Zamani Abdul Ghani: Changes and challenges concerning the insurance
industry in Malaysia
Keynote address by Mr Zamani Abdul Ghani, Deputy Governor of the Central Bank of
Malaysia, at the 23rd Pacific Insurance Conference, Kuala Lumpur, 29 October 2007.
* * *
Let me start by joining my colleagues from the Malaysian insurance industry in extending a
very warm "Selamat Datang ke Malaysia" to all the guest speakers and conference delegates
from abroad. It is my earnest hope that you will not only benefit from the deliberations during
the conference, but also find time in between your short stay here to discover Malaysia and
experience our rich diversity in colours and culture.
I am indeed honoured to be with you this morning to officiate the opening ceremony of the
23rd Pacific Insurance Conference - the first to be held in Kuala Lumpur in the conference's
44-year history. I must congratulate LIAM for its efforts in organizing this prestigious
conference involving insurance leaders from the Asia Pacific Region. The conference theme
"New Solutions for Traditional Challenges: Winning Ideas from Industry Leaders" is most
appropriate as the changing financial landscape poses significant challenges to the
insurance industry in the Asia Pacific Region. It is indeed timely therefore that the life
insurance fraternity has come together to share critical insights and perspectives of key
challenges ahead and map out new strategies to capitalize on the opportunities while
avoiding the pitfalls. With a gathering of more than 300 industry leaders from 25 countries, I
am confident that the deliberations will generate new solutions/strategies in an industry that
is undergoing rapid transformation, underpinned by globalization, broad-based financial
deregulation and increasing opportunities as well as uncertainties amidst an environment of
heightened volatility.
Rapid developments in technology and financial liberalization have played a catalytic role in
transforming the financial services industry worldwide. Consequently, traditional business
boundaries have become increasingly blurred, as demand for financial products and services
become more diverse and sophisticated, transcending the traditional offering of stand-alone
banking, insurance or investment products. As changes in the global financial industry
continue to occur and indeed accelerate, insurance companies in the region will face
mounting pressures to adapt effectively into the evolving environment by embracing
innovation and becoming strategically more focused.
A key ingredient in supporting such transformation is to nurture strategic leaders who have
the foresight to anticipate, influence and reshape the strategies in tune with these
developments. Charting the journey forward, insurance leaders need to consider the
following salient trends:
•
Firstly, the global trend seen in several industries, including insurance, to reduce
costs and increase efficiency and productivity in an increasingly competitive
environment. The traditional paradigm of pricing goods and services purely on
costplus basis should therefore be re-evaluated. Indeed the focus needs to be shifted
towards providing products and services that provide superior value proposition to
consumers, made possible through re-engineering of business processes and
operating models that promote greater productivity and competitiveness.
• the dynamics of the market place have already resulted in alternative
Secondly,
marketing approaches to the traditional agency system, including more cost
effective distribution channels like bancassurance. This concept has gained
acceptance worldwide for the provision of a wide range of life and pension products
via the distribution networks of banks.
•
Thirdly, globalization of the world economy and financial markets, as well as trends
towards greater financial innovation and promoting shareholder value, have
contributed to a wave of mergers and acquisitions between insurers, banks and
asset management companies resulting in the emergence of financial
conglomerates. These integrated entities will inevitably raise the bar in the entire
business value chain, including product design and pricing, streamlining of
distribution channels and integrating valuable databases of customer information,
thus accentuating further competitive pressures within the life insurance markets in
the region.
•
Finally, an area that will present significant opportunities as well as challenges to
the insurance industry will be the evolving structure of social security systems and
safety nets that will have to keep pace with demographic changes as well as the
rising cost of medical care. Many nations are already finding it difficult to provide
adequately for the needs of the aging population through state provided social
security.
It has been reported that globally, life insurance premiums amounted to USD2,200 billion in
2006, and Asia as a region is the fastest growing life insurance market, in line with rapid
economic development and growth. Financial services and economic liberalization in Asia,
particularly in China, India and South-East Asia have significantly widened the market
outreach for life insurance whilst unlocking considerable market potential in new growth
areas. Indeed, the transformation of Asian countries into industrial and services
powerhouses, with increasing share of world output, will present abundant insurance
opportunities within the region as countries make huge investments in upgrading their
physical, financial and human capital infrastructure.
