Recent global catastrophes are putting pressure on Singapore's insurers and reinsurers to look at their exposures and price their risks accordingly, reports Helen Yates

One of Southeast Asia's "tigers", Singapore is often dubbed an "economic miracle" having, in a matter of decades, achieved a financial and economic status envied by many developed nations. It has also evolved into a major insurance and reinsurance centre and is currently the largest captive domicile in Asia. In 2004 the market consisted of 56 direct insurers, six life insurers, 43 general insurers, seven composite insurers, 33 reinsurers and 51 captive insurers.

Singapore's regulator, the Monetary Authority of Singapore (MAS) opened up the direct life and general insurance market in 2000 in order to create an "open and competitive environment", which according to former MAS chair Lee Hsien Loong "was the first step to raising standards and strengthening resilience". The 49% foreign shareholding limit in locally-owned direct insurers was also lifted. Since opening its doors total assets for the industry have continued to grow at an average annual growth rate of 20%.

But it hasn't all been plain sailing. The Asian recession at the end of the 1990s, followed by the outbreak of Severe Acute Respiratory Syndrome (SARS) in 2002 and, more recently, the natural disasters in 2004 and 2005, have all taken their toll.

Risk-based approach

Singapore is sometimes referred to as a "nanny state" because of its strict rules on everything from chewing gum to freedom of the press. The current prime minister Lee Hsien Loong (who is the eldest son of Singpore's first prime minister Lee Kuan Yew) is the former chair of the MAS, a position now held by former prime minister, Goh Chok Tong. Despite this pervasive political influence, both former and current chairs of the MAS have had a progressive approach to regulation. In Lee's keynote address to the International Insurance Society's 38th Annual Seminar in July 2002, he said, "The relationship between the regulator and the regulated should be arms length but not adversarial ... Candid, thoughtful feedback, including dissenting views, go a long way to ensuring that policies are pragmatic and remain relevant."

Recent supervisory development in Singapore has revolved around the amendment to the Insurance Act in 2003 and includes the introduction of a Risk-Based Capital Framework (RBC). Already a requirement for insurers, reinsurers were given a two-year exemption from having to comply. RBC takes into account not only the insurance risks but also risks arising from an insurer's investments. "This will help to level the playing field between banks and insurance companies, and minimises opportunities for capital arbitrage," promised Lee. "The new capital requirements should also provide an early indicator of financial weaknesses, and thus facilitate progressive intervention by regulators."

Since the beginning of 2004, it is now also a requirement for non-life insurers to seek actuarial assessment in order to gauge the adequacy of their reserves. MAS is currently in the midst of deciding capital requirements for reinsurers, while a separate framework for authorised reinsurers is also being set out under the new Insurance Act regulations. This is intended to enhance MAS' oversight of transactions between registered entities and unregistered reinsurers.

Primary insurance market

Total premiums for the insurance industry for 2004 amounted to S$17bn ($10bn), an increase of 10.6% over 2003, while total assets expanded by 11.8% to S$86.6bn ($51bn). The Singapore general insurance arena is relatively small and saturated. Competition across main classes of business has led to softening in rates and thin margins over the past few years, especially in higher capacity lines such as motor and workers' compensation. But this is now expected to reverse following 2005's global catastrophes, as Standard & Poor's credit analyst HweeHoon Tan explains. "The current view is that there is likely to be a hardening trend at the renewals but the trend locally on the direct rates has been softening. For the non-life market with this potential renewal at higher rates it is possible that around half a year down the road the softening trend will start to reverse."

Singapore has a rapidly aging population, and that, along with rising expectations and demand for better healthcare by an increasingly informed and affluent public, has created huge demand for health insurance. According to the MAS, at the end of 2004 there were 6.9 million individual life policies in force, providing S$263bn ($156bn) in insurance coverage. It is estimated that 86.3% of the Singaporean population is covered by some form of life insurance, with endowment policies being most popular. "Insurance premiums form 6.02% of our GDP for life insurance and 1.48% for general insurance," said an MAS spokesperson. "Given the very low probability of natural catastrophes occurring in Singapore, and the high savings propensity of the general population, the lower penetration of general insurance vis-a-vis life insurance is expected."

