Main points of Governor's Keynote Address

Main points related to the insurance industry in the Governor's Keynote Address at the 21st Federation of Afro-Asian Insurance and Reinsurance Conference:

• The insurance industry has remained resilient throughout the current financial crisis
• Maintaining strong capital buffers and sound risk management is imperative to ensure the continued resilience of the insurance industry especially the domestic and external conditions are expected to remain volatile
• Insurance and pensions will have a greater role especially with the ageing population
• Prospects for higher insurance penetration rate: in 2008, Asia (5.95% of GDP), Africa (3.57%) compared with America (7.29%) and Europe (7.46%)
• The demand for investment-linked and wealth management products are strong with changing priorities of the young workforce in the middle income group
• Insurers need to strategise to increase the accessibility of insurance products e.g. through bancassurance and internet
• Public-private partnership between Government and the insurance industry are needed to cope with catastrophe losses
• High growth in Takaful: between 2004 and 2007, the average annual growth rate of the global takaful industry is estimated at 25%, compared to 10.3% for conventional insurance
• More integrated approach to the prudential regulation of the insurance industry together with the other segments of the financial sector, such as the one practised in Malaysia, enables the regulator to form a more complete assessment of the risks to financial stability while ensuring consistency in the treatment of risks across the different industries

Source: BNM

Good potential for financial advisors in Malaysia

A Swiss Re's survey, covering 8 Asia-Pacific markets, concluded that there is a good potential for financial advisors in Malaysia.

Some of the findings:

• Lowest CAFRI (Consumer Appetite for Risk Index ) - India, followed by Malaysia
• Singapore ranks 4th in CAFRI out of 8
• Strong interest among Malaysians to use financial advisers

Source: Business Times

ASM organised risk management talk

ASM organised a talk on risk management covering credit, interest rate, equity and foreign exchange risks yesterday. 3 speakers from Morgan Stanley gave their presentations in Bangunan AmAssurance.

The talk was attended by 100 people, mainly ASM members but there were some non-members from finance and investment departments of insurance companies. There were about 10 qualified actuaries among the participants, which was considered high compared to some other recents talks organised by ASM. Some attendees admitted that they attended the talk to gain CPD hours, which is now a requirement for Fellow and Associate members of ASM. The talk was worth 3 CPD hours.

Actuaries suggest ways to avoid global financial crisis

The International Actuarial Association has proposed systemic changes to avoid a repeat of the global financial crisis. Some of the proposals are:

• A counter-cyclical capital regime where more capital is put away in boom times as a buffer for the bad
• Creation of a national risk officer
• Financial services companies to have an independent chief risk officer who reports directly to the Board
• Higher capital requirements for market participants with remuneration incentives focused excessively on short-term results

The President of the Institute of Actuaries of Australia will be in KL next week. Anyone who is interested in discussing the above further with the President can contact this blogger.

Source: Lateline Business, SuperReview, IAA

Managing insurance business during crisis

The Monetary Authority of Singapore shared ideas on managing the insurance business during the financial crisis to the insurance industry during the LIA AGM luncheon recently.

Some ideas shared:

• Strengthen the solvency positions early
• Conduct stress testing, including considering scenarios that are potentially devastating for business profiles
• Be watchful on potential frauds
• Should not charge into complex products that the insurer does not have expert knowledge of
• Regular updates to policyholders on the impact of the financial turbulence on their policies

Source: Straits Times

Compesation Costs DBS up to S$80 mil

It will cost DBS Group S$70 mil to S$80 mil in compensating Lehman minibond investors in Singapore and Hong Kong.

Some facts:

• 3,300 investors in Hong Kong bought the product, amounting to S$257 mil.
• 1,400 investors in Singapore bought S$103 mil.

DBS admitted that there were cases where the sale did not meet DBS' standards.

Source: The Star

DBS to Compensate Customers

DBS has decided to compensate customers who bought into Lehman's minibonds. The bank actually admitted that the sale of Lehman's minibonds did not meet the bank's standards in some cases.

Source: Business Times

Insurance Companies Strategies in Facing Crisis

How are insurance companies in Malaysia handling the current financial crisis?

Allianz Malaysia Bhd

• Tapping on group's worldwide best practices: underwriting, claims, investment, IT etc
• Streamlining both general and life businesses
• Prudent investment strategy backed by well defined investment mandates, guidelines and limits

Manulife

• Have good risk management system and practices in product design, investment management and asset liability management
• Strict criteria in evaluating both fixed income and equities investment

Hong Leong Assurance

• Well diversified investments
• Minimum exposure to equity market, mainly in sound dividend-yielding stocks
• No exposure to collateralised debt obligations
• Investments mainly in local market

Source: The Star

Minibond Holders Potentially Lose S$639 mil

The Monetary Authority of Singapore (MAS) said that about 10,000 people in Singapore bought a total of S$639 mil of the failed Lehman mini bonds. A number of these people are retirees, losing their lifelong savings, some even contemplate commiting suicide.

