Singapore Insurance Market

AMITY INTERNATIONAL BUSINESS SCHOOL

A Term Paper Report On Singapore Insurance Market Submitted by: Ankit Aggarwal A1802011208 MBA IB(2011-2013)

ACKNOWLEDGEMENT

As part of our course curriculum dissertation in our specialization has helped us in gaining deep knowledge into the field of finance. Any accomplishment requires the effort of many people and a project of this nature requires intellectual nourishment, professional help and encouragement at various stages.

I bear to imprint of my people who have given me their precious ideas and time to enable me to do this research. I owe much to Ms Latha who has been my mentor and my guide all through.

At last but not the least I also thank to all persons interviewed for their kind cooperation. I‘m indebted to all those who have been helpful throughout the process of writing this report but as the cliche goes, I‘m solely responsible for any remaining errors of fact or judgement.

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TABLE OF CONTENTS

CHAPTER 1.

CONTENTS EXECUTIVE SUMMARY

PAGE NO. 4

1.1 COUNTRY FACTS 1.2 SINGAPORE INSURANCE MARKET OVERVIEW 1.3 PENETRATION RATE 1.4 NON LIFE MARKET 1.5 MARKET SHARE OF INSURERS 1.6 MARKET STRUCTURE GWP 1.7 DISTRIBUTION CHANNELS 2.

LITERATURE REVIEW 2.1 CONSUMER AND COMMUNITY ATTITUDE TOWARDS INSURANCE IN SINGAPORE

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2.2 ACCESSIBILITY OF INSURANCE IN SINGAPORE

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2.3 AFFORDABILITY OF INSURANCE IN SINGAPORE ANALYSIS 3.1 SWOT ANALYSIS

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4.

LEARNING POINTS

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5.

RECOMMENDATIONS

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SINGAPORE SOLUTIONS

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7.

CONCLUSION

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REFRENCES

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EXECUTIVE SUMMARY Singapore is one of the most open economies in the world and the Singapore Government has strived to market Singapore as the Asian hub for all businesses. Keeping in line with that ambition, this report seeks to discuss the feasibility of Singapore being the Asian hub for the insurance market and make recommendations to enhance growth of the local insurance market. A SWOT (strengths, weakness, opportunities and threats) analysis on the Singapore insurance business environment was first conducted to determine the current condition of the insurance market, as well as growth projections in view of the recent global economic recovery. This report will also evaluate the competitiveness of the Singapore insurance market on both a regional and global basis, such as cross-referencing to the Hong Kong and Bermuda insurance market throughout the SWOT analysis. The analysis is summarized as follows

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COUNTRY FACTS The Republic of Singapore is an island city-state, approximately 710.22 km in size, located at the southern tip of the Malaysian Peninsula, 137 kilometres north of the equator. Before European settlement, Singapore was the site of a Malay fishing village at the mouth of the Singapore River. In 1819, Sir Stamford Raffles of the British East India Company established a trading post on the island, which was used as a port along the spice route. Over time, Singapore became a key commercial and military hub and the centre of British power in Southeast Asia. In 1963, Singapore achieved independence from Britain and merged with Malaya, Sabah, and Sarawak to form Malaysia. Singapore seceded from the Malaysian federation and became an independent republic on 9 August 1965. Since independence, Singapore's standard of living has risen dramatically. Foreign direct investment and state-led efforts to industrialise the country has created a modern economy focused on industry, education and urban planning. Singapore is now the 5th wealthiest country in the world in terms of GDP (PPP) per capita.

Figure 1 shows singapore gdp per capita constant prices since 2000

figure 2 shows gdp per capita (purchasing power parity ppp)

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The population of Singapore including non-residents is approximately 4.99 million. Singapore is highly cosmopolitan and diverse with Chinese people forming an ethnic majority with large populations of Malay, Indian and other people. English, Malay, Tamil, and Chinese are the official languages. Singapore is a parliamentary republic, and the Constitution of Singapore establishes representative democracy as the nation's political system. The People's Action Party (PAP) dominates the political process and has won control of Parliament in every election since self-government in 1959. Singapore has a highly developed market-based economy, which has historically revolved around extended entrepôt trade. Along with Hong Kong, South Korea and Taiwan, Singapore was known as one of the Four Asian Tigers. The economy depends heavily on exports and refining imported goods, especially in manufacturing. Manufacturing constituted 26% of Singapore's GDP in 2005. The manufacturing industry is well-diversified with significant electronics, petroleum refining, chemicals, mechanical engineering and biomedical sciences manufacturing sectors. Singapore has one of the busiest ports in the world and is the world's fourth largest foreign exchange trading centre after London, New York City and Tokyo. Singapore has been rated as one of the most business-friendly economies in the world, with thousands of foreign expatriates working in multi-national corporations. Singapore is also considered to be one of the top centres of finance in the world. In addition to this, the city-state also employs tens of thousands of foreign blue-collared workers from around the world. The Singaporean economy grew by 8.3% in 2004, 6.4% in 2005 and 7.9% in 2006. However, the economy grew by 1.1% following the global financial crisis in 2008. The per capita GDP has risen dramatically since independence in 1965. Singapore is a popular travel destination and tourism is one of its largest industries. The total visitor arrivals reached around 10.2 million in 2007. The Orchard Road shopping district is one of Singapore's most well-known and popular tourist draws. To attract more tourists, the government decided in 2005 to allow two casino resorts (termed Integrated Resorts) to be developed at Marina South and Sentosa Island. Singapore is fast positioning itself as a ‗medical tourism‘ hub — about 200,000 foreigners seek medical care in the country each year and Singapore medical services aim to serve one million foreign patients annually by 2012 and generate USD 3 billion in revenue. The Economic Development Board is a statutory board of the Government of Singapore. It has been tasked to plan and execute strategies to sustain Singapore as a leading global hub for business and investment. In 2009, Singapore had a population of 4.99 million people, of which 3.73 million were Singaporean residents.

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The home ownership rate in Singapore is high, with approximately 90.1% of households owning their own home. Many Singaporeans live in Housing Development Board (HDB) Apartments and private apartments or condominiums. HDB apartment dwellers have access to a Fire insurance scheme, so there is a high insurance penetration rate for building cover. However, the penetration rate of contents insurance is much lower.

Singapore Insurance Market Overview With its open market, stable government, English speaking population, good facilities for staff and expatriates, as well as easy access to the rest of Asia, Singapore has positioned itself an important regional hub for finance and insurance. As a result, many multinational corporations have established their regional head offices in the country. Regulated by the Monetary Authority of Singapore, the general insurance industry is also strongly represented by the General Insurance Association of Singapore. The size of the Singapore general insurance market is about S$3 billion (gross premiums) with the population having a per capita expenditure on both Life and General insurance higher than its neighbours. Per capita expenditure on General insurance has grown steadily from S$369 in 1990 to S$813 in 2008. Singapore serves as an important regional reinsurance centre as well as the largest captive domicile in Asia. Motor is the largest class at around 30% of the market. The liability market in Singapore is more developed than many in Southeast Asia but still lags behind property and motor in terms of size. This is mainly because litigation is seen almost as a last resort in Singapore and indeed many Southeast Asian markets.

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Market Structure and Size The Singapore general insurance market is competitive and is fragmented with 153 insurers registered in Singapore. Of these, there are 12 active direct life insurers and 39 active direct general insurers servicing a population of 4.9 million people, of which 3.7 million are Singapore residents. There are also 40 active reinsurers and 51 captive insurers in Singapore. About 75% of the life and non-life companies are foreign-owned. The General Insurance Association (GIA) has 33 members licensed to transact general insurance business in Singapore. The Life Insurance Association (LIA) has 16 member companies and three associate members comprising life reinsurance companies.

