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Legislative and regulatory framework
The insurance industry in Singapore is regulated by the Monetary Authority of Singapore (MAS). As Singapore's central bank and financial regulator, the MAS promotes sustained, non-inflationary economic growth through monetary policy formulation and close macroeconomic monitoring of emerging trends and potential weaknesses.
MAS is an integrated supervisor overseeing all financial institutions in Singapore – including banks, insurers, capital market intermediaries and financial advisors. The MAS is tasked with creating a leading financial services sector in Singapore, and promoting a strong corporate governance framework. The MAS also works with other government agencies and financial institutions to develop and promote Singapore as a regional and international financial centre.
General, life and health insurers may carry on insurance business in Singapore as registered insurers or foreign insurers. Registered insurers are approved under section 8 of the Insurance Act (Cap 142) (IA). They can be registered as direct insurers, reinsurers or captive insurers. Foreign insurers are approved under the law of another territory to carry on insurance business in that territory. These insurers operate in Singapore under a foreign insurer scheme established under Part IIA of the IA. Currently the Lloyd’s Asia Scheme is the only foreign insurer scheme in Singapore. Authorised reinsurers are approved under section 8A of the IA, and can provide reinsurance of liabilities under insurance policies to persons in Singapore. Lastly, representative offices are approved under section 6 of the IA.
A Policy Owners’ Protection Scheme (PPF Scheme), administered by Singapore Deposit Insurance
Corporation Limited (SDIC), has been set up in 2011 to protect policy owners in the event of failure of a life or general insurer which is a PPF Scheme member. The role of the SDIC is to collect levies from PPF Scheme
members, manage the Policy Owners' Protection Life Fund and the Policy Owners' Protection General Fund, and make compensation payments.
Financial reporting, capital and taxation
Financial reporting requirements
For both non-life and life business, the basis for an insurer’s financial accounts is the Singapore Companies Act and Singapore Financial Reporting Standards (FRS).
Singapore uses both FRS39 & FRS104 (based on International Accounting Standards (IAS) 39 and International Financial Reporting Standards (IFRS) 4, respectively) with effect from 2005. Separate insurance funds must be maintained for Singapore policies and Offshore policies. For each insurance fund established in Singapore under the Insurance Act, insurers must file quarterly and annual Insurance Act returns with the MAS. Such returns are prepared in accordance with the valuation and format prescribed by the Insurance Act.
For life insurance business, both the Singapore Insurance Fund (SIF) & Overseas Insurance Fund (OIF) must be further segregated into separate insurance funds maintained for participating policies, non participating policies and investment linked policies. There is separate accounting for policyholders and shareholders profits within an insurers accounts. The transfer of profits out of insurance funds is subject to regulatory requirements.
Capital regime and requirements
The existing capital regime in Singapore is Risk Based Capital 1 (RBC1) and is regulated by the MAS. The minimum paid up capital requirement for a direct insurer involved in investment-linked policies only or short-term accident and health policies is SGD 5m. For any other type of direct insurer the minimum requirement is SGD 10m, and for reinsurers it is SGD 25m. Prior written approval is required from the MAS should a registered insurer incorporated in Singapore wish to reduce its paid-up ordinary share capital or redeem any preference share.
The calculation of solvency margin, or Total Risk Requirement (TRR), is based on standard formula calculations for 3 risk groups:
Insurance Risks
Market risks
Concentration risks
The TRR of a registered insurer is the aggregate of the total risk requirements of every insurance fund established and maintained by the insurer under the Insurance Act. In the case where the insurer is a registered insurer incorporated in Singapore, it is all assets and liabilities of the company (including any assets and liabilities of any of the insurer’s branches located outside Singapore).
In the light of evolving market practices and global regulatory developments (ie Solvency II), MAS is currently reviewing the risk-based capital framework for insurers in Singapore.
The review (“RBC 2 review”) aims to improve the risk coverage and risk sensitivity of the current framework and to specify the MAS’ supervisory intervention threshold. In order to arrange a smooth transition from the current to the new framework, MAS plans at least two years of parallel run with the existing framework. The calibration of the required capital calculations is expected to be completed during 2013. The new regulations intend to target a similar level of capital as Solvency II. At this stage it will be based on a standard model rather than an internal model approach. The actual implementation date is yet to be confirmed.
