nor shamsiah mohd yunus : innovation in a disruptive era remarks by ms nor shamsiah mohd yunus, governor of the central bank of malaysia ( bank negara malaysia ), at the malaysian insurance institute ( mii ) summit " innovation in a disruptive era ", kuala lumpur, 28 september 2018. * * * i would like to congratulate the malaysian insurance institute for organising this summit. this is my inaugural engagement with the industry and it gives me great pleasure to be able to address all of you today. in line with the theme of this conference, my remarks today will cover three things : 1. firstly, the role of insurance within the context of key developments that are shaping our economy ; 2. secondly, how the bank views and is responding to innovation in the insurance sector ; and 3. finally, some perspectives on our regulatory and supervisory focus moving forward. role of insurance in an economy insurance plays a core function in the modern economy and the financial system. there is a positive relationship between economic growth and insurance development. this is borne out by studies which have shown that more developed markets have a higher share of insurance in the economy. the role of insurance in the economy is worth restating, particularly given the economic and social challenges that we face today. a core purpose of insurance is providing protection against individual and business risks through risk transfer and pooling. this improves individual welfare, and supports consumption and investment activities. the effects are more pronounced among lower income groups and micro - and small businesses that are disproportionately impacted by events such as the death or incapacitation of a breadwinner, or business disruptions. insurance and takaful therefore play a critical role in reducing inequality. this is key and growing risk can be seen in economies that are becoming more prosperous, and at the same time more divided. a well - developed insurance sector also contributes to wider economic efficiency and resilience. at a time where global developments can have a far greater impact on domestic economic performance, it is important for countries including malaysia, to continue to develop our growth potential through further diversification into new and higher value - added economic activities. insurance facilitates this by allowing businesses to take risks, without which we cannot have innovation. it also enhances access to financing. this is possible because insurance has the ability to pool, assess and assume risks that are outside the expertise and capacity of banks or businesses themselves to bear. such examples would be weather -

##mediation for a given level of risk. alternatively, constraints on supervisory authorities or practices could shift the frontier in the opposite direction if use of effective tools is prohibited. given the complexity of these relationships, it is not surprising that there is a wide range of estimates and theories about the optimal type and level of oversight of financial institutions. nonetheless, we need to understand better these relationships in order to make policy choices more effective. this is an area where i believe the official sector, industry participants, and researchers can all continue to make progress. social and private perspective a second interesting issue reflects the perspective on risk and return. in traditional portfolio investment problems, it is clearly the risk and return to the private investor. when thinking about policy, however, the appropriate perspective of the official sector is for society as a whole, which likely differs from the perspective of an individual firm. that is, the official sector and private sector might measure the axes differently — particularly the risk axis — because the official sector cares about spillovers, externalities, and other market failures that private actors may ignore. 11 this broader perspective is a critical part of the supervisory framework for large banks that was implemented after the financial crisis. in particular, the official sector recognizes the potential impact that stress at a large bank could have on financial markets or the real economy. as a result, the federal reserve supervisory program pursues two complementary goals for large bank supervision — one, to enhance resilience to lower the probability of failure or inability to provide intermediation services and, two, to reduce the impact on the financial system or economy in the event failure or material weakness does in fact occur. 12 this difference in perspective potentially introduces some divergence in views and assessment of what an efficient policy looks like. a set of policies might be socially efficient — that is, on the frontier when risk and return are measured for society as a whole – but perceived as inefficient by the industry or the public, who may focus on the private impact on individual firms or sectors. this can lead to some debate about the stated goals and assessment of the efficacy of a particular policy mix. i believe this is an area where better communication can help and the official sector can be clear on expected outcomes and explain any divergence between social and private perspectives. distinguishing policy changes 4 / 7 bis central bankers'speeches a third issue is that it is not always easy to distinguish policy changes that move outcomes along the frontier from policy changes that move outcomes toward the frontier