Penetration Rate (% of GDP) The penetration rate for both Life and General insurance was steady at 1.2% of GDP. The per capita expenditure on insurance has increased (see table below), from $369.1 in 1990 to $813.3 in 2008. per capita expenditure on insurance 39

Source: Insurance Statistics 2008, Monetary Authority of Singapore

Non-Life Market (GWP) The Singapore domestic general insurance market is mature and has shown steady growth in the last decade, despite a 7.7% decline between 2003 and 2004. Gross direct premiums (domestic) have recovered and exceeded 2003 levels again in 2007. While the market grew by 13% in 2008, the global financial crisis has impacted 2009 growth, with the industry delivering a 1.6% increase in Domestic GWP to S$2.92 billion in 2008. 8

The general insurance industry had an underwriting profit of S$151.8 million in 2008 and would have fared better if not for the S$241.1 million underwriting loss in the motor portfolio.

Market Share of Insurers Singapore has an open general insurance market with more than 39 active insurers operating in the market. The Singapore government liberalised ownership rules in 17 March 2000, removing the 49% limit on foreign shareholding in locally owned direct insurers. Since then, the industry landscape has evolved considerably and up to 75% of Life and General insurance companies are now foreign owned. The S$3 billion domestic market is arguably fragmented with the top 10 insurers (in terms of gross premiums) sharing 63% of the market, with no one insurer having more than 14% market share. Many of these companies are foreign owned and reflects the open and competitive nature of the Singapore insurance industry. Figure 31: Market Share of Top 10 General Insurers in Singapore

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Market Structure (GWP) Motor is the largest business line comprising 29.2% of the general insurance gross premiums. However, 2008 was a challenging year for Singapore‘s motor underwriters, with an S$241.1 million underwriting loss overshadowing the industry‘s profit results for the year. The motor result was a significant increase from the 2007 loss of S$103.2 million and attributable to poor underwriting standards and inflated claims, resulting in average motor premiums jumping by as much as 15% in 2009.

Gross Premium of Singapore Insurance Fund by Business Line

In the 2008 General Insurance Association of Singapore (GIA) Annual Report, GIA President Mr Derek Teo stated, ―This is the largest loss ever recorded by motor underwriters in the Republic and has severely impacted the overall results for the industry.‖ He further noted that the GIA has been proactive in its attempts to stem these dramatic losses adopting a Motor Claims Framework (MCF) in June 2008 to instil greater discipline into the motor claims process. The MCF has gained acceptance amongst Singapore motorists evidenced by the 24% increase in numbers of accidents reported within 24 hours. The GIA believes that with strict compliance to the MCF, motor claims and premium can be contained. The MCF‘s objective is to give the insurer the opportunity to conduct a survey of the damaged vehicle and to estimate the cost of repairs before it is repaired. This is an important and necessary step to minimise the possibility of inflated claims.

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Distribution Channels General insurance business in Singapore is predominantly distributed via agents and brokers. Nevertheless, bancassurance and the internet are gaining a foothold with some personal lines products such as home, personal accident and travel insurance. The bulk of commercial and corporate insurance is sold via brokers and agents.

Brokers There are 34 insurance brokers registered as members of the Singapore Insurance Brokers Association (SIBA). In an article on his company‘s web site, Anthony Lim, chief executive of Acclaim and president of the Singapore Insurance Brokers' Association noted that in 1998, brokers accounted for about 40 per cent of gross domestic general insurance premiums written, or about $600 million. He further noted that in 1998, the Singapore insurance broking industry was largely dominated by foreign players, with the top five brokers in Singapore being Marsh & McLennan, AON, Jardine Lloyd Thompson, Alexander Forbes and Zuellig Insurance Brokers, at the time. About one-third of the 55 to 60 broking companies are foreign players and they account for approximately two thirds of the total premiums generated by brokers, or $400 million. This is because most local players tend to be small, with the average local broking firm generating annual premium sales of about $4 million. QPIB status is awarded to brokers who have achieved a minimum standard of broking skills and knowledge. Many QPIBs will have achieved these skills through a combination of formal study and experience. Before being awarded QPIB status, applicants must show they have undertaken 24 hours of continuing professional educations (CPE) in the year prior to application. To maintain their status brokers must complete 24 hours of ongoing professional education each year.

Agency The agency channel is strong in Singapore, especially in the Life insurance sector. Established in 1978, the Life Underwriters Association of Singapore (LUA) is the premier professional association representing financial practitioners. Its 5000-plus members represent 40% the membership of the insurance-based financial industry of approx 13,500 agents. The tied agency channel contributed to the bulk of new Life business, with tied representatives being responsible for 59 per cent of new weighted business sales for the first quarter of 2009. The share of new Life business sold through the bank distribution channel accounted for 25 per cent of sales. Licensed Financial Advisers contributed 11 per cent whilst other channels, including

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direct sales, accounted for the remaining 5 per cent.The industry revised the agency registration system in 2005. Under the new framework, insurance companies are more accountable for the ongoing training and management of their agents. Agents are also subject to a ‗fit and proper‘ test in order to be registered

Bancassurance Bancassurance is a growing channel with many banks offering personal lines products to its customers. Banks are also offering insurance products to their various customer bases – credit cards, commercial or deposit databases. In Singapore, the role of bancassurance is growing and is changing traditional distribution patterns. The number of traditional life agents has been falling from 20,000 life agents in 1998 to approximately 12,000 in 2004, in part due to the inroads made by bancassurance as an insurance distribution channel. According to the Life Insurance Association of Singapore, in 2004 bancassurance accounted for 30% of new life policies.

Internet Singapore has a high number of internet users – a point that is not lost on Singaporean insurers who have recognised the internet as key element in its distribution network. While agency is still the key channel for personal lines and commercial insurance as brokers are for corporate insurance, the internet shows great potential for low involvement, low premium products such as travel insurance.

Figure : Singapore internet users as a percentage of population 40

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LITERATURE REVIEW

Consumer and Community Attitudes towards Insurance in Singapore The perception about the value of insurance by consumers or businesses is arguably the main factor behind the relatively low insurance density and the existence of underinsurance in Singapore. Outside of the regulated or mandatory classes, it is the lack of perceived value towards general insurance that lies behind the decision by many Singaporean consumers to forgo purchasing insurance or to deliberately under insure. Non-compulsory personal insurance is where penetration is relatively low and underinsurance more prevalent. Unlike motor insurance which is compulsory and home building/fire insurance which is often required by banks, many consumers simply do not see the value in purchasing other products like home contents or personal accident. Ms Stella Tan, CEO of Tenet Insurance, believes that with ‗regulatory‘ classes, like motor and work injury insurance, the market would be almost like fully insured otherwise the consumer or business/employer will face penalties. However, other than those regulatory classes, insurance penetration would vary ‗quite a lot‘. Ms Tan believes that with personal insurance, the penetration rate is still low because many Singaporeans believe the country is very safe. As a result, many question the need to pay a premium for insurance. Ms Stella Tan believes that the penetration rate for home insurance is also very low, stating, ―I don‘t think it exceeds 50%.‖ She adds, about the typical home insurance purchaser, ―The only home insurance that they buy would be what is required by a bank. When you take out a home loan when there‘s a mortgage, they will buy insurance, because it‘s required by the bank and of course the public housing has a group scheme where I think an amount of insurance is required. But that‘s again on the structure itself, that‘s nothing to cover the contents.‖ Ms Denise Soh of Aon Benfield agrees and notes that, ―A lot of people don‘t buy insurance for household contents. It‘s just the mentality, they don‘t see the need and they don‘t think that their house will ever be on fire, they don‘t think that anybody will get robbed.‖ Ms Soh notes that there are stories, sometimes in the newspaper, where people who suffer fire damage to their properties have no insurance whatsoever. She notes that ―generally the Singaporean mentality is just that everything is safe – that things will probably never happen to me, I‘ll never get robbed or fires won‘t happen.‖