On the domestic front, the Malaysian economy continued to be on a steady growth path with
real GDP expanding by 5.7% in the second quarter of 2007 and an anticipated 6% for the
entire year. In tandem with this growth, the insurance industry, including the takaful sector,
recorded a combined premium growth of nearly 10% for both the life and general sectors to
reach RM13 billion in the first half of 2007. The assets of the life and general insurance funds
correspondingly registered a double-digit growth of 14% to RM116 billion as at end June,
2007, from 11% in the corresponding period in 2006. This growth momentum is expected to
continue in 2008 in line with the sustained growth of the Malaysian economy.
One of the key mandates of Bank Negara Malaysia is to develop the insurance industry into
a strong, dynamic and innovative component of the financial system. In this respect,
industrialization and real sector growth have to be complemented by a strong and thriving
services sector, especially in the area of banking and insurance. As a mobiliser of long term
private savings, life insurance has a critical role in providing long term funding for the
massive investment required to achieve the growth and income objectives of Vision 2020,
that is, in becoming a fully developed economy.
In line with the rapid changes taking place in the business landscape of the insurance
industry, the authorities have moved away from prescriptive regulation to one that allows for
a more flexible operating environment. Specifically, insurers are now operating in an
environment where regulations have become more principle-based. The principle-based
regime places greater expectation and demands on the leadership and senior management
of insurers in driving fundamental changes required within the organization in response to the
changing regulatory landscape. In particular, senior management of insurers must raise the
bar for the organization to achieve best-in-class practices that are aligned with the
organization's strategic orientations, rather than merely complying with a minimum set of
prescribed requirements. A pre-requisite for this transformation is that senior management
acquires a thorough understanding of the relationship and inter-linkages between the various
components of the insurance business, and to manage these dynamics in a manner that
optimizes performance.
The regulatory shift also places greater prominence on creating a strong risk management
culture that is fundamental to sound insurance operations. In Malaysia, the transition to a
Risk Based Capital Framework and the implementation of the risk-based supervisory regime
constitute important capacity building elements of this change. The transition taking place is
in tandem with emerging trends taking place at the international front, as well as the core
supervisory principles of the International Association of Insurance Supervisors (IAIS), which
collectively, provide a road map on the future direction of insurance regulation.
Notwithstanding the move to a more principle-based regime, it is important that there
remains a sufficient degree of regulatory oversight to maintain financial stability and public
confidence. It is equally important for the regulations to focus on facilitating market-led
adjustments that will allow the industry to evolve in response to market developments. This
includes putting in place mechanisms that harness market forces and discipline, to reinforce
prudential regulation whilst also promoting a more efficient and responsive financial system.
As we prepare ourselves for the challenges arising from greater integration and increased
competition, there will be regular review and re-assessment of the regulatory framework as
we benchmark our regulations against leading business practices and international
standards set by recognized bodies such as the IAIS and the International Accounting
Standards Board.
Rapid developments in technology and information systems coupled with the forces of
globalization have made the world increasingly borderless. While such developments are
welcome as they provide a platform to hasten the pace and manner through which
businesses and financial transactions can be efficiently concluded, they can also facilitate
money launderers and terrorist financiers to conduct a range of illegal activities, thus
destabilizing a country's financial system and damaging its image and reputation. As
structured programs on Anti-Money Laundering and Counter Financing of Terrorism activities
are relatively new especially among many developing member countries, it remains a
challenge for the financial industry and regulators alike to formulate adequate measures and
mechanisms to counter these perpetrators. In this regard, compliance with the standards set
by the Financial Action Task Force on Money Laundering help deter the Asia Pacific region
from being targeted as a regional centre for money laundering and terrorism financing. In this
regard, I am especially pleased to share with you that Malaysia has been ranked among the
top 10 countries in terms of AML/CFT compliance in the recent Mutual Evaluation Report
2007 assessment exercise.