MAS is investigating the complaints filed by the investors accusing the financial institutions of mis-selling. Financial institutions that were involved in the seling of Lehman mini bonds include DBS Group, Hong Leong Finance, UOB Kay Hian, OCBC Securities and ABN AMRO, now part of the Royal Bank of Scotland.

Source: Asiaone Business, Business Times

What Went Wrong with AIG?

Interesting findings from the probe into AIG's saga so far:

• AIG's executives were sent on a $440,000 retreat to posh California resort, less than a week after the federal government bailed out the Group
• AIG executives hid the full range of its risky financial products from auditors as losses mounted

On what went wrong, you will hear Greenberg blaming his successors, and his successors in turn blaming mark-to-market accounting rules. Read for yourself the following 2 news articles which are similar, I think good risk management lessons can be learnt from there.

Source: The Star 1 & 2

Which Regulator to be Blamed for AIG's Crisis

With AIG's crisis resulted in $85 bil federal bailout, who should be blamed, the state or federal regulators?

Would the crisis have been avoided if the US adopts a centralised federal regulation?

What risk management lesson do we learn from here?

I suggest you read the source article and draw your own conclusions.

DBS and HSBC to Update Investors

The structured products sold in Singapore that invested in Lehman mini bonds were sold by both DBS and HSBC. Both banks have been asked by Monetary Authority of Singapore to update their investors on a timely basis.

Source: Business Times

How Safe is Your Investment in Structured Products

There are quite a number of structured products out there now sold by financial institutions including banks, insurance companies and takaful operators. Investors should know that most of these products are capital-protected, which is not the same as capital guaranteed.

The capital protection is linked to the credit of the underlying investments. With the latest Lehman event, investors in Hong Kong and Singapore who purchased Lehman-linked minibonds may stand to lose most or all of their original investment.

So make sure you fully understand the risks before purchasing such capital-protected structured products.

Read more:

Asian retail investors cry foul

Tan Kin Lian's Blog

Articles on AIG - Part 3

More assurance from the company:

AIG’s Malaysian unit unaffected

Business as usual for AIG Malaysia

Development in Thailand, Hong Kong, Singapore and India:

AIG injects 14b baht into Thai banking unit

I think this one falls into the must-read category:

Where AIG Went Wrong

Other articles:

Why AIG was saved

AIG's new chief plans to keep company in business

Pru and Avivia tipped to benefit from AIG sale

ETF working on AIG-linked funds’ revamp

Insurance Industry Exposure to AIG and Lehman

I will update this as and when more figures are released on the insurance industry exposure to Lehman and AIG.

Exposure to Lehman

Aegon: £211 million
Aetna: $132 million
Aviva: £270 million
Friends Provident: £18 million
Hannover Re: €23 million
Munich Re: €350 million
Swiss Re: $45 million

Exposure to AIG

Aetna: $102 million
Aviva: £148 million
Swiss Re: $178 million

Source: Insurance Daily, Courant.com

Equitable Life - Maladministration by Regulators

The Parliamentary Ombudsman to the UK Equitable Life case has concluded that the maladministration of the former Department of Trade and Industry, the Government Actuary's Department and the Financial Services Authority has contributed to the Equitable Life debacle.

Some of the mistakes made are:

• One person was permitted to play both the role of Chief Executive and Appointed Actuary for more than 6 years, this has weaked the Appointed Actuary's role as whistle-blower
• The calculations of solvency position was not challenged, the financial position of Equitable Life was not properly verified
• Misleading information was permitted to be provided to policyholders and potential policyholders
• Equitable Life was permitted to take credit for a reinsurance arrangement which had not been concluded

Two recommendations were made by the Ombudsman:

• The public bodies to apologise for the failure
• A compensation scheme to be set up by Government for those affected

The Ombudsman's report is 1,800 pages long but regulators may want to take time to read the report as it is certainly a valuable lesson learned although in the hard way.

Source: Ombudsman's Press Release

Risk Management Depository

We are starting a new topic on Risk Management. The objective is to create a central depository for risk management lessons learned in the insurance industry worldwide.

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An audit firm has been fined for failures in its duties as auditor of Independent Insurance. Independent Insurance collapsed in 2001. The actuarial consulting firm alerted that the reinsurance contracts taken out by Independent did not stack up but the auditor failed to check the terms of the reinsurance treaties.

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