The outbreak of SARS in Asia saw a decline on the life side in 2003, although there have since been strong signs of an economic recovery. More recently, the Indian Ocean tsunami and other natural catastrophes have highlighted the importance of risk analysis and quantifying potential exposures on the non-life side. "The 2004 tsunami that hit Asia highlighted that disasters previously not thought of, can happen in one's backyard," said the MAS spokesperson. "With the recent unprecedented increased frequency of natural catastrophes like earthquakes, hurricanes and typhoons, the management of risks is becoming crucial."

Motor claims management

Motor insurance is the largest class of general insurance business in Singapore, with gross premiums amounting to S$671.7m ($400m) or a 31.2% share in 2004. For a number of years motor insurers sustained heavy losses due to intense competition resulting in unsustainable premium rates and inadequate controls over claims costs. But now things are looking up.

According to S&P credit analyst Adrian Chee of the Financial Services Ratings Group certain measures particular to the motor industry have helped to control rates and thus have contributed to the overall improvement in terms of underwriting performance for that line. "One industry-wide example would be the setting up of the independent assessment centres for motor accidents," he explains. "Essentially this move was to actually bring some degree of control with regards to assessment of the damage arising from motor accidents."

These new initiatives were the brainchild of the Motor Insurance Task Force. With the aim to make motor insurance fairer and easier to understand, it recommended measures to streamline the claims process, including the introduction of a risk-based premium rating systems. "They have managed to turn around the motor insurance class but it remains to be seen whether they will actually continue to reap the underwriting profits because the latest research shows there is some pressure in terms of the rates," commented ratings analyst Tan.

Nevertheless, for the first nine months of 2005 underwriting profits for motor insurance nearly quadrupled to S$36m ($21m), according to the General Insurance Association of Singapore. The association said that all classes performed well. Premiums for personal accident showed the highest jump, up 13%, as more Singaporeans bought travel insurance. S&P's Chee puts this down to hardening rates and the new claims control measures rather than an improvement in underwriting discipline. He believes many classes of business will remain vulnerable to rate competition. "From what we've observed, the industry is certainly rather cyclical and pricing discipline in particular is not really a key strength."


After 9/11 a number of reinsurers exited the Singapore market as many closed down regional offices. Since then there has been a steady flow of new entrants into the market, one of the most recent being Scottish Re in October. As a domicile for reinsurers Singapore has benefited from its open market entry policy, tax incentives and its geographic proximity to new business opportunities in Asia. The Association of South East Asian Nations (ASEAN) forms the backbone of offshore business for most reinsurers operating in Singapore. At the end of 2004, business from ASEAN accounted for almost 30% of offshore written premiums. Other major markets for Singapore-based reinsurers include Korea, Japan, Australia and Taiwan.

For international reinsurers, diversifying within Asia also provides the opportunity to balance risk concentrations as markets within the US and Europe become more mature. "Many countries in Asia, including China and India, remain relatively untapped with low penetration," said the MAS spokesperson. "Asia's rising profile in the economic and global insurance arena, coupled with growing consumer sophistication and risk awareness, continue to offer prospects for significant business growth for both the direct insurers and reinsurers based in Singapore." With China opening its market to foreign reinsurers S&P's Chee believes this could add to the attractiveness of Singapore as a domicile. "You could see the growth of the Chinese market with Singapore serving it as a regional hub."

Given the cross-border nature of reinsurance, it is not surprising that in 2004 reinsurers accounted for 78.8% of total offshore net premiums.

Over the past couple of years offshore business has been boosted by the performance of reinsurers, which has also helped offset a weaker investment performance. In 2004, total premiums amounted to S$1.3bn ($772m), a decline of 2% from 2003 due to a 15.8% reduction in casualty and other business.

This was attributable to changes in the business strategies of some major reinsurers along with the streamlining of business profiles to reduce unprofitable accounts.

In 2005, the increase in frequency and severity of natural disasters and the resulting impact on reinsurers' performance is likely to further shape business strategies going forward. Reinsurers are already focusing on increasing capacity and upping premiums on more exposed lines. According to the MAS, "While the foreign reinsurers operating in South East Asia may not have been affected directly by the recent catastrophic events in the US, it can be expected that the major reinsurance groups would try to reinforce the importance of underwriting discipline within the groups in order to achieve the expected economic return on capital."

- Helen Yates is deputy editor of Global Reinsurance.


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