The Operational Mechanism of Insurance Regulation in Singapore Insurance regulation in Singapore is the responsibility of the Insurance Department under the Monetary Authority of Singapore (MAS). Since Singapore's accession to the World Trade Organization in 1997, and in order to meet the requirements of opening up its insurance market, the Insurance Department has set the objective of fostering a sound, competitive and continuously improving insurance market ...
The Operational Mechanism of Insurance Regulation in Singapore
Insurance regulation in Singapore is the responsibility of the Insurance Department under the Monetary Authority of Singapore (MAS). Since Singapore's accession to the World Trade Organization in 1997, and in order to meet the requirements of liberalising its insurance market, the Insurance Department has set a regulatory objective of fostering a sound, competitive and continuously improving insurance market. Its main elements are: first, implementing prudential and effective regulatory statutes and policies to promote the sound and safe operation of insurance institutions and protect the lawful rights and interests of policyholders; second, creating a sound legal and tax foundation and business environment conducive to the sustainable development of the insurance industry; third, encouraging the insurance industry to raise its operational standards and strengthening the internal governance of insurance companies; and fourth, building a people-oriented, cohesive insurance regulatory system that gives full play to the potential of its staff. In particular, over the past two years MAS has adopted many new measures to improve and strengthen insurance supervision.
Continuous Evolution of the Supervisory Approach
Singapore began applying a solvency-based approach to supervision in the early 1980s. Over time, the operating mechanisms and external environment of Singapore's insurance market changed substantially, and solvency supervision, as a typical form of insurance regulation, also encountered a number of problems. First, Singapore has many types of insurance institutions with a high degree of related-party transactions and a strong potential for cross-contamination of risk; the one-size-fits-all approach of solvency supervision could hardly meet the requirements of risk-based supervision under the new circumstances. Second, in a market environment of financial conglomeration, and particularly where MAS had already adopted a risk-based capital approach for the banking sector, applying only solvency supervision to the insurance industry could not meet the requirements of integrated financial supervision. Third, the assessment of insurance risk was insufficiently comprehensive: it focused more on liability risk and did not fully reflect asset risk. Fourth, for insurance institutions of the same type but with different levels of risk control, it did not reflect differentiated capital requirements, making it difficult to enhance institutions' incentive to further strengthen risk control.
With respect to the supervisory approach, in order to meet the needs of market development, new supervisory methods and instruments such as risk-based capital (Risk-Based Capital, RBC) were studied and formulated, progressively achieving a shift from solvency margin supervision (Solvency Margin) to a risk-based approach (Risk-Based Approach, RBA), changing the previous situation of excessively detailed conduct-of-business regulation and creating a more efficient and dynamic market space for insurance institutions. This new approach, and in particular the RBC method within it, can comprehensively measure the asset and liability risks of insurance institutions of different types and different standards of management; the risks to be monitored and assessed are more comprehensive and specific and the technical requirements are higher. Compared with the previous practice of conducting an on-site inspection of each insurance institution once every three years, with each inspection taking three to four months, the frequency of on-site inspections under the new approach will increase somewhat, but they will be better targeted, allowing limited supervisory resources to be allocated and used more effectively and risks at different companies to be identified, monitored and addressed in a timely manner. The RBA approach is not a negation of solvency supervision, but rather, in light of Singapore's national circumstances, a refinement and improvement built on the principles and techniques of solvency supervision.
Under the overall RBA approach, different identification and assessment methods are applied to the two major categories of risk faced by insurance institutions, namely financial risk and non-financial risk. The three financial risks - assets, liabilities, and whether the two are matched - are identified and measured using the RBC method; non-financial risks such as operations, management and conduct of business are addressed through on-site and off-site examinations. The RBC method is the core of the RBA approach, that is, the three financial risks of each insurance institution are measured by category and risk-based capital adequacy ratio requirements are proposed for each company in a targeted manner. Based on the results of the above risk identification and measurement, an early-warning system is established for each company together with separate supervisory opinions. The early-warning system classifies risk by severity into five categories: normal, early warning, concern, danger and failure.