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Taxation
The profits of an insurer carrying on a business in Singapore are subject to Singapore income tax under sections 10(1) and 26 of the Income Tax Act (ITA). While section 10(1) is the general charging section, section 26 lays out some specific rules to arrive at the taxable income of a general insurer, a life insurer and a composite insurer. A general insurer is required to compute its taxable profits based on its total income, including premiums, interest and other investment income. It is allowed adjustments for unexpired risk reserves and deductions for actual losses, distribution expenses and allowable management expenses.
The calculation of a life insurer's taxable profits is fund based, being the aggregate of taxable profits of its Par Fund, Non-Par Fund, Investment-linked Fund and Shareholders Fund. The taxable profits of these funds are determined according to specific and rather complex rules laid out in section 26 of the ITA. A composite insurer's taxable income is the sum of the taxable profits of its general insurance business and life insurance business. Other than the taxable profits allocated to policyholders of the par fund which is taxable at 10%, income of an insurer is normally subject to tax at the corporate tax rate which is currently 17%. Tax exemption or lower concessionary tax rates of 10% or 5% are also available under a range of tax incentive schemes. There are qualifying criteria and conditions for these tax incentive schemes. In addition, to enjoy such tax incentive schemes, an insurer is required to apply to the MAS to be an approved insurer.
Common tax incentives available to the insurance industry include the following:
Offshore insurance business tax scheme – 10%
Offshore takaful and retakaful business tax scheme 5%
Offshore specialised risks tax scheme – 0%
Marine hull and liability tax scheme – 0%
Offshore captive business tax scheme – 0%
Offshore broking tax scheme – 10%
Financial sector incentive – headquarter services tax scheme – 10%.
Goods and services tax (GST) at the standard rate of 7%
(currently) generally applies to general direct insurance premiums, except for certain qualifying direct premiums from international marine and aviation insurance, travel insurance and export credit insurance which can be zero-rated. General reinsurance premiums are exempt from GST. Similarly, life insurance and reinsurance premiums are exempt from GST.
There is no stamp duty on insurance premium in Singapore. There is also no premium tax in Singapore.
Products and the market
Products
In the domestic non-life sector, the main products are motor, personal accident, workers injury compensation, health and fire. The Offshore Fund is dominated by marine cargo and hull, although Singapore is developing as a key regional hub for complex insurance and
reinsurance underwriting. Commercial insurance
products are offered through the companies market and a growing Lloyd’s platform. Most general insurance is sold through intermediaries and the main global insurance and reinsurance brokers are all represented.
The Life market offers regular and single premium products. Participating (Par) products are the most popular, followed by Non-Par and Investment linked. Of the total Single premium sales, a significant amount is comprised of CPF (Central Provident Fund) sales. The CPF is a comprehensive savings plan for working Singaporeans and permanent residents to fund their retirement, healthcare, and housing needs.
Tied agency is the main distribution channel for life business in Singapore, with many insurers looking to enlarge their agency force and/or take steps to boost agency productivity. Bancassurance is expanding rapidly, and the ‘Financial Advisor’ channel has gained traction in recent years.
Many insurers are actively exploring non-agency
channels, including a growing (but still relatively modest) trend of companies adopting the direct/online channel in Singapore, primarily for travel, home, personal accident and motor insurance.
The MAS recently introduced the ‘Financial Advisory Industry Review’ (FAIR). This is a comprehensive evaluation of the financial advisory industry with the Review Panel chaired by the Monetary Authority of Singapore (MAS). See ‘key issues’ for further information.
Headline market statistics and commentary
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Drivers
General insurance Direct Life insurance
Offshore gross premium accounted for 65% of total general insurance premium in 2011.
High catastrophic losses incurred resulting from a number of natural catastrophes in the region and insured/reinsured in the Singapore Offshore Insurance Fund (OIF). Events included earthquakes in Japan and New Zealand, and floods in Australia and Thailand.
