These trends however saw the start of the erosion of the linkage between finance and the real economy, sowing the seeds of financial activity that would become inherently unsustainable. In several parts of the world, finance progressively deviated from long-term value creation towards the pursuit of short-term returns. Banks’ trading and fee-generating activities became much more lucrative than traditional lending activities. This in turn spurred innovation in financial services that became more and more removed from the service to society and the economy. During the period just prior to the global financial crisis, domestic credit provided by the financial sectors such as in Iceland and the US, which had previously averaged 48% and 149% of GDP respectively, had become decisively decoupled from, and had far outstripped real economic activity. Domestic credit by the financial sectors in Iceland and the US had by 2007, risen sharply to 299% and 236% of GDP respectively. The experience of the global financial crisis highlights the potential for the benefits of finance to be dramatically reversed, resulting in destructive rather than constructive effects of finance. Several studies have shown that the marginal returns to growth from finance diminish at high levels of financial development. In other words, there can be “too much finance” where the costs to growth and stability outweigh the benefits of financial development. Similar to other booming industries, the financial sector at the height of its exuberance showed an overinvestment of resources in terms of capital including human capital which only became apparent after the bust.

During recent episodes of market volatility which saw substantial capital outflows by foreign portfolio investors, insurance companies were among the large domestic institutional investors that provided stability to the market. Indeed, the insurance has become an important component in the Malaysian market in contributing towards the growth of bond and sukuk markets. Low penetration signals opportunities for insurers There is no doubt that the industry has come a long way. This journey has been made possible with the commitment of many in this room today who have led their various institutions to greater heights, and who understood and supported the reforms introduced in the industry over the last two and half decades were critical to take the industry to a new  BIS central bankers’ speeches  1  level of maturity. It was painful but necessary. The fruits of the various reforms we made are for all to see. The industry is now more resilient and robust. Over the last 4 decades together, we had laid a strong foundation for the insurance industry to grow even larger. Therefore, our aspirations for the industry ought to be more ambitious. Under the Government’s Economic Transformation Programme (ETP), a penetration level of 75% by 2020 has been set as a goal for the industry. After two decades of steady growth, the current level of insurance and takaful penetration, at 54%, still remains below targeted level. While this ratio is in no way flattering, it also reflects the enormous untapped potential in the Malaysian insurance sector.