Let me now turn to a subject close to us here in Malaysia, that is, Islamic insurance or better
known as takaful. In recent years, takaful has grown significantly as the Islamic alternative to
conventional insurance and has evolved from being a domestic operations to becoming a
thriving global business. The global takaful market is expected to grow between 15 and 20
per cent per annum. Nevertheless, the market penetration level remains low, notably less
than 5% in many Muslim countries and 6.8% here in Malaysia, thus providing significant
market potential that remains untapped.
Bank Negara Malaysia will continue to foster the continued growth of takaful business by
providing a conducive business and regulatory environment. However, there is a clear need
for the takaful industry to deliver innovative financial products and services, that can
effectively compete with those offered by conventional insurers. While acknowledging the
necessity of having different rules in certain areas to reflect the underlying fundamental
differences between the two systems, a key consideration of the Bank is to maintain a level
playing field. Given the functioning of Islamic finance in parallel with the conventional
financial system, neutrality in treatment between takaful and conventional insurance products
is considered important to ensure the sustainability of both systems in the economy. The
dual system would also serve to provide a comprehensive array of financial products and
services as well as intermediaries for the overall benefit of consumers.
Allow me to also share with you Malaysia's latest initiatives to strengthen its position as an
international Islamic financial centre. In line with our efforts to enhance our inter-linkages with
the global Islamic financial markets, the Malaysian Government has launched the Malaysia
International Islamic Financial Centre or MIFC as part of the initiatives to position Malaysia to
become a leading international Islamic financial centre. It is our objective to build greater
intermediation linkages between East Asia, South Asia and the Middle East which will, in
turn, further expand inter-regional trade and cross border investment flows. As part of these
initiatives, foreign financial institutions are allowed to establish International Islamic Banks,
International Takaful Operators, as well as International Currency Business Units to
undertake international currency business in Islamic finance with non-residents in Malaysia
or abroad through a locally incorporated entity or a branch.
The Malaysian Government has also focused its efforts towards strengthening its position as
an international takaful and retakaful centre, with particular emphasis on widening and
deepening the retakaful sector so as to effectively complement the growth and expansion of
the takaful industry. In this regard, I wish to invite strong and qualified applicants to make
Malaysia as their centre for retakaful activities. Foreign applicants with strong credentials are
certainly welcome to conduct retakaful business in Malaysia.
The changing global investment climate continues to pose challenges for life insurers in
respect of their life fund investment. The recent sub-prime crisis in the US has induced
greater fluctuations of the yield curve as well as higher volatility in the equity markets. Given
the increased proliferation of innovative products with investment guarantees, insurers'
remain very vulnerable to the movements of the capital markets. As for traditional
noninvestment linked business, asset-liability management and duration mismatch continue to
pose a challenge, and insurers must seek new long term investment avenues to minimize the
risk of mismatches.
The occurrence of global warming and climate change is of particular significance to the
insurance industry which, has had to bear the brunt of severe losses arising from
weatherrelated catastrophes. Between the 1960s and 1990s the number of natural catastrophes has
doubled while insured losses increased nearly seven-fold, most of them weather-related.
While the property and casualty insurers have been the hardest hit, life insurers are not
necessarily spared as climate change has also taken its toll on human lives via natural
disasters, epidemics and the like. While the global insurance industry has displayed
remarkable resilience to withstand such record losses, the future remains fraught with
uncertainties and the challenge is to ensure that risk management strategies remain
adequate to counter the impact of unpredictable changes in global climate patterns.
Allow me now to briefly share with you, some of the measures undertaken by Malaysia in
responding to the evolving changes and challenges seen in the insurance marketplace.
Firstly, in the area of structural reform, industry consolidation remains an area of priority for
Bank Negara Malaysia in its efforts to foster a more competitive and resilient industry to
harness economies of scale, expand distribution capacity, enhance business volume and
exploit opportunities for cost rationalization.