The OIF continues to grow as Singapore develops as a key regional hub for complex insurance and reinsurance underwriting.
Of 2011 Offshore total gross premium, S$1,632.8m is from direct business, S$3,700m from reinsurance and S$1,064m from captives.
The largest sources of reinsurance premium in the OIF are China (19%), followed by Australia/New Zealand (18%) and Japan (13%).
Despite increased gross premium and only marginal rise in claims incurred, increases in distribution costs and management expenses caused an overall reduction in underwriting profit of the domestic Singapore Insurance Fund (SIF).
There was a return to profitability of motor insurers in 2011. The underwriting profit for that line amounted to SGD21.2m, and it was the first year since 2005 that motor insurers have achieved an underwriting profit.
All major classes of business in the SIF achieved growth in premiums written with health recording the highest increase in earned premiums at 14%, after seeing no growth in 2010. Personal accident showed 8% growth, and motor 4.5%.
Net Incurred Loss Ratio % of the SIF deteriorated slightly from 55.1% in 2010 to 56.3% in 2011.
Non-Life insurance penetration (% of GDP) in Singapore has risen over the years (from 2.55% in 2005 to 2.9% in 2011).
Low interest rates and investment returns are impacting profitability. The focus is on ‘core’ functions like
underwriting and claims.
Consumer confidence in life insurance solutions has remained strong, despite the uncertain economic climate.
This has led to 22% growth in new business sales (weighted basis).
Various initiatives have contributed to this growth, including programmes to boost agent productivity, the development of bancassurance and other distribution channels, and launches of new products.
However Financial instability has undermined investment earning on Investment Linked Products (ILPs).
Of new business sales, single premium increased by 17%
and annual premium by 24%.
Significant impact from new entrants selling ‘high net worth’ products.
Potential barriers to entry
In 2000, the MAS introduced a programme to liberalise the insurance industry. This removed the closed-door policy on direct insurers, and allowed the admission of new entrants based on the
following criteria:
Domestic and international rankings.
Present and past credit ratings.
Track record and reputation.
Commitment to contribute to Singapore’s financial sector development.
Applicants with a strong record in product innovation and use of alternative distribution channels, or in specialist fields, will receive favourable consideration.
There is not any fixed limit on number of new entrants, but admission will be spaced out to minimize the risk of unsound, short-term market practices. Foreign ownership is permitted in the form of wholly owned subsidiaries or branches. There are no restrictions on the level of foreign ownership. Foreign insurers and reinsurers are also allowed to set up representative offices, though these are not authorised to write business. There is a requirement for any increase in shareholdings (local or foreign) in a locally
incorporated insurer to 5% or 20% to be approved by the MAS. Reinsurance companies and captives have an open policy on admission.
Along with the liberalization, MAS introduced measures to raise standards of corporate governance and market conduct, strengthen protection of
policyholders’ interests by insurers, implement revised minimum capital requirements and enhance the efficiency of distribution. The continuation of this can be seen in the imminent changes to capital
requirements (RBC2) and Financial Advisory Industry Review (FAIR).
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Key developments and future outlook
Key issues
In 2012, the MAS introduced the ‘Financial Advisory Industry Review’ (FAIR). This is a comprehensive evaluation of the financial advisory industry with the Review Panel chaired by the Monetary Authority of Singapore (MAS). There are 5 key thrusts of FAIR:
– Raise the competence of financial advisory representatives
– Raise the quality of financial advisory firms – Make financial advice a dedicated service – Lower distribution costs of insurance products – Promote a culture of fair dealing.
In January 2013, the MAS released the 28
recommendations from the FAIR review panel making proposals in each he above 5 areas.
In the light of evolving market practices and global regulatory developments, MAS is reviewing the risk-based capital framework for insurers in Singapore.
The review (“RBC 2 review”) aims to improve the risk coverage and risk sensitivity of the current framework and to specify the MAS’ supervisory intervention threshold. In order to arrange a smooth transition from the current to the new framework, MAS plans at least two years of parallel run with the existing framework.
