It is an honour to have been asked to write a guest editorial for Asia Insurance Review’s (AIR) 20th Anniversary. As the leading trade publication in the world’s fastest-growing region for insurance, it has a significant role to play in propagating the news, views and developments in this vibrant region’s industry.
But AIR is not just about the publication. Over the years, AIR has played a key role in industry developments through the prestigious Asia Insurance Industry Awards that salute excellence in the insurance industry; and conferences such as the CEO Insurance Summit, where the key current and future challenges and opportunities in insurance are discussed; the Australia and New Zealand Insurance Industry Awards; the “Who’s Who in Asia’s Insurance Industry”; and the Middle East and North African CEO Summit.
Of course, the ethos of any publication is a reflection of its management and I would like to warmly congratulate Sivam Subramaniam on his launch and ongoing leadership of AIR since 1991. Under his energetic, prolific and always good humoured stewardship, AIR has become the premier professional Asian insurance magazine and a key media and partner for international organisations such as The Geneva Association.
Potential regulatory threats
Yet whilst the sun clearly shines brightly for AIR and its team, I must focus on the sinister clouds that have gathered over the industry over the last year or two. These clouds are the potential outcomes of the international regulatory discussions that are underway in the wake of the worst financial crisis in living memory. These threaten to stifle the very growth and stability of insurance that has weathered the storm so well and absorbed many of the financial shocks thrown its way and in the way of its policyholders through the same crisis.
Unfortunately, in some ways, the roots of this threat can be attributed to the industry itself and it is on the challenges that we have set ourselves, and by implication, the solutions to those challenges, that I will focus in the next short paragraphs.
The Geneva Association has done a considerable amount of work on the crisis, the current regulatory discussions and in interacting with regulators, supervisors and politicians on this issue, but space and time are limited so I would urge you to follow that up on our website, www.genevaassociation.org.
Insurance – the foundation of modern societies and entrepreneurialism
We all know that insurance is, in fact, the basis on which modern societies and entrepreneurialism rest – especially new initiatives. There is a strong argument that the average person could not take the financial risk of driving a car without it or set up in business; nor could satellites be launched into space; nor could shipping operate on such a scale. How could we share commonly the risks of morbidity and mortality? It enables consumers, businesses and other enterprises to take measured risks and to absorb financial impacts without ruin – that is a remarkable thing – but one that is regularly underestimated.
As an industry, insurance has spent too long keeping quiet, going about its business and allowing the wider world to ignore and not understand it. It seems that very few, if any, senior insurance figures leave the industry and finish their working lives in politics.
Very few become active in other high-profile financial institutions such as the IMF, World Bank, OECD, etc.. And very few, at least to date, have found their way into the international governmental and regulatory bodies that are currently charged with righting the wrongs of the currently regulatory set-up and preventing a recurrence of the financial crisis. And whilst we are not been widely represented at the highest level, nor are we well understood. It seems that historically, we have not felt an urgent need to address this knowledge gap.
Insurance sector needs to engage more proactively
Before the financial crisis it didn’t seem to matter much - after all, regulation was set at the national or regional level and the G-20 and the Financial Stability Board (FSB) were focused on other issues.
For consumers, insurance markets work relatively well although it is mostly regarded as an inevitability rather than a beneficial purchase. The general media have focused on insurance mis-selling and denied pay-out or coverage horror stories, but seldom the larger picture.
Whatever the root, it is clear from recent events that we need to engage more proactively. Financial regulation is rightly set to change but how this is conducted and the technicalities of new regulation to come will be crucial in promoting healthy markets. This is particularly true in the insurance industry where a fundamental and detailed understanding of all aspects of the industry is needed to regulate it correctly.
We have to make sure that this knowledge is present, not only at the specialised insurance bodies that regulate and supervise our industry, but also at the political and wider financial regulatory entities that shape the framework.
Geneva Association clearing misconceptions about insurance
Over the last year, and through careful analysis, The Geneva Association has been working vigorously to support the work of International Association of Insurance Supervisors (IAIS) and FSB in addressing the central questions around global financial stability and systemic risk, projecting industry knowledge and understanding into the regulatory debates.