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Mr Chan Hwee Seng, Chairman of Crawford & Company Singapore, says, ―Most of the under insurance comes from householder insurance, particularly contents and to some extent the premises, where the sum insured is not commensurate with the true value.‖ He adds, ―Maybe these policy holders don‘t really know the basis of insurance which is quite critical because when we do the adjustment, the sum insured must represent replacement costs, but they were only insuring on historical costs.‖ Many consumers are not aware of the replacement value of their assets during policy inception let alone on renewal. Mr Chan Hwee Seng remembers when he started his loss adjusting practice in 1972; commercial underinsurance was rampant in Singapore. Stock, for example, was usually under insured. However, Mr Chan notes that today, most corporations and multinationals in Singapore perform proper valuations to assess the proper replacement cost of their assets. Nevertheless, he notes that the issue of underinsurance prevails with home insurance. The issue is exacerbated in homes with mortgages, where the home owner insures for the loan amount, not the replacement cost of the premises. Mr Chan acknowledges that times have changed with SMEs in Singapore, noting that the customer is now taking the time and effort to establish proper values and sums insured. He believes the change in mindset occurred from the mid-1990s, saying, ―Today, I see a lot more sophistication in deciding the sum insured.‖ Ms Patricia Mack, Vice President, Claims & Liability Management at Swiss Re Singapore, agrees, observing that SMEs and larger companies are today more aware about the consequences of insufficient insurance. She goes on to say that they perceive insurance as a necessity.An improvement in the level of insurance penetration can be achieved by increasing awareness. Consumers have been known to respond favourably over time where insurers or their intermediaries are active in promoting their products and educating the public about the benefits of insurance. Ms Stella Tan says, ―Singaporeans in the past have not been very familiar with general insurance and that is why the General Insurance Association over the last two years have been making efforts to actually create this awareness that without general insurance, do you know that the world wouldn‘t move, the trade wouldn‘t move – you can‘t carry on with your normal life.‖ She adds that many people are only familiar with life insurance because that they have bought life insurance, noting that, ―if you ask them to name an insurance company, they will give you the names of the life companies, not general insurers.‖ She notes that with the recent publicity about rising motor premiums in Singapore, consumers may take a greater interest in their general insurers. Ms Stella Tan cites the travel insurance market as an example of where penetration has increased as a result of increased awareness. She notes that, ―four or five years ago when we (Tenet Insurance) started working with the

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national association of travel agents, less than 30% of Singaporeans who travel actually buy travel insurance.‖ Ms Tan says that Tenet Insurance participated in travel fairs and states that, ―in our early years, we did more education than selling insurance. We were there to explain to people why they need to buy travel insurance.‖ She notes, ―You need to provide constant reminders and give examples before people realize they need it.‖ Following a few high profile cases of accidents overseas, more people are now seeing the need for travel insurance. She cites reported cases of Singaporean tourists who were injured in a bus accident in China, with no one to evacuate them. Stella believes the penetration rate for travel insurance in Singapore has now doubled to 60%. Mr Derek Teo, President of the General Insurance Association of Singapore, makes a similar point, noting that many Singaporeans travel and that they are aware of the need for travel insurance. He states that the penetration level for travel insurance is very high now, adding that it is easy to purchase, via the internet or telephone.‖ Mr Chan Hwee Seng believes that more people are starting to see the value of purchasing insurance. Awareness tends to increase following highly publicised losses. A recent case of public food poisoning resulted in increased queries about product liability. There have also been increased awareness about the perils of non insurance following a large fire in a public market with hundreds of stores wiped out - many were not insured. The mindset today is different to even ten years ago, when SMEs were more ‗cost-conscious‘ with their insurance and tended to underinsure. The level of awareness about the perils of underinsurance has grown through the efforts of the MAS and organizations such as General Insurance Association (GIA), Singapore Insurance Institute (SII) and CASE. Insurers and their intermediaries have also been educating their clients about the adequacy of their insurance. Nevertheless, with personal lines insurance, the notion that ‗it won‘t happen to me‘ still persists. There are also some consumers who still have a less than positive view of insurers – especially if they have issues with their insurance claims or know someone who does. Mr Derek Teo notes that apart from travel insurance, many consumers still view non-mandatory insurance classes as a luxury rather than a necessity. Ms Tan Li Leng, Head of Sales Support and Events at NTUC Income, says that in the past, insurance was a taboo subject, especially life insurance. It was perceived by some communities that asking someone to buy life insurance to someone was akin to saying that they were going to die. However, today, with education and improved awareness, this is no longer the case. Some consumers are more willing to purchase life insurance because there is a mindset that they will be able to obtain a return from their life insurance

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policy. However, as this does not apply to general insurance, so some are reluctant to purchase general insurance. She believes that many people do see the value of insurance – but it may not translate to an actual purchase. Ms Tan believes it is because people are generally optimistic about their circumstances and do not believe that disasters or losses will not occur to them. ―I think the public always thinks these things happen to other people‖, she says. For example, she notes that Singapore has very little exposure to natural disasters like bushfires, floods or typhoons. That is why those who have mortgages purchase insurance for their building, but not contents. Mr Sivam Subramaniam, Editor in Chief of the Asia Insurance Review, makes a similar point, ―In Singapore, we do not have catastrophes to worry about, so they only buy home insurance because of the loan.‖ Nevertheless, he believes that SMEs have a better awareness about the value of insurance, noting that the communication by agents and development of products aimed at SMEs is good. Mr Francis Savari, Head, Client Portfolio Management at Munich Re Singapore, believes that the general attitude in Singapore is that insurance is still a necessity. Nevertheless, Mr Savari acknowledges that insurance is still a product that is sold rather than bought.

Robert Saville, Chief Underwriting Officer South East Asia for Munich Re, agrees, stating that insurance is something that most adults will know something about, maybe not so much in terms of in-depth knowledge, but they will know about the concept and benefits. And being a generally conservative country, there is a relatively high desire to purchase insurance. Mr Derek Teo believes that some insurance consumers do not understand that there are implications for underinsurance. For example, he pointed out that in the past, some employers chose to under declare wages to reduce their Workmen‘s Compensation Insurance premiums. Mr Teo notes that the situation has changed since April 2008 following a revision to the Workmen‘s Compensation Act. There are now audits conducted by the Ministry of Manpower and increased awareness about the penalties for underinsurance.

