Adrian Leonard spotlights how reinsurers in the Singaporean market have defied a carrier exodus by writing increased premiums.

Tiny Singapore, a former British colony that lies at the approximate geographical centre of south-east Asia, took its first steps toward becoming a reinsurance hub in 1974, when the first foreign reinsurer opened up shop on the island. The number of reinsurers rose steadily to a peak of 48 in 1997, and today 33 reinsurers are recognised by supervisor the Monetary Authority of Singapore (MAS), although only 23 are active. "Shrinkage in reinsurers reflects trends in the global reinsurance sector," said Portia Ho of MAS.

Despite the decline in numbers, gross reinsurance premiums written in Singapore have defied the trend. The total has grown from S$1.03bn (US$623m) in 1998 to S$2.63bn (US$1.52bn) in 2002, Ms Ho reported to assembled delegates of the 7th Singapore International Reinsurance Conference. International business accounted for 45% of all general insurance business written in Singapore in 2002, of which 87% was reinsurance.

Ms Ho said the explanation for this success lies in Singapore's licensing regime, which is based on direct supervision and separate solvency margins for local and international business. At present the margins require reinsurers to divide their income into local and 'offshore' business, and set aside the higher of S$1m or 20% of net premium income or 20% of loss reserves for local business, but at least 100% of liabilities for international reinsurance business. Ms Ho also cited Singapore's centrality to a booming region, its stable business environment, the island's good infrastructure, and - naturally - its "sound regulatory regime" as factors behind its success.

Another explanation - one that Ms Ho did not mention - is Singapore's preferential, 10% tax rate for underwriting profits arising from international business. Despite the attractive rates, one international broker attending the conference said it is no longer a draw. "Tax is driving reinsurance business out of Singapore," he said. "A 10% tax rate is still too much, and Singapore is becoming a local market."

However, perceptions may belie reality. MAS reports that the growth of offshore non-life premium outpaced that of local premium in 2002. Although the main driver was primary business, international reinsurance business written in Singapore has grown steadily year after year, dipping only marginally in 1997, and rocketing up since 1998. Preliminary figures for the second quarter of 2003 show a 23.9% increase in gross international non-life premiums in the second quarter of 2003 over the same period of the previous year, and a 58.8% increase in net premiums (including direct and captive business). MAS predicts an underwriting profit on the business of S$5.6m, and an operating profit of S$13.8m.

Nonetheless, the notable absence of several reinsurers that were active in the late 1990s illustrates the reinsurer exodus. In its 1998 annual supervisory report, MAS listed supervised reinsurers including several who have clearly been merged away (Eagle Star Re, Kemper Re, MMI, New Re, Rhine Re), those that stopped writing reinsurance (Generali, CNA Re), and others that simply packed up their Singapore offices and went home (AGF IARD, Central Re, CTR, Royal Re, QBE's Sydney Re, Yasuda Fire...). The current list records more reinsurer departures, companies driven out for various reasons including merger, failure and simple flight. It describes as "in run-off" the Singapore operations of Alea, ASEAN Re, Reliance National, Copenhagen Re, Gerling Global Re, Le Mans Re, Sompo and Sorema (among others).

Ms Ho proudly explained Singapore's new Risk-Based Supervision Framework for insurance companies, which "aims at identifying areas in an insurer's operation that possess significant inherent risks, and examining how such risks are being mitigated." She described the implementation of the process in 2002 as a "fundamental change" in the supervisory process, since it shifts oversight from an audit-based inspection system to a forward-looking regime that focuses on prevention.

"Insurers are graded according to their risk profile and the strength of their risk mitigating measures into five different stages of health," Ms Ho explained. Companies thus are assessed on a spectrum ranging from 'normal' to 'viability-at-risk' and finally 'winding-up or closure'. "Those that are not normal will be supervised more intensely," she said, "and encouraged to strengthen their internal controls and risk management systems."

More change is in the pipeline. The risk-based supervision regime will be augmented with the introduction of risk-based capital requirements in 2004. Another plan involves the introduction of regulations requiring insurers to file a so-called notice of reinsurance management. "We will place a risk charge on reinsurance recoverables based on the reinsurer involved," Ms Ho said. Under a pending set of amendments to the Insurance Act is an authorisation framework to govern the cross-border supply of reinsurance to Singaporean cedants by companies that do not have a physical presence in Singapore.

"Against an increasingly volatile operating environment and the lack of a global regulatory system for reinsurers, the enhanced supervisory regime is appropriate and timely," MAS states in its consultation document on the amendments. "The effects are that insurers who choose to deal with cross-border reinsurers should be more vigilant and take into account relevant risks involved when designing and implementing their reinsurance protection programmes." At present, cessions to reinsurers that are not registered with MAS attract a withholding tax of 40%.

Ms Ho did not mention a flag flown the previous week at the International Association of Insurance Supervisors (IAIS), by Deputy Prime Minister Lee Hsien Loong, who is also Chairman of MAS. The IAIS, while meeting in Singapore, heard from Mr Lee that he has plans to lower Singapore's minimum paid-up capital requirement for insurers by 60% to S$10m for multi-line carriers. For branches operating in Singapore, the requirement will apply to the parent company. The aim is to attract niche insurers.

An historic change may also affect reinsurers remaining in Singapore. MAS implemented a requirement for actuarial sign-off of unexpired reserves in February 2002. "The financial impact of the actuarial investigation is still unknown and could result in the need for reinsurers to increase their reserves, which may in turn impact their solvency position," according to research company AXCO's Singapore Market Report. To ease the potential burden, a phased implementation has been promised.

Ms Ho concluded by pledging that Singapore will continue to be a major reinsurance hub for Asia. Despite the contraction in the number of players, its momentum has showed no signs of a significant slow-down.

By Adrian Leonard

Adrian Leonard is a freelance insurance journalist and a regular contributor to Global Reinsurance.