We have also highlighted the potential negative effects that would result from implementing reforms that treat insurers like banks. On behalf of our near 90 members we have been working hard to answer questions and right misconceptions about the functioning of the industry. Alongside other industry bodies we have led meetings with countless politicians, central bankers and treasurers to inform, educate and review the initial International Monetary Fund (IMF) and G-20 plans to reregulate the financial sector.
Fundamentally, it has been the thorough analysis of the specific nature of our industry and the lack of any systemic risk stemming from its core activities that has shaped many aspects of the debate. For the most part at least, people are ready to listen when presented with a careful analysis and the uptake of our central messages has been very encouraging:
“Both the IAIS and the insurance industry have concluded that core insurance activities do not pose systemic risk”, according to an IAIS press release, November 2010;
“Failures of one insurance company don’t tend to produce knock-on failures among others” according to Lord Turner, Chairman of the UK’s FSA and member of the FSB in October 2010; and,
“In the insurance industry, size allows for a greater diversification of risks and therefore a better overall risk profile. ..The nature of insurance activities is such that they cannot be described as systemic”, French Ministry of Finance, LePetit Report, April 2010.
Potential inclusion in the SIFI list
However, big challenges remain. Indeed, a new challenge has emerged with the recent announcement of the potential inclusion of insurers in a list of so-called systemically important financial institutions (SIFIs), which is a euphemism to describe those financial institutions that are potentially the source of such massive and contagious risk that it could destroy the whole financial system.
Historically, no insurance activity ever created any threat in such a way that it could take down the financial system. We have not yet seen the analysis that designates a company as a SIFI and indeed, regulators are considering different approaches as we write this text.
However, we are concerned that in a move to capture potentially dangerous activities in banking (where, so far, all systemic threats have emanated) could, as an unintended or at least tolerated side-effect, directly affect insurance markets in a very negative way, curtailing the ability of insurers to organise risk transfer and to provide coverage at affordable prices and under effective conditions.
It seems that that very little analysis has been undertaken on the implications of a SIFI designation in insurance, how it affects competition and what the long term economic implications are. We should all be vigilant to make sure that political expediency does not drive the regulatory agenda in the wake of the crisis, but rather good sense and carefully thought-through regulation that will facilitate the growth of our industry whilst preventing activities that could be contrary to the interests of policyholders and/or the market.
Must work more closely with governments
For the future, there are some lessons learned. It is clear that we need to be close to critically important decision processes and should to feed insurance alumni into the political and economic halls of power, helping to underline and properly reflect our intrinsic and vital relevance to economic and societal development.
There are many more opportunities for creative solutions and new insurance products, provided we have the right regulatory frameworks. The growth of insurance in Asia has been astonishing and markets elsewhere have much to learn from the dynamic and energetic industry here, and vice versa.
We must all interface more closely with governments to create joint solutions and partnerships where purely private markets reach their limits. Insurance stands on the cusp of a great opportunity – the potential to be the private sector party able to help, advise and partner with governments to manage the daunting risk tasks facing our societies: catastrophic events, old-age security, health and long-term care, terrorism to name but a few.
Hire the best!
At the same time, we should not neglect our future human resources. Insurance has not been very successful in creating an attractive image for itself and despite offering some of the best working conditions of any industry; we are often an also-ran for graduates in finance and an unknown for others.
Great companies are made from great teams and great teams are made of great people. We must be mindful of, and reach out to, academia and graduates more. Insurance is a diverse industry needing diverse talent. It is an exciting place to be and future graduates should ideally recognise it as such. The most pressing challenges to modern societies and their social, economic and financial fabric are risk issues: from natural catastrophes to old-age security, from man-made disasters to financial markets, from terrorism to basic economic development – it is risk that plays a major role and it is insurance that is the ultimate risk industry
GFC can be a catalyst for insurance to shine
In many ways, the financial crisis can be the catalyst for insurance to step up from its old image and claim its rightful place in society as a utility that makes the economies of the world thrive.
I hope that in 20 years’ time, at the 40th anniversary of AIR, we will be looking back at 2010 as the starting point for a time of great success for our industry, when the industry stood up and was fully recognised.
Patrick M Liedtke
Secretary General and Managing Director
The Geneva Association