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Accessibility of Insurance in Singapore Singaporeans have ready access to a variety of general insurance distribution channels. The agency channel is popular with consumers and SMEs while larger businesses utilise the services of brokers. Personal lines products such as home and motor insurance is predominantly sold by agents. Bancassurance is also taking hold, especially where there is a concerted effort by the bank to promote insurance to its customer base. Insurance can also be purchased at post offices, kiosks run by insurance companies at shopping centres and via the internet. Low premium and low involvement products like travel insurance are increasingly being bought online. Mr Ken Brown, Managing Director of ACE Insurance Singapore41, notes that Singapore has a high savings rate and that Life companies have had significant penetration for many years because of their tied agency force. He believes the non-life sector has increased their penetration because of their bancassurance programs, which have evolved very effectively over At the time of interview, Mr Ken Brown was the Managing Director of ACE Singapore. He was appointed Chief Operating Officer of ACE’s Australia and New Zealand operations in October 2009. the last 10 years. He goes on to state that independent financial advisers are a distribution force that is becoming more powerful for insurance products. Mr Brown states that in Singapore, as in most countries, distribution and the platforms that are used to engage the market are the keys to increasing penetration. Mr Brown says that, ―Unlike the traditional approach where you will ‗build a product and they will come‘; now you‘ve actually got to customise it for the customers and figure out how you actually get it out there. So it is supply chain, it is logistics, and most progressive insurance companies seek to define that distribution, utilise it, maintain it and service it, and of course that is the principal key for success.‖ Mr Brown makes the point, ―You need to match the nature of the product and what the customer‘s need will be, to their value assessment, to the means to get it there.‖ Mr Brown believes e-commerce is an area with massive potential in Asia and notes that the issue is getting people to go online and execute a transaction or sale online. He says that one of the ways to manage underinsurance for online purchases is to create a mini-module that educates the consumer about underinsurance and how to set adequate sums insured. Mr Brown also advocates the evolution of e-commerce as a support tool for the traditional agency channel. It can be a tool to improve efficiency without sacrificing the relationship based selling element inherent in the agency channel. Ms Stella Tan says that the ‗Code of Practice‘ has enhanced standards in the general insurance industry, particularly in personal lines insurance. The Code 17

of Practice impacts policy design, sales, customer advice and claims and provides protection for the consumer. Commercial and Corporate clients will have access to advice from their broker and many multinationals would be on a regional or international program. The provision of good advice by the intermediary or insurer is an important on many levels. Firstly, it reduces the potential for misunderstandings about what is covered in the event of a claim. The variance between what is covered by the insurance policy and what the policyholder believes is covered leads to disagreements and is part of the reason why there was a negative perception about insurers. A professional advisor will organise for the most appropriate type and level of cover for their client, which in turn reduces underinsurance and also reduces the potential for misunderstandings in the event of a claim. Mr Chan Hwee Seng says that the provision of good advice is important and notes that training for agents has improved. For example, he was asked by an insurer to provide a lecture for 300 agents recently. Common areas for training and discussion include the establishment of replacement and reinstatement values and the basis of valuation. Insurers are also providing their policyholders with guides on how to value their properties. The policyholder will set their sum insured themselves but at least they have a guide. Mr Chan Hwee Seng says that brokers are playing a good role in advising their clients to insure adequately, stating that they provide examples of large losses or claims to increase awareness of the perils of underinsurance. He says that getting property and asset valuations for insurance is cost effective and readily available in Singapore. An area where there is conjecture is in the establishment of the sums insured. Ms Janet Lee, Vice President Client Markets with Swiss Re, believes that one of the reasons for underinsurance is the lack of awareness about the correct amount to insure. Sometimes, this could be due to a lack of advice from their agent who may not have been well trained in providing advice in this aspect. Ms Michelle Chan, Head of Claims, Munich Re Singapore, says that the main thing is to explain to the client how the insurance package fits their needs from the beginning, so that their expectations are managed. In many countries in Southeast Asia and certainly in Singapore, it is the agency network that is controls access to consumers and SMEs. Mr Robert Saville says that some people may know their insurance agent well, but not the actual insurance company. It is generally the agent who has the relationship with the client, not the insurer. Ms Tan Li Leng believes that a professional agency channel would lead to a positive perception of the company and industry – which is why she believes in providing ongoing training to agents.

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Mr Sivam Subramaniam believes that the Life and Non Life insurance sectors have divided themselves itself in a way that the person on the street may find it difficult to understand. Some consumers may not understand why their Life agent may not sell them home insurance. He believes that agents should offer both Life and Non-Life insurance products, noting that the more successful life agents realise that to service their clients, they need to offer non-life products. Mr Subramaniam points out that in countries like Malaysia and Vietnam, Life agents outnumber Non-life agents. The issue pertains to the remuneration structure. The commission payable on non-life personal lines products is generally low. Mr Subramaniam says that ―Intermediaries are not pushing it (personal lines) hard because the economies of scale are not there.‖ Mr Subramaniam believes that the Life agents in Singapore are well trained and professional and should be able to offer non-life products to their clients. Mr Derek Teo believes one way to address low penetration is to provide accessibility. He cites travel insurance as an example where access is good and penetration levels have increased in recent years. Consumers in Singapore may purchase their travel policy via their travel agent, insurance agent or online. Access to good advice will continue to improve as the industry continues to develop the professionalism of its workforce and intermediaries and as insurers in Singapore continue to develop their distribution platforms for both consumers and their intermediaries.

Affordability of Insurance in Singapore Singapore has one of the highest incomes per capita in the region and in terms of GDP per capita, is one of the highest in the world. Affordability is arguably less of a factor leading to underinsurance and the current levels of insurance penetration in Singapore than attitude or access. Mr Derek Teo believes that affordability is not an issue for Singaporeans. He also notes that instalment billing is common, especially with personal lines products, which makes it easier for consumers to spread their payments over the year. The question therefore arises, whether affordability is a factor affecting underinsurance or the purchase decision at all in Singapore? It can be argued that wage earners from the lower income groups spend a larger proportion of their income on necessities and have less disposable income for nonessentials or luxuries. Insurance products may be seen by these consumers as luxuries and we may find a proportion of the population citing cost or affordability as a reason for under-insuring to save premium or not buying insurance at all.

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Ms Janet Lee believes that sometimes, people underinsure to save money. This is more of an issue with personal lines insurance than commercial insurance in Singapore. However, both Ms Janet Lee and Ms Patricia Mack believe that affordability is less of an issue in Singapore compared to the attitude and mindset of consumers towards insurance. Ms Tan Li Leng makes a similar point, saying that affordability is not a major issue affecting insurance penetration. However, there are some who are underinsured because they purchase only what they can afford at a particular point in time. Mr Chan Hwee Seng noted that when he began in the insurance industry in the 1970s, only 5% of the Singapore population had some form of personal insurance. He believes that about 80% of the population has some form of personal insurance today. He says of travel insurance, ―With the affluence and higher disposable incomes, people like to travel, so there has been a significant growth in travel and personal lines insurance.‖ The answer lies in the consumer‘s perception of value. While non-compulsory insurance continues to be perceived as a ‗grudge‘ purchase, affordability will be a factor, albeit a small one, with individuals or businesses choosing to deliberately under insure or not to purchase appropriate cover in order to save money – for something else. In a paper on underinsurance in the Life insurance industry in Singapore, Associate Professors Yee Wah Chin and Wu Yuan from Nanyang Technological University noted that several studies have quoted cost as the primary reason for not having sufficient insurance. The paper cites a study by Fielding (2005), who states that earners from the lower income quintiles spend their entire income on necessities and do not have disposable income for insurance. Insurance products are seen as wants and not needs; luxuries and not necessities. The paper also refers to Saffron (2006), who found that many people cite cost as a reason for not buying insurance. Respondents say they ―simply have no money for it‖ as they have financial commitments such as housing, car, and credit card loans which need to be paid along with their daily expenses. There is therefore no urgent need to buy life insurance. Next to the ―more urgent‖ necessities, life insurance is seen to be less important and less critical. While the respondents understand the importance of life insurance, they see it as something that can wait till they are financially better off. Arguably, the same could apply to buyer behaviour pertaining to non-compulsory general insurance and parallels may be drawn to consumer purchase behaviour for non-life insurance.

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ANALYSIS

SWOT ANALYSIS OF MARKET STRENGTHS In this Section, we will discuss the various strengths that Singapore has as a market for insurance in particular the benefits to the insurance companies that have set up in Singapore. EASE AND CONVENIENCE The ease, convenience, speed and sheer efficiency with which the business of insurance can be transacted is one of the main reasons why the insurance market in Singapore is expanding. This high expansion rate can potentially lure risk managers and brokers from around the world to Singapore to do business with the insurance company set up here. The Singapore Government‘s push for Singapore to become the Asian Hub in as many industrial sectors as possible has offered insurance players an advantage of close proximity with their clients or supplier, since most of them have regional branches or headquarters situated in Singapore. According to a ranking by doingbusiness.org, Singapore is ranked 1st in terms of ease of doing business.