Continuous Improvement of the Regulatory Framework
In terms of its regulatory system, Singapore, guided by the 17 Insurance Core Principles of the International Association of Insurance Supervisors (IAIS), has continuously improved its regulatory standards covering the insurance regulatory architecture, objectives and goals, market entry of insurance institutions, corporate governance structures and internal control systems, asset-liability management and capital adequacy requirements of insurance institutions, conduct of business in the insurance market, statutory financial statements and on-site inspections, progressively aligning itself with prevailing international insurance supervisory standards and general trends. At the end of this year, the World Bank and the International Monetary Fund will conduct a comprehensive assessment of the development of Singapore's insurance regulatory system against the 17 IAIS principles.
From 2000, the Singapore government decided to open up its insurance market and to adjust its insurance regulatory system accordingly. The government also undertook major reform of the regulatory regime for insurance intermediaries: first, it comprehensively reviewed the legal regime governing insurance intermediaries, amended the Insurance Act and enacted the Financial Advisers Act to replace the previous laws and regulations on insurance intermediaries; second, it reformed the regulatory regime for agents, especially life insurance agents, combining deregulation with prudential supervision.
Early in 2002 the Insurance Act was amended to add provisions on general insurance brokers, reinsurance brokers and all intermediaries, bringing general insurance brokers and all intermediaries within the scope of the Insurance Act. The Financial Advisers Act brought life insurance brokers within its regulatory scope.
For a long time agents have been the main distribution channel for Singapore insurance products, especially life insurance; in 2001 business sold through agents accounted for more than 80% of total premium income. In recent years MAS has carried out a series of reforms to the agency management regime. First, it standardised the organisational structure of agency organisations. Before 1996 insurance companies could establish multiple agency organisations; some had as many as five levels of internal management with a wide span of control, and some had more than a thousand staff. This led to weak management of agents, uneven quality of agents, irregular market conduct and numerous complaints. MAS began to regulate the insurance agency market in 1996 and, through the issuance of Regulation No. 306, focused on streamlining and standardising the agency organisation system. After several years of regulation, the size of agency organisations was effectively controlled, companies' management of agents was markedly strengthened and the quality of agents generally improved. Second, it tightened the professional standards for agents. While standardising the organisational structure of agency organisations, MAS set out clear requirements for agents, agency supervisors and agency managers in terms of age, educational qualifications, qualification examinations, professional training and professional ethics. Third, it reformed the agency commission system. Before 1996 insurance companies paid agents high commissions, with some companies' rates exceeding 200% of first-year premiums and reaching 300%; agent attrition was high, professional quality and service standards were low, and some even used improper means to mislead customers. Through Regulation No. 306, MAS reformed the standards for payment of agent commissions.
Continuous Strengthening of the Role of Industry Associations
In its insurance regulatory system, Singapore gives full play to the role of insurance industry associations, delegating day-to-day supervision of insurance institutions - such as self-regulation of market conduct, market entry of agents and handling of insurance complaints - to the relevant insurance industry associations, forming a regulatory system that combines government supervision, corporate governance and market discipline.
The Singapore insurance industry has established a relatively sound system of industry associations by category of institution, with separate associations for general insurance, life insurance, reinsurance and insurance brokers. By addressing the issues of greatest concern to customers, each association protects customer interests and supports and promotes the long-term development of member companies. The associations also stress in particular that the responsible persons and relevant managers of member companies have an inescapable responsibility for all of the company's business conduct, including problems in the professional ethics of agents.
Under the guidance and impetus of MAS, each association has various specialist committees that bring together experts from within the industry to study and resolve major issues of self-regulation and development. In practice, MAS and the industry associations have established a sound interaction mechanism. On the one hand, many projects are initiated and required by MAS and implemented in detail by the relevant industry association; for some important projects MAS even sends staff to participate directly. On the other hand, the associations have established smooth communication channels with MAS to report promptly on common problems encountered in the operation and development of the insurance industry.
