Besides refining the treatment of liability risk, we will also look at capital charges for asset risks. This will help to level the playing field between banks and insurance companies, and minimise opportunities for capital arbitrage. The new capital requirements should also provide an early indicator of financial weaknesses, and thus facilitate progressive intervention by regulators. These risk-based capital requirements will be introduced by end-2003. Raising professional standards in insurance To improve corporate governance and internal governance, it is critical to raise insurance professional standards. All insurance professionals should constantly upgrade both their technical and management skills. In 2000, MAS appointed a private sector committee, the Committee for Efficient Distribution of Life Insurance Products (CEDLI) to recommend minimum standards of transparency, competition and efficiency in the distribution of life insurance products. MAS accepted CEDLI's recommendations to enhance the sales advisory process and professional training. To date, industry practitioners have adopted these minimum standards enthusiastically. Many have gone further, and set their own requirements that exceed the prescribed standards, because they realised that this makes them more competitive in the market. This has improved the level of professionalism among life insurance agents and greatly enhanced the reputation of the industry, which in turn, is helping the industry to attract higher-calibre talent. Training and competency requirements should apply across-the-board to all insurance professionals, and not just to life insurance intermediaries. MAS is currently reviewing the manpower capabilities of the insurance industry and will identify the main competency gaps and areas of weakness.

The five steps range from "Normal" to "Viability at Risk" and terminally, "Winding Up or Closure". Insurers assessed to be on the more critical steps will receive more stringent and intrusive supervisory actions. MAS draws the analogy between the risk classification of an insurance firm and the medical assessment of a patient's health. If an insurer is classified as being on the "Viability at Risk" step, it will probably be admitted to MAS' Intensive Care Unit. However, MAS is not regulating for a no-failure regime. We encourage industry consolidation. In today's competitive environment, size brings financial strength and facilitates diversification on both sides of the balance sheet. But it is not possible, and also not desirable, to operate on the basis that we will never, under any circumstances, allow a financial institution to fail. That way lies moral hazard. Improving corporate governance and internal controls A risk-based supervisory approach relies heavily on the strength of company leadership and management. Corporate governance is thus critical. MAS expects the Board of Directors to provide clear strategic leadership and set consistent corporate values. Management teams must operationalise these strategies while upholding the spirit of the corporate values. Given the nature of the insurance business, corporate values need to be guided by risk management concerns. What is the company's risk appetite? What should be its risk tolerance limits? What is the level of risk management skills in the company? How profitable is the underwriting of various classes of risks?