REGULATORY SYSTEM Singapore is politically stable, has low government debt burden, a high sovereign financial rating, and a stable monetary system. The government recognizes the value of encouraging the development of financial businesses, including insurers, and thus the environment tends to be ―business friendly.‖ Singapore has an effective financial regulatory system that reduces systemic risk, deters fraud, and facilitates consumer protection, thereby fostering confidence in the financial system. EDUCATED WORKFORCE & Strategic Location Singapore also boasts a highly-educated workforce and one of the highest ratios of GDP per capita. It also has an excellent judiciary, a good telecommunications system, world-class legal and banking systems. The low crime rates and political stability makes Singapore a pleasant place to live and work in. Because of its strategic location, Singapore is easily accessible to the Asian region, which is important in raising capital and providing insurance and reinsurance to Asian clients. Singapore also has close ties to 2 large emerging markets – China and India – where the demand for insurance will likely grow in tandem with their economy.

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SUPPORT INFRASTRUCTURE A thriving island of more than four million people, Singapore has a free enterprise economy. A very important advantage that allows Singapore to sustain its free enterprise economy is the intellectual capital and support infrastructure that have developed in Singapore. The infrastructure development paralleled the growth in economy beginning with the adoption of a pro-business, pro-foreign investment, export-oriented economic policy combined with state-directed investments in strategic government-owned corporations during the short 40 years history. In addition, the infrastructure support is located in a small concentrated area, collectively known as the Central Business District, with everything within easy walking distance. In essence, Singapore can be viewed as a ready-made, plug-and-play environment for businesses. INTELLECTUAL CAPITAL The Singapore Government‘s Education initiative during the country‘s early years of independence have resulted in the presence of significant intellectual capital in computer modelling and analytical capabilities. These skills are particularly important in insurance underwriting and pricing. Singapore now houses significant intellectual capital in all areas required to successfully operate any industry, including an insurance enterprise. This includes significant expertise in actuarial science, insurance brokerage, insurance underwriting, accounting and auditing, tax management, and general business management. A study on comparisons of intellectual capital between countries ranked Singapore 6th, behind Finland, Sweden, Switzerland, Denmark and America, validating our intellectual strengths as one of the best in the world. Singapore also has become known as a leading incubator for financial innovation and some of this innovativeness has rubbed off for new insurance and risk transfer solutions. The intellectual capital present in the Singapore market is a primary driver of innovation. As Singapore is small in size, the ability to innovate is also enhanced, facilitating close cooperation between the public and private sectors. The private sector also has easy access to the regulator, which allows for mutual trust and confidence to build up over time to an extent not present in many other jurisdictions. The lack of significant regulation allows Singapore insurers to move quickly to develop innovative policies to cover new and evolving risks.

ECONOMY OF AGGLOMERATION Economy of agglomeration is a term used in urban economics to describe the benefits that firms obtain when locating near each other. It is similar to the idea of economies of scale and network effects in that the more related firms are clustered together, the lower the cost of production becomes because firms have competing multiple suppliers and can achieve greater specialization and division of labor. As competing firms cluster, it attracts more suppliers and customers than a single firm could alone. The

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concentration of insurance companies in Singapore, especially the captive insurance sector, therefore provides a natural market for Singapore‘s reinsurers, and the presence of the reinsurers and intellectual capital and infrastructure makes Singapore a one-stop destination for insurance solution. The presence of multiple reinsurers in the market also facilitates retrocessions and other forms of risk-sharing. Professor Henry Yeung from NUS also stated that Singapore should leverage on the economy of agglomeration in areas of research and development to become a global innovation cluster for all business sectors, including the insurance industry.

PROFESSIONAL SERVICES With insurance companies, trusts, mutual funds, shipping, P&I vehicles and holding companies located in Singapore, it is hardly surprising that our professional support services are in a quality league of our own. In addition to services supplied by leading insurance brokers and captive management companies, the availability and caliber of world-class legal, banking, accounting, actuarial and general financial and management services have helped Singapore develop a powerful international business industry.

WEAKNESSES There exists an underdevelopment of the non-life segment, and the anticipated lack of growth in life premiums for the projected period in Singapore‘s insurance sector. In contrast, life premiums are expected to remain as they are, with 0% growth expected, although we think this will translate to 2% in US$ terms, and 3% in euro terms. These may be due to some inherent weaknesses present in the Singapore‘s insurance market which will be discussed in this Section.

VULNERABILITY Although Singapore‘s insurance market does not suffer from direct impact from financial situations occurring in the major insurance markets, there still exists an indirect effect. Firstly, weaknesses experienced by parent offices and foreign reinsurers may lead to negative spillover effects on local operations. Secondly, as Singapore insurers rely heavily on reinsurance support from around, they would be affected by the reduction or even cancellation of reinsurance cover, restrictive coverages, and higher premium charges. Therefore, Singapore insurance market is still susceptible to outside risks even though the events may not happen locally. HIGH SET UP COST Due to intellectual capital and highly educated workforce in Singapore, employees are expected to receive high wages. In addition, according to a report by Economic Intelligence Unit, Singapore is the 10th most expensive

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city in the world to reside in and among the Asian cities it is the third expensive city with cost of living index of 112 (Table 1). Thus, insurance companies setting up in Singapore will have to face higher salary expenses as well as higher cost of living as compared to countries where there is cheaper labor and lower cost of living. These constitute to higher costs or expenses and lower profit margins for the insurance companies that established their operations here. Table 1 Rank | City Name | Cost of living Index| | 1 | Tokyo | 152 | 2 | Osaka Kobe | 145 | 3 | Paris | 132 | 4 | Copenhagen | 124 | 5 | Oslo | 123 | 6 | Zurich | 122 | 7 | Frankfurt | 118 | 8 | Helsinki | 118 | 9 | Geneva | 115 | 10 | Singapore | 112 | 11 | Hong Kong | 110 | 12 | Vienna | 109 | 13 | Dublin | 108 | 23 | New York | 100 | 27 | London | 99 | SMALL SIZE As Singapore is a small country with small population as compared to United States and United Kingdom, the number of exposure units is much lesser and risk diversification is spread among smaller exposure units. According to the law of large number, as the number of exposure units increases, the more closely will the actual loss experience approach the probable loss experience. Furthermore, due to the small population, there will be lesser demand for insurance, so the risk is spread among fewer people. Hence, this results in higher premium being charged for each policy so as to cover potential losses. This would deter the insurance companies both local and foreign from setting up in Singapore as they may choose countries like US where there is large number of exposure units and pooling can eliminate average risk. Besides, higher premium means that many consumers will not be able to afford the insurance. STRICT REGULATIONS Singapore has a risk-based supervisory regime, which applies supervision intensity and regulatory requirements that commensurate with the risks that the institution poses to the financial system. As a result, insurance companies may not be able to make excessive profits due to the stringent regulations. Thus the strict regulations in Singapore may be a push factor to potential

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insurance companies seeking to establish their business operations in the South East Asian Region.

