We live in interesting and ageing times

One of the major challenges for insurers is the effect from economic trends that are more structural than cyclical – such as an ageing population and what could be a long-term, low interest rate environment – and the effect this could have on investment portfolios and company pension funds. “There was an overreliance on global monetary policy to solve the financial crisis and it is exerting a cost,” he said. “We have entered a period of negligible or even negative interest rates for long-term investors and we have to accept that [in the] long term, low interest rates could be here to stay.” The ageing global population also has implications for investments and the saving behaviour of investors. “The baby boomer generation is approaching retirement. We expect to live longer than our parents. It is a problem that should have been recognised earlier.hideIt will mean more savings and the gap between savings and investments will grow.” Low interest rates are actually leading to an increase in savings as opposed to being a catalyst for increased consumer spending, especially in Japan, where people are choosing to save rather than spend in order to have something left for retirement. It has become a self-reinforcing economic cycle, said Mr Shanmugaratnam, because of the weakness of the underlying economies, especially in the developed markets. “Productivity has slowed and growth will be slower [during] the next 20 years. This will pose a challenge for the investment funds held by insurers and pension funds. It hits their assets and liabilities – the discount rate reduces and the gap in maturities increases. It means we have a problem.” This problem has led more investors and pension funds to look to alternative assets such as derivatives for greater returns but, said Mr Shanmugaratnam, a change in asset allocation or investment strategy will not change this problem in any fundamental way. “There is inherently a shortage of quality alternative assets. The search for yield does not raise yield, it just redistributes it. There is a finite supply so more allocation will actually reduce the returns over time.” For many Asian countries, the pensions deficit is an acute issue. China has a complex system of retirement schemes and is in the middle of a process of reform. Thailand will also enter an ageing phase and there are a number of countries in Asia, such as Japan, Korea, Singapore, Taiwan, which have grown quickly and now face an ageing problem. But it is a global challenge that needs global reform, said Mr Shanmugaratnam. “You have to allow people to work longer and make it attractive to do so. You have to rearrange the workplace – so it becomes the norm for older people to be part of teams and celebrate the presence of older people in work, either full-time or part-time.” There also needs to be reform of the investment market so that the costs for ordinary savers are reduced, said Mr Shanmugaratnam. “A shift towards defined contribution schemes from defined benefit schemes has fragmented the marketplace. Risk has been placed on the individual and there has been more active than passive management. That has meant higher costs that are not sustainable. We have to have greater pooling of funds and we need more passive management in the long-term. If we can take 100bps out of fees, it makes a large difference to savings.” Then there is the need to reform the healthcare system, said Mr Shanmugaratnam. “People are living healthier lives but we have extremely inefficient healthcare systems, subsidies have dispensed too illiberally and it is taking up a lot of public and private resources that could have been used for retirement security. We need fair and sustainable healthcare systems.” As challenging as all of these issues are, there is an opportunity for the insurance industry to play a greater role in the search for solutions, especially in Asia where forecasts suggest that if the current growth rate continues for the next decade, it will account for 40% of the global insurance market. At present there is a for traditional risks, said Mr Shanmugaratnam, with too much capital chasing after property and casualty premiums. Instead, insurers should be looking to invest their capital in industries like infrastructure, transport, communications, power, water and the environment. “These markets have been traditionally financed by banks and governments, but both will be more constrained in future and unable to meet infrastructure needs. Institutional investors will become more important and infrastructure will become an important asset class – it is diversified, it has a low correlation to other asset classes and it has inflation-linked returns.” But, said Mr Shanmugaratnam, we need more quality data to build trusted benchmarks for reliable asset allocation. We also need to rethink the capital frameworks so there are lower risk charges for infrastructure assets and invest-ments held by insurers, something that the MAS is currently considering. There are also underwriting opportunities for insurers in the developments within Asia, such as the rise in man-made and natural catastrophes and the protection gap that exists in many parts of Asia. The concentration of wealth and growth in urban centres, combined with nature’s wrath, has created an unacceptable cost to the rising disasters. “Insurers such as Lloyd’s say that even a modest rise in natural catastrophe insurance coverage would have a massive effect on the economic cost of natural disasters. However, insurance penetration remains low. There is also a lack of data and that makes it difficult to have efficient underwriting. That means that there is limited insurance coverage at a high cost and that equals continuous low penetration.” But if various industries can collaborate and pool their data, this problem can be solved, said Mr Shanmugaratnam. The MAS has developed the Natural Catastrophe Data Analytics Exchange in partnership with the Institute of Catastrophe Risk Management, a body attached to the Nanyang Technological University (NTU), to help plug the gap in data. And Mr Shanmugaratnam invited insurers to get involved, not just for nat cat but other areas of growing global concern such as cyber risk. “The frequency, sophistication and audacity of cyber attacks are growing and the demand for insurance will increase but the market needs development and the available data is weak. “There is a lack of awareness of the importance of insurance. We need more collaboration between insurers, academia and the public sector to improve the collection and modelling of cyber risk data.” To this end, Singapore has just launched the Cyber Risk Management Project, an initiative led by the NTU with support from the MAS, the government’s Cybersecurity Agency and a number of private companies. “Public-private partnership is the smart way forward for all of these issues,” said Mr Shanmugaratnam.

We live in interesting and ageing times

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