In light of this unprecedented mix of challenges, the insurance industry is responding as follows: a.  Firstly, focusing more on improving underwriting profitability. Against a backdrop of low yields, insurers can no longer rely on investment income to compensate for poor underwriting results. Insurers now recognize the need to strengthen their underwriting capabilities, in order to improve underwriting profitability. Following the spate of natural catastrophes in Asia-Pacific in 2011 for instance, many insurers have imposed more stringent underwriting and risk controls such as event limits and policy exclusions. Steps have also been taken to close data and risk modelling gaps, which will enable more accurate measurement and in turn, better management of risk exposures. b. Second, optimizing investment and product portfolios. For in-force businesses for which policy terms cannot be changed, insurers are primarily seeking to optimize their investment and hedging strategies. For new products and policy renewals, insurers are also looking to re-price their policies or adjust guarantee levels. c.  And third, enhancing operational efficiency. Apart from improving premium and investment income, insurance companies are also streamlining processes to lower operational and claims expenses. 1  Economist, Jan 14, 2012, citing Munich Re’s numbers. Adjusted for inflation. RMD adjusted for Hurricane Sandy (Oct 2012) to Munich Re’s numbers. BIS central bankers’ speeches  1  5. Going forward, there is no doubt that a longer-term and more sustainable approach is needed to achieve long-term profitability.

This will enable a more accurate assessment of an insurer’s financial and capital strength, even in times of stress. However, this can increase volatility in an insurers’ balance sheet, and raise overall risk charges and capital requirements on long-term assets. In order not to disincentivise insurers from investing in longer maturity instruments, it is therefore critical for regulators to continue to calibrate their solvency regimes carefully. We do note however, that some regulators have or are introducing into their capital frameworks, mechanisms to smooth out the effects of market volatility, such as the illiquidity premium in Australia and the matching adjustment & volatility balancer in Europe. These mechanisms recognize the long term and illiquid nature of insurance liabilities, where insurers are able to hold assets to maturity. Increasing Importance of Risk Management 13. So let me now move on to talk about the increasing importance of risk management in these challenging times. The forces I have mentioned earlier, have triggered an investment mindset shift, particularly in the last 6 to 12 months amongst insurers – from conservative asset allocation strategies and matching of liabilities – to reaching for yield. 14. In their search for returns, many Asian insurers are investing more tactically across asset classes and diversifying their fixed income portfolios. In addition, many are thinking outside the low yield box and considering an extension of the investment universe parameter. This would encompass non-traditional asset classes, such as emerging markets, infrastructure, trade finance, structured credit, and alternatives such as hedge funds, real estate and private equity.