OPPORTUNITIES This section attempts to identify the opportunities that can be grasped by the Singapore‘s insurance market to translate into higher profits for the market. ASIA MARKET As Asia experiences economic expansion in the recent years, there has been an increased demand in life insurance and other annuity products. As reported by the Life Insurance Association, Singapore life insurance premium increased by 16% during 2010. The life insurance market generated US$1.3 billion in new sales, up from US$1.1 billion in 2009. Singapore‘s aging population as well as its well established CPF systems are the main driving factors of this growth trend. Furthermore, the recent financial crisis has accentuated the need to be prudent and start planning for the long term. In addition to this, Singapore also has its own initiatives to open up its insurance market in order to match competition from the international players as well as enabling Singapore to be a leading center for insurance services in the Asia-Pacific. As such, the market participants in Singapore would stand to gain if they exploit Singapore‘s liberalization initiatives. On the other hand, focusing on Singapore herself, there are gaps in Singaporeans‘ insurance protection needs. Studies done by the insurance industry have revealed that Singaporeans are under-insured, predominantly in the 30-49 age groups. This can be partly attributed to the expensive insurance premium on top of the many financial obligations faced by them. Furthermore, the people might undermine the importance of insurance, and the general sentiment that misfortune would not befall them. As a result insurance was not one of the main priorities. This could be one opening for growth by tapping on the under-insured. REINSURANCE MARKET Lloyd‘s has been the major driver in the development of reinsurance market in Singapore. The number of syndicates grew fivefold from 3 in 2005 to 15 now. This implies that Lloyd‘s is providing more capacity from Singapore to the Asia market, and in addition offer insurance for specialist risks for the first time. With this influx of reinsurers into the market, there is no longer a need to go to the London Market for lead terms on complex risks. Singapore has also attracted businesses from Japan, Korea, Australia and China. There is an opportunity for Singapore to capture this new growth in the demand for reinsurance. The area expected to see the highest growth is catastrophe risks. A report by Swiss Re highlighted that 16 out of 20 worst catastrophes occurred in Asia, and only 3 of them had insurance. In addition, other specialist risks such as aviation, energy, political, terrorism and trade credit risks are gaining popularity as well. This suggests that the market for reinsurance is far from saturated, and growth opportunity for Singapore looks promising.

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CAPTIVE INSURANCE MARKET Due to the many characteristics of Singapore such as its regulatory system, geographic location, infrastructure, attractive tax regime and its competitive insurance capital in Asia, Singapore has a huge potential to become the preferred domicile for captive insurance within the Asia region. The penetration of captives in Asia-Pacific companies is still relatively low as compared to the US and Europe. This presents a growth opportunity to the captive insurance market in Singapore. However Singapore must be aware of the threats from other emerging domiciles such as Dubai and New Zealand. In order to remain competitive, Singapore would have to maintain its regulatory framework and its attractive tax regime. All these factors coupled with the natural advantage of Singapore‘s location would be the main driver of growth in the captive market. THREATS In this section, this report will focus on the threats posed by close rivals of the Singapore insurance market on a regional and global basis. More specifically, to highlight certain advantages that the Singapore insurance market do not currently possess compared to close rivals such as the Hong Kong insurance market in Asia and the Bermuda insurance market in the global scene. TAX REGIME IN HONG KONG In the Asian context, Hong Kong could be considered as Singapore‘s biggest rival in the financial and insurance markets. Both locations offer very competitive corporate tax rates, with Hong Kong being slightly more attractive to insurers at 16.5%. According to the Inland Revenue Authority of Singapore (IRAS), Singapore‘s corporate tax rate has been lowered to 17% from 18% from 2010 onwards. Since both Hong Kong and Singapore are world renowned financial centers with excellent regulatory and infrastructure framework, the corporate tax regime may be the differentiating factor that influences the choices of insurers of where to expand their operations in Asia. GEOGRAPHICAL LOCATION OF HONG KONG MARKET Taking advantage of a more liberal regional insurance market after the 1990s financial crisis in Asia, many foreign insurers and reinsurers have positioned to expand their market share in the region. The admission of China to the WTO has accelerated the process, as has the Closer Economic Partnership Arrangement (CEPA) between Hong Kong and China. A number of foreign insurers and reinsurers have announced plans to expand their regional operations in Hong Kong to cater for the development of the regional insurance market (as well as the Mandatory Provident Fund market in Hong Kong). Mainland affiliated companies are also linking up with foreign insurers in Hong Kong to cater for the mainland business. Furthermore, the Hong Kong Office of the Commissioner of Insurance has been actively promoting Hong Kong as an excellent environment for captives from mainland China, citing a well-developed infrastructure, advanced telecommunications, the rule of law, independent judiciary system and an efficient workforce. This is an advantage that Singapore does not possess in terms of the ease of access to the huge and fast-growing Chinese market with a population of

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1,331,460,000. We believe that this huge and emerging market will pose a huge demand on all types of life and non-life insurance for both individuals and corporations. We believe that the Chinese government will also encourage corporations and insurers to expand their operations in Hong Kong rather than Singapore as Hong Kong is currently under the Chinese jurisdiction, albeit still functioning as a ―One Country, Two Systems‖ Special Administrative Region (SAR) at least for 50 years since 1997. As such, the threat to the growth of the Singapore insurance market is very substantial, significant in the foreseeable future.

NO CORPORATE AND INCOME TAXES IN BERMUDA MARKET Bermuda is acknowledged as a key participant in the global insurance and reinsurance markets. An attractive feature of Bermuda as an insurance domicile is that Bermuda has no corporate income tax, i.e., there is no tax on capital gains, profits, or shareholder dividends. The no tax guarantee extends until 2016. Comparatively on a global basis, Singapore‘s corporate income tax of 17% seems to be an exorbitant price insurers have to pay for incorporation in Asia. The increasing trend of globalization of the insurance business has made incorporation in Bermuda a more attractive location as taxation directly affects an insurer‘s bottom line. Aside from regulation and taxation, Bermuda has several other advantages as a location for insurance operations. Bermuda is politically stable, with a low government debt burden, a high sovereign financial rating, and a stable monetary system. The government recognizes the value of encouraging the development of financial businesses, particularly insurers, and thus the environment tends to be ―business friendly.‖ Bermuda has an effective financial regulatory system that reduces systemic risk, deters fraud, and facilitates consumer protection, thereby fostering confidence in the financial system. As conclusion, it is very important for the Singapore insurance market to improve on its competitiveness and attractiveness to insurers because it faces very stiff competitions on both a regional and global basis in order to ensure sustainable growth.

FINANCIAL CRISIS AND IMPACT ON MARKET The 2008 financial crisis may mainly be a banking crisis, and the insurance market in general does not seem to be threatened. Nonetheless, insurance companies have been affected, and in mostly adverse ways. For many insurers, direct exposure to the epicenter of the crisis, the US mortgage market, and to related securities appears to have been limited. But due to the spread of the crisis across geographical boundaries through investment portfolios, financial market valuations and economic activity in the insurance market has deteriorated to an extent. This is especially true for US mortgage and financial guarantee insurance companies with their highly concentrated coverage of the credit and market risks. Thus, while insurers as a group may have cushioned the negativity of the financial crisis, some insurance groups 27

had added to the downward pressures. Financial instruments that were at the core of difficulties served an insurance function and, thus, some institutions from the insurance sector have been impacted by the crisis on one or the other side of their balance sheets. The open nature of Singapore‘s economy has resulted in the island and its insurance market feeling the full impact of the global financial crisis. As shown from the figures below, the net premiums of both the general insurance and the life insurance had declined to an extent from 2008 to 2009. The life insurance business was hit greater in light of the financial crisis with a decrease of approximately $2 billion in net premiums as illustrated.