In line with international developments MAS is planning both to increase the scope of the risks to be included in the TRR calculation and to recalibrate the required risk charges for existing risks. The overall impact will not be assessable until the calibrations are set and based on experience in other jurisdictions the impact may vary widely between insurers.
The proposal is that TRR will include elements for credit spread risk, insurance catastrophe risk and operational risk. The calculation of these risk charges has still to be set. However since these risks have not been considered in RBC calculations so far, this will lead to an increase in the base capital requirement calculation.
In addition to the review of the current Risk-Based Capital (“RBC”) regime, in January 2013 MAS has released a consultation paper that sets out proposed new ERM requirements to be applied. The objective is to improve industry standards on ERM practices. This will enhance an insurer’s understanding of the risks and its potential impact on business, and focus management actions on implementing risk
management policies and practices to ensure ongoing business viability in line with long term business goals and strategy, and its capital resources.
There have also been consultation papers released by the MAS in early 2013 on the following topics:
– Proposed Public Disclosure Requirements for Insurers – The MAS is proposing to enhance the public disclosure requirements for insurers to ensure that they disclose relevant, comprehensive and adequate information on a timely basis in order to give members of the public, including policyholders, a clear view of their business activities, performance and financial position.
This is expected to enhance market discipline and understanding of the risks to which an insurer is exposed and the manner in which those risks are managed. MAS proposes to apply the disclosure requirements to all registered insurers, except for captive insurers and marine mutual insurers.
– Review of Requirements on Investment Activities of Insurers – All insurers are expected to observe MAS’ Guidelines on Risk Management and maintain sound investment practice. Direct life insurers are subject to additional requirements on their asset management processes. With the growth of assets and corresponding increase in the investment activity of direct general insurers and reinsurers, MAS proposes to extend the scope of these additional requirements to include direct general insurers and reinsurers. The proposals relating to the governance and risk management requirements would cover insurers on a solo basis and insurance groups.
Future outlook
General insurance Direct Life insurance
Non-Life penetration (% of GDP) has risen over the years (from 2.55% in 2005 to 2.9% in 2011). This is high for the region, and growth is expected to continue.
Premiums are growing, however only at single figure rates in the SIF.
Demographics indicate long term growth potential in health insurance.
The development of the domestic non-life segment will be dependent on consumer confidence and the
continued trend of global companies setting up operations in Singapore, due to the stable business environment.
A strategy for the government is to develop Singapore as a key regional hub for complex insurance and reinsurance underwriting.
There is still huge scope for expansion of the offshore insurance business.
The growth of the economies in South East Asia bodes well for growth prospects of Singapore as a regional insurance hub.
Singaporeans continue to see life insurance as a beneficial channel for organised savings.
Life density rose from about US$1,893 per capita in 2005 to US$3,106 in 2011. Density is expected to increase further if there is sufficient investor confidence. However, volatility in global and regional financial markets could cause density to remain flat.
Insurers are looking at developing innovative products or increasing productivity of their distribution channels as a way to increase premiums and market share.
Expected further population growth offers future opportunities.
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Key players and competition
Competitive environment
Singapore is a leading insurance centre in the Asia Pacific region, with 161 registered insurers and reinsurers.
Non-life insurance in Singapore is made up of a mature domestic segment and a rapidly developing offshore segment.
The offshore segment benefits significantly from the overall economic growth of South East Asia. Singapore is also a regional centre for reinsurance, with global reinsurers already making up a large proportion of the offshore non-life business written.
Singapore has a mature domestic life insurance segment. Life insurance premiums continue to grow strongly as a result of high income levels and high savings rates. There is also a growing ‘high net worth’ market that writes both domestic and offshore business.
General insurance Life insurance
There are 46 active direct general insurers in Singapore.
Foreign insurers have a stronger presence in the non-life segment than the life segment.
The SIF is considered over serviced with a market of just over 4.2 million people. However, a large amount of general insurance premium comes from the offshore business due to Singapore’s role as a major regional insurance centre and an important shipping hub.
There are 16 active direct life insurers in Singapore.
Prudential, AIA and the local life companies (one of which is a subsidiary of a very large local bank) are dominant within their segment, and some foreign companies have found it difficult to achieve a significant market share.
Key players