In recent years the associations have done a great deal of work, mainly in unifying management and operational standards, promoting industry development and technological progress, regulating market conduct and improving the industry's image. For example, to standardise the sale of life insurance products, increase transparency in product sales and unify professional training for sales personnel, the Life Insurance Association established the Life Insurance Distribution Efficiency Committee in 2000, which formulated and implemented the influential CEDLI report. To improve the management and service standards of motor insurance, the General Insurance Association established a special motor insurance committee, which formulated and implemented the MITF report and set out codes of conduct in ten areas.
Recently, to make it easier for customers to complain and to enhance the independence and fairness of complaint handling, the General Insurance Association and the Life Insurance Association are preparing to establish a dedicated Insurance Dispute Resolution Organisation (IDRO). The organisation is intended to provide a one-stop service, accepting complaint cases between customers and insurance companies and among insurance companies involving amounts of up to S$100,000. The organisation is scheduled to begin operations at the end of 2002.
IDRO will report regularly to MAS on the receipt, investigation and adjudication of all types of complaints, and will report major matters immediately. This will help MAS to keep abreast of market and company operations in a timely manner and will also strengthen oversight, ensuring efficiency and fairness.
Continuous Comprehensive Innovation
— Introducing the ElderShield Scheme
As Singapore's population ages, the Singapore government proposed as early as three years ago that the long-term care needs of the elderly be addressed through commercial insurance. In early 2001 the government tasked the Ministry of Health with taking the lead, together with MAS, in developing the ElderShield scheme. The scheme operates on a model under which the government is responsible for product development and insurance companies are responsible for actual operations. The government has now developed the insurance product and put it out to public tender; among the four life insurers that bid, Great Eastern Life Assurance and NTUC Income Insurance Co-operative won the tender.
The ElderShield scheme is commercial insurance with a social assistance character. By paying a certain premium, Singapore citizens and permanent residents can obtain basic financial support in the future should they become severely disabled and require long-term care.
The Singapore government's active promotion of the ElderShield scheme will, to a certain extent, relieve part of the funding burden for long-term care of elderly people who become disabled through illness, thereby offering a new approach and avenue for addressing the problem of an ageing population.
— Actively and Prudently Developing Corporate Captive Insurers
Singapore's captive insurance market has developed rapidly. There are currently 49 captive insurers, of which 47 are general insurance captives, 1 is a life insurance captive and 1 is a composite captive. Only one captive was established by a Singapore business; the rest were established in Singapore by foreign businesses. In 2001 the total premiums of captive insurers reached S$2.4 billion, accounting for 13% of the country's total premium income.
To promote Singapore's development into a regional financial and insurance centre, the Singapore government has adopted a series of preferential policies and incentives for the establishment of captive insurers. First, low registered capital and licence fees. The minimum registered capital for establishing a captive insurer is S$400,000, a very low threshold compared with the minimum registered capital requirement of S$25 million for establishing general insurance, life insurance and reinsurance companies. Second, lenient entry conditions. For general insurance, life insurance and reinsurance companies, MAS conducts rigorous review from a number of aspects in accordance with international standards, whereas for captives MAS only requires applicants to submit materials such as a future business plan and projected income and expenditure, and approval may be granted after a general review. Third, preferential tax treatment. Captives pay income tax of only 10% on offshore insurance business and 24.5% on onshore insurance business. General insurance, life insurance and reinsurance companies must pay income tax at 24.5% on both onshore and offshore insurance business. This is also the main reason why there are many foreign-owned captives in Singapore. MAS also applies solvency supervision to captives and will move towards a risk-based supervisory approach. Supervision of their specific business conduct is relatively lenient, but the law expressly prohibits captives from doing business with direct insurers; captives must reinsure with reinsurers in a timely manner in accordance with their own risk profile.