LEARNING POINTS From the onslaught of the financial crisis, a few learning points to the Singapore‘s insurance market have been surfaced. First and foremost, there is the need to enhance corporate governance in financial institutions. Financial institutions should regularly appraise the skills-set of their Boards to make sure that they are in line with the risk profile of the institution and the challenges from the risk setting it operates in. MAS have issued a consultation paper, in the wake of the crisis, on proposed enhancements to the corporate governance regulations and guidelines. These constitute major improvements to the regulatory framework for the financial sector and will help in strengthening public confidence in the insurance industry. In addition, the authority is reviewing the risk-based capital requirements of Singapore‘s insurance market to evaluate the necessity of adjustments. For instance, there have been changes made to the stress-testing requirements for both life and general insurers. Nevertheless, there is only so much the regulators can do and the industry itself should make certain that prudent risk management policies and practices are in place. The Boards and senior management should be responsible of ensuring that their institutions are well equipped to manage the emerging risks in an increasingly demanding environment.

RECOMMENDATIONS After looking at the SWOT analysis of the Singapore‘s insurance market as well as the lessons learnt from the financial crisis, our group has come up with the following recommendations. 1) Singapore is well endowed with many benefits for the insurance companies established in the country. Our group feels that these strengths identified above should be capitalized on and brought to the attention of potential insurance companies around the world. The local government as well as the insurance associations in Singapore should play their parts in promoting Singapore insurance market internationally. For instance, Singapore is well-known for its regulatory system and clean government. It is imperative to leverage on this advantage of an independent regulatory system 28

against the Hong Kong insurance market which is currently under the Chinese jurisdiction. In addition, the setting up of headquarters of Lloyd Asia in Singapore will also increase the capacity to local insurance businesses and can be used as a pull factor for insurance companies to set up in Singapore. 2) One of the main weaknesses stated in our SWOT analysis was the small size of the Singapore‘s population, resulting in minimal number of exposure units. However, this can be overcome if the local insurance business expands regionally, especially to the ASEAN countries in terms of captive and the reinsurance segments of the business. This will thus aid to increase the exposure units for various insurance types, and at the same time, attract more businesses to Singapore. It will be a win-win situation for both Singapore insurers and the ASEAN countries as Singapore as an insurance market has much to offer. 3) The main threat surfaced against the competitive insurance markets is the tax regime in Singapore, as taxes were higher in Singapore as compared to Hong Kong and Bermuda. Hence the authority can provide tax incentives to attract more insurers to set up their businesses in Singapore. These tax incentives can be in the form of waiver or reduction in the tax rates for the first few years of operations in Singapore. These will then result in a competitive advantage Singapore insurance market will have over the two other similar markets. 4) Insurance companies should look into provision of direct insurance via the internet. Household Access to Broadband, 2005-2009, Annual Base: Resident Households in Singapore Source: IDA's Annual Surveys on Infocomm Usage in Households and by Individuals As shown from the diagram above, the household access to internet broadband has been increasing over the years from 2005 to 2009. The internet will also grow in importance, both as a source of information and a platform for transactions and payments. It is allowing for further cost reductions, and increasing competition by enabling consumers to compare and choose from competing products on a scale that no other medium has allowed. By leveraging on the potential of the internet, the skills and quality of the agency forces can be significantly upgraded to deal with more complex issues in the insurance business. The influx of the internet in the insurance market will change the business, and the configuration of players in the market. 5) Strong risk management systems as well as operational capabilities are also crucial in order to compete in a globalized and integrated financial market. As mentioned, the authority is taking on a more active role in reviewing the requirements for both life and general insurance. Hence, particularly in the wake of the financial crisis, there is a vital need for the institution management to work closely with the authority. Further, to manage the institutions well, good corporate governance is of essential importance to the insurance business and should be ensured by each and every insurance institution in Singapore. It is crucial for all insurance companies to understand that stability of the business should not be traded for fast growth, i.e. in the insurance for catastrophic risk.

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6) In order to tap on the huge underinsured market in Singapore, the insurance companies should aim to present this information of underinsurance to the market so as to highlight and to raise awareness of this current existing problem. This can be done further in the engagement of the insureds through roadshows, exhibitions or through sales seminars by the insurance companies. On the side of the government, MAS can perhaps surface the problem through newspapers or the daily news to reach out to the masses. This effort will then translate into an increase in the volume of insurance policies purchased in Singapore. 7) Insurance companies should always be looking for ways to better penetrate the insurance market even within Singapore herself. For instance, insurance companies could adopt a more cost-effective way of addressing the needs of Singaporeans by offering simple products instead of bundled protection. This would reduce the premium charged. Furthermore, they could also find ways to reach out to more people and emphasize the importance of proper insurance protection. MAS is ready to play its part in this process as well. It can work with the insurance industry to improve transparency in the disclosure of bundled insurance products such as the Whole Life plan. With these efforts in place, the consumers would be able to make better decisions and hence increasing the percentage of Singaporeans who are insured. Despite the bid to lower premiums by unbundling the services, it will not be a detriment to the insurance industry as more and more people opt to buy insurance protection.

Singapore Solutions The key to addressing underinsurance or the penetration levels of insurance in Singapore lies with improving awareness about the range of insurance covers available and their benefits. By improving the perception of value towards insurance products, consumers and businesses may see the benefit of establishing adequate sums insured and purchasing non-compulsory insurance products. Ms Denise Soh says that it is important to understand the consumer‘s mindset and the reasons behind their penchant to purchase insurance. Ms Stella Tan agrees and adds that it is about how insurers package the cover and include policy extensions which customers will value. An example is the inclusion of traditional Chinese medicine (TCM) cover with personal accident policies or a ‗home assistance‘ extension in home policies. Ms Tan points out that apart from the peace of mind against large losses, extensions like ‗home assistance‘ which covers the home owner from being accidentally locked out of the house will be viewed as providing real value for money. A critical issue affecting a number of insurance industries around the world is the battle to attract talent into the industry. There is a need to improve public perception about insurance as a career choice. In some countries, there is still a stigma attached to a career in insurance – that it is basically a sales role. In many parts of Asia, the lay person will usually only encounter a life or general

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insurance agent, unless they are in business and require the services of a broker or general insurance agent for business insurance. Different bodies in Singapore cooperate to provide training and development opportunities that ultimately increases the professionalism of the insurance industry in Singapore and is consistent with the efforts of the government to make Singapore a regional and international financial centre. The General Insurance Association (GIA) of Singapore has started an ―Outreach‖ program to increase awareness about insurance as a career choice. In addition to presentations at university campuses, the Outreach program provides sponsorship for Singaporean students to participate in a 10 week work experience program with various companies in Singapore and overseas. The program has grown, with each batch of students saying positive things about the insurance industry. The Singapore Insurance Institute (SII) also organizes conferences that provide development opportunities for insurance professionals.

Ms Patricia Mack, the immediate past President of the Insurance Law Association of Singapore (ILAS), stated that they recently organized a seminar on marine, piracy and political risk into the 21 Century. Ms Janet Lee advocates the training and development of agents, who in turn may inform their own clients about the perils of underinsurance. She notes that MAS requires agents to clock in CPD hours as well as taking exams before they are qualified to sell insurance products. This applies to all intermediaries, including bank staff who sell insurance. Ms Mack believes that the penetration of insurance will increase as awareness grows and new innovative products are developed in Singapore. She also states that insurers should prevent rate erosion to protect their bottom line. Ms Janet Lee believes that the claims function is no longer viewed as a ‘backroom‘ operation. Many insurers realize that their reputation is at stake and have given more prominence to the active management of their claims. Ms Tan Li Leng states that continuous education and improving awareness is the key to increasing penetration and reducing underinsurance. Ms Tan says that in the current economic climate, the insurance industry should remain positive and believe that in good times and bad times, people will require insurance. The insurance industry should also continue their efforts to inculcate a positive public perception about the industry. Mr Robert Saville says, ―Insurance companies do get a bit of a rough ride in terms of the way society

