The Monetary Policy Statement (MPS) remains the key monetary policy communication tool of the central bank to provide the rationale for monetary policy decisions. Given the pronounced changes in the economy and the significant changes taking place in the financial sector, the industry would essentially need to respond to the new challenges arising from: i. Greater linkages, integration and interdependence between nations. This trend is likely to intensify as more countries embark on initiatives to promote closer regional economic and financial integration, to enhance their level of economic performance. ii. The challenge of intensified competitive pressures, arising not only from changes in the financial environment, the technological advancements and financial reforms but also the entry of new players, including the non-traditional competitors such as non-financial services. iii. Consumers are increasingly confronted with a wide range of new and innovative products and services that are delivered via new and more efficient delivery channels. As consumers are becoming increasingly demanding and financially sophisticated, greater emphasis needs to be given to the provision of the variety and quality products and services at competitive prices through the most effective channels. Banking institutions need to anticipate and rapidly respond to these new demands and expectations. iv. Policymakers are also confronted by the challenge of maintaining overall financial stability whilst at the same time, promoting efficiency in the financial system. Balancing the trade-offs arising from meeting these objectives will be necessary to determine the best course of action.

Notwithstanding this wider reach, life insurance coverage has remained relatively low compared with the more developed markets in the region such as the Republic of Korea, Singapore and Japan which reported penetration rates of more than 80%. Given the vast untapped market potential and the increased product innovation and new distribution channels, the life insurance penetration in Malaysia is expected to strengthen. Demographic changes leading to a growing ageing population has been a growing concern in many countries. Given the trends in rising life expectancy and falling birth rates, responding to the increased challenges of retirement financing has been high on the nation's socio-economic development agenda. Going forward, there will be greater interest in private pension schemes representing an are of significant growth opportunities for life insurers. The financial performance of the Malaysian insurance industry has also continued to be impressive during the 2000 and 2005 despite the challenging underwriting and investment conditions, with growth primarily driven by the life sector. Total insurance fund assets of the industry grew at an average  BIS Review 55/2006  3  annual rate of 13.8%. The insurance industry also increased in importance as a component of the economy and financial system. The ratio of total industry assets to nominal GNP rose from 16.1% in 2000 to 20.4% in 2005, while the ratio to total assets of the financial system continued on an upward trend from 4.0% in 2000 to 5.1% in 2005.