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     FrontPage Edition: Thu 26 Jan 2006

Importance of corporate governance for insurance companies

Source: www.mas.gov.sg

KEYNOTE ADDRESS BY MR LOW KWOK MUN, EXECUTIVE DIRECTOR (INSURANCE), MONETARY AUTHORITY OF SINGAPORE

AT THE 2ND ASIAN CONFERENCE ON CORPORATE GOVERNANCE AND DIRECTORS' AND OFFICERS' LIABILITY INSURANCE 23 JAN 2006
An Excerpt
To give you an idea of the significance of the insurance industry in Singapore, total sums insured in the Singapore life insurance industry amounted to more than $330 billion as at end-2004.
As a comparison, total deposits of non-bank customers in the domestic banking unit, which are largely S$-denominated deposits, amounted to only slightly more than $220 billion as at end-November last year. These include deposits of both individuals as well as corporations.
If foreign currency deposits are added, total deposits in Singapore's banking system amounted to about $490 billion. Though not exactly comparable, the exposure of policyholders to life insurance companies is almost as large as the exposure of depositors to banks...
MAS strongly believes that the standards of corporate governance for banks and direct insurers need to be higher than that for other commercial entities, to take into account the unique roles they play in the financial system and the economy.
This is why in September last year, we issued an enhanced set of guidelines on corporate governance for all banks and direct insurers operating in Singapore.
The guidelines are based on the Code of Corporate Governance issued by the Council of Corporate Disclosure and Governance (CCDG) that are applicable to companies listed on the stock exchange. Given the unique characteristics of the banking and insurance industries, we supplemented the CCDG's guidelines with additional principles and guidelines.
The guidelines are not mandatory, but are best practices that MAS would strongly encourage all banks and direct insurers to adopt.
We also introduced a set of regulations that are mandatory for the locally-incorporated banks and significant direct life insurers.
The regulations contain elements that MAS believes are essential for good corporate governance. These elements are built upon the basic principle that the Board of Directors has the primary responsibility to ensure that the financial institution operates in a prudent and sound manner, with the interests of depositors and policyholders adequately safeguarded.
A key element of good corporate governance is the strength and quality of the Board of Directors, coupled with sufficient independence within the Board to ensure that key decisions are made after due consideration has been given to the interests of all stakeholders.
In MAS' corporate governance regulations, we have made it a requirement that one-third of the members of the Board of Directors should comprise individuals who are independent of the institutions' management, business relationships and substantial shareholders.
During our public consultation on the guidelines and regulations, views were expressed about whether it is more important to have well qualified directors who understand the business or directors who are independent but have little appreciation for the complexities of the financial industry.
Some have argued that given the limited pool of financial expertise in Singapore, it would be difficult to find individuals who know the business as well as satisfy the independence criteria laid down by MAS.
As a regulator, MAS views that both qualities are equally important. Directors of financial institutions should understand the intricacies of the business so that they can perform their responsibilities effectively.
For example, the Board of Directors of a life insurance company should be adequately equipped to review reports produced by the company's actuary, and satisfy themselves of the strength of the company's financial condition.
In addition, the Board would have to review the company's reinsurance strategy as well as its underwriting strategy.
All of these require the directors to have sufficient knowledge of insurance, or at the very least, adequate knowledge of financial markets so that they are able to raise pertinent questions to senior management to satisfy themselves that the company's business is well managed.
At the same time, there should be sufficient independence within the Board of Directors to serve as a check-and-balance for key decisions that the Board has to make. In the case of a non-financial corporation, it is acceptable to assume that a director's primary responsibility is to protect the interests of the shareholders who appointed him.
But in the case of a financial institution, such as an insurance company, to which members of the public or policyholders have entrusted their funds, the directors of the insurance company have the added responsibility to safeguard the interests of its policyholders...
It should be emphasised that the requirement for a minimum number of independent directors on the Board of an insurance company should not dilute shareholder control or stifle efficiency in Board decisions. That is why MAS only expects a minimum of a-third of the Board of Directors to be independent.
We do recognise that some life insurance companies have relatively small operations and a small Board. It may not be practical at this moment to require them to enlarge their Board and appoint new independent directors.
Therefore, we have decided to focus the independence requirements on the direct life insurers whose operations are more significant.
We have set the threshold at $5 billion in assets, but we will review this at a later stage taking into account international developments as well as our experience in applying the requirements on the significant life insurance companies. Having said that, all insurance companies are still encouraged to adhere to the higher standards on Board independence where possible and if their circumstances warrant it.

Full Text of Speech

Source: www.mas.gov.sg News Release 23 Jan 2006

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