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views them, when they are actually underpinning a lot of development and a lot of profitable growth.‖ The insurance industry performs a critical role in the community and economy and the perception by consumers should be improved. He notes that awareness is one of the main drivers of why people buy insurance, so the education of the consumer about the products and potential risks out there would be a good thing. He states that following a catastrophe, the subsequent media report raises awareness and often leads to increased sales. Mr Saville notes, ―Then people start to forget and sales drop off again.‖ Mr Francis Savari advocates the promotion of the positive things that the insurance industry does for Singapore. He says, ―While the direction can come from the Monetary Authority of Singapore (MAS), at the end of the day, it is the responsibility of individual companies to make sure you portray yourself as positively as possible to the general public. Mr Sivam Subramaniam makes a similar point, stating that the insurance industry needs to market itself properly. He states that the industry needs to do more to stimulate demand and inculcate the value of protection and peace of mind with consumers. The health insurance sector in Singapore would be a prime candidate for public education campaigns and perhaps some form of regulatory intervention to stimulate demand. He goes on to say that the insurance industry needs to go on a public relations offensive. For example, Mr Subramaniam notes that one hardly hears about the claims that have been paid and how the insurance industry underpins the economy. Ms Michelle Chan also advocates a close working relationship between the insurer and reinsurer when it pertains to claims. Reinsurers have been taking a more proactive and technical stance with some claims and this involves a change in mindset in reporting of claims and managing client expectations. Arguably, the higher the claim, the higher the expectation by some clients the claim will be paid. Mr Chan Hwee Seng advocates the drafting of insurance policies in ‗plain English‘ to make it easy for the consumer to understand. Mr Derek Teo notes that the key to addressing underinsurance is communication – to raise awareness. Derek states that the General Insurance Association (GIA) is proactively creating awareness about general insurance. An example is a video about general insurance that has been shown for the last two years at schools and universities to create awareness about general insurance amongst graduates. Mr Teo feels that there is a gap in the talent pool and notes that the GIA, with the support of MAS and the insurance industry, has organized the Global Internship Program for university students to gain valuable experience working in the insurance industry. He notes that education is important – not

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only with creating awareness about the benefits of insurance for consumers, but with the training of agents to improve professionalism. The GIA itself provides Consumer Guides and product information on their web site. A screen shot of the GIA Consumer Section is provided below.

CONCLUSION Underinsurance is a significant problem in many parts of the world. It is certainly present in Singapore and needs to be addressed. Its financial impact is felt by communities and governments, especially following catastrophes and disasters when those who lose assets and property struggle to find the funds to rebuild their lives and livelihood. In these countries, the general insurance density or penetration levels (industry gross premium as a percentage of GDP) are relatively low compared to some developed economies in other parts of the Asia, including South Korea and Taiwan (see Figures 5 and 6). Governments have to step in to provide funds to the community in the event of disasters. Inevitably and despite the best efforts of governments, these taxpayer funded aid packages are never enough to completely rebuild. Underinsurance is a zero sum game. In the event of a loss, the insured will not receive sufficient funds to replace or reinstate their insured asset. On the flipside, the insurer would not have collected the correct premium commensurate with the exposure or risk on an individual policy basis and on a portfolio basis if underinsurance is prevalent throughout the portfolio.It can be argued that some individuals and businesses consciously make the decision to underinsure because of price. This is certainly the case with many individuals and some businesses in developing nations where affordability remains an issue. Generally many people are underinsured because they do not see the value in insuring adequately. If price is viewed as an indicator of value to the purchaser, then price is certainly a factor causing underinsurance where disposable incomes are relatively low and where a higher priority is placed on other necessities. The relatively poor perceived value of non-compulsory general insurance products is the key reason why consumers or businesses choose to underinsure or not to insure at all. Exacerbating this issue is the fact that there has not been a convenient and cost effective method to estimate the true value or replacement cost of personal or business assets. In these situations, underinsurance is evident in the event of a claim because consumers or businesses cannot determine an accurate sum insured during policy inception or on renewal. Insurers and their intermediaries have tried to rectify the issue by providing consumer guides and access to professional advice. However, the issue prevails because asset

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values do change and access to accurate advice may be costly or not easily available. Quite often, when risks are circulating within domestic markets and are not subject to international rating, sums insured may not be adequate. Mr Francis Savari notes that in Southeast Asia there are individual risks circulating within the domestic market that are attractive to local insurers because they do not have to be subjected to international rating. He adds that whenever there are large risks which require more capacity, then it goes to the international market and is subject to reinsurers‘ pricing requirements. It is clear that access to good advice is important. Discussions with insurance industry leaders in, Malaysia, Vietnam and Singapore have indicated that where appropriate advice is provided, the instances of underinsurance can be reduced. Good advice, whether provided directly by the insurer or intermediary, ensures the client is given the information and opportunity to consider adequate covers commensurate to their exposures. This is likely to reduce the potential for misunderstandings in the event of a claim. To address this, the insurance industries in Malaysia and Singapore have instigated measures to ensure adequate training is provided to insurance intermediaries and advisers. The minimum Continuous Professional Development or ‗CPD‘ hours is an example of this and has led to an improvement in the professionalism of the agency networks in Singapore and Malaysia. This method is not without its limitations and success is dependant on the relevance of the training provided and discipline of both insurers and intermediaries to take training seriously, attend sessions and to apply it in practice. The online or internet channel and bancassurance has impacted how people collect information and purchase insurance. As access to technology improves and as online purchasing becomes commonplace, these channels will continue to grow and develop as insurance distribution networks in their own right. In time, the online channel and bancassurance may become key drivers for insurance penetration and growth. For this to occur, insurers in Vietnam, Malaysia and Singapore need to be prepared with innovative products and a convenient process for completing the sale, including the application and billing process. The future will see insurers leveraging multiple channels to meet customer requirements at their various touch-points (i.e. sales, service and claims). There is no doubt that the agency channel is the key channel for personal and commercial lines in Malaysia and Singapore. In Vietnam, insurers utilise their branch networks in a similar vein. These channels provide the reach and access to advice that is needed to increase insurance penetration in metropolitan and rural areas. There is also some perceived comfort on the part of the policyholder that in the event of a claim, they have someone to help them through the claims process. Naturally, as consumer awareness about products increase and insurers simplify policy language and claims procedures, there will be a shift to maximise efficiency within distribution channels and make it

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both easier and cheaper for consumers and businesses to access products and advice. Insurers should also leverage technology to improve efficiency and ease of transacting business for consumers and intermediaries. In Malaysia and Singapore, insurers are already providing agency portals for transactions and information dissemination. It will not be long before many insurers utilise technology to enhance the service provided to consumers and agents and allow them to transact online, from quote to fulfilment. Takaful has the tremendous potential to increase insurance penetration, especially in Malaysia, where the takaful industry has grown at a higher rate than the general insurance industry (albeit from a smaller base). Nevertheless, the takaful industry will need to address many of the issues that also afflict the traditional insurance industry, including issues pertaining to awareness and distribution, if it is to continue to see significant premium growth in the future. Awareness plays a critical role in improving the perception of value and therefore in reducing the penchant for under-insuring one‘s assets. There is anecdotal evidence and a belief by some of the insurance leaders and professionals interviewed for this report that where there has been customer awareness and education, the penetration of insurance products have increased. This has occurred with travel and health insurance as well as commercial insurance products purchased by SMEs. Insurance and basic financial planning should be taught at secondary schools to improve awareness and to allow the younger generation to gain a better understanding of financial products including insurance, prior to starting their working life. This would be an improvement over the often random process that is undertaken now by consumers along their journey to financial literacy. The insurance industry also needs to attract and retain talent. Many insurance practitioners in Malaysia, Singapore and Vietnam have come into the industry by accident. Most of the industry leaders interviewed for this paper have stated that the attraction and development of talent is critical for the ongoing success of the industry in the future.

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