the financial sector". Bank Negara Malaysia has
been the supervisory authority of the banking industry since its establishment in 1959 and for
the insurance industry since 1988. This integrated approach within the Central Bank has
enabled us to form a more complete assessment of the risks to financial stability while
ensuring consistency in the treatment of risks across the different industries to avert risks to
the overall financial stability.
The rapid pace of changes in the global economic and financial environment requires
industry players to continually upgrade their expertise. Cooperation in this area between
industry players can contribute towards bringing the insurance industry to the next frontier.
Since its establishment in 1964, the Federation of Afro-Asian Insurers and Reinsurers has
fostered a strong cooperation among insurance industry players in Africa and Asia. Such
expertise may indeed be tapped through such regional platforms, bringing with it mutual
benefit to the insurance industry in both markets.