Secondly, the shift towards principle-based regulations and the implementation of a
riskbased capital and supervisory framework in Malaysia provides a greater degree of flexibility
for insurers to exploit business opportunities arising from the changing financial environment,
whilst not losing sight of the inherent risks. Moving forward, Bank Negara Malaysia will adopt
an increasingly differentiated regulatory approach where insurers that exhibit strong
corporate governance and risk management practices will be given greater regulatory
flexibility.
Thirdly, the advent of bancassurance and bancatakaful has seen more players packaging life
insurance and family takaful with innovative investment options that incorporate banking and
investment product features. Bancassurance and bancatakaful provide immense potential for
further market penetration given the relatively higher level of public confidence in financial
dealings with banks and the significant spin-offs that can be reaped through data mining
arrangements with banks. Although bancassurance has become firmly entrenched in
Malaysia (accounting for 45% of new business premiums in 2007), it also continues to
develop rapidly in terms of market reach and operational sophistication.
Fourthly, with the rapid technological advancements and increasing consumer demands for
more efficient delivery of products and services, the Malaysian insurance industry has
continued to transition towards information technology-driven solutions, as well as,
leveraging on more efficient payment and settlement systems such as e-payments. This has
significantly enhanced the delivery of personalized and customized insurance solutions,
made possible through the utilization of new delivery channels, including those that are
internet-based. In the area of general insurance for instance, the successful implementation
of e-cover notes for motor insurance policies led to vast improvements in service efficiency,
better enforcement of cash-before-cover regulations as well as reduction in premium
collection fraud.
In the area of capacity building, human capital development is key to the future development
and growth of the financial sector. As competition intensifies, the role of human capital in
defining the areas of comparative advantage will become more prominent. Recognizing
these trends, Bank Negara Malaysia launched the International Center for Leadership in
Finance (ICLIF) in 2003 to accelerate the development of top management talent for the
corporate and financial sector within the Asian region. At the management trainee level, the
Bank has initiated the Financial Sector Talent Enrichment Programme or in short FSTEP, a
joint collaborative effort undertaken with the industry and training institutes aimed at boosting
the supply of well-trained and competent personnel for the financial services industry. This is
complemented by the International Centre for Education in Islamic Finance (INCEIF) which
was established for the purpose of meeting the increased demands of Islamic finance
professionals as well as conducting research and consultancy in Islamic finance. I would very
much like to encourage you to take the opportunity of participating in some of these
programs.
Finally, no less important an area for consideration in re-engineering financial sector
development, is consumer education and protection. Today, we experience growing
consumerism as well as changing consumer preferences and expectations in tandem with
increased education levels and growing personal wealth. These and other developments
collectively reinforce the need for greater financial literacy to ensure the efficient functioning
of the financial system.
An important aspect of Bank Negara Malaysia's regulatory strategy and approach therefore,
has been to ensure that the continued growth of the financial sector is underpinned by fair
market practices and conduct. In this regard, initiatives undertaken by Bank Negara Malaysia
in the insurance sector have been primarily directed towards enhancing product
transparency and disclosure, improving sales practices, raising the bar of professionalism for
insurers and intermediaries, as well as strengthening the consumer protection framework.
Apart from promoting sound and fair market practices, considerable efforts have also been
made to develop the necessary infrastructure to facilitate consumers in obtaining redress,
information and advice on matters relating to financial services. These include the
implementation of the Consumer Education Programme and the establishment of a
dedicated customer service centre (Bank Negara Malaysia LINK) and contact centre (BNM
TELELINK) to improve access to information on financial products and services by members
of the public.
As we advance forward, changes in the global economy and international financial landscape
will continue to be dynamic and the level of complexity and sophistication in the financial
markets will further intensify. Achieving success in an environment fraught with greater
uncertainty and more intense competition, will ultimately hinge on the ability of the industry
players to continuously innovate and deliver enhanced value propositions to customers.
On that note, ladies and gentlemen, I hope that the 23rd PIC will not only be a platform for
industry leaders to share and explore ideas for the benefit of the life insurance industry, but
more importantly, to be followed up with affirmative actions on the part of the delegates
involved. Sir Winston Churchill once said, "There are plenty of good ideas if only they can be
backed with the power of action". With that, I wish you a fruitful Conference.
Thank you.