Singapore's life industry recovers
If one word could be used to sum-up Singapore’s life
insurance market it would be ‘volatile’, at least in terms of new
business. This was no better illustrated than by the boom enjoyed
in 2007 followed by the bust in 2008 and into early 2009.
Encouragingly, solid signs of a recovery are evident.
Among the hardest hit by the global
financial crisis, Singapore’s life insurance industry appears to be
on the mend following two consecutive quarterly increases in new
business.
Based on figures released by the city state’s
Life Insurance Association (LIA), the life insurance industry
achieved total weighted new business premium income of S$2.12
billion ($1.53 billion) during the third quarter of 2009.
This represented an improvement of 87.6
percent compared with S$1.13 billion in the second quarter of 2009,
and 159.2 percent compared with S$818 million in the extremely weak
first quarter of 2009.
During the worst of the financial crisis in
late-2008, Singaporean life insurers implemented a number of
emergency measures to assist policyholders.
These included offering an extended ‘premium
holiday’ for whole life and endowment policyholders with small
one-time fees and low-cost relief schemes that offered
policyholders coverage against death, critical illness and
permanent disability.
“The latest results reflect a more upbeat
consumer sentiment against an improved outlook for the Singapore
economy as a whole,” said Darren Thomson, president of the LIA and
president and CEO Canadian insurer Manulife Financial’s Singapore
business unit.
Specifically, new business in the third
quarter of 2009 returned to within a fraction of new business of
S$2.128 billion in the third quarter of 2008.
The strong quarter-to-quarter recovery
effectively placed the industry back to the levels before the
global crisis and if sustained will see annual new business
approach the record levels of S$9.681 billion achieved in 2007 and
S$9.4 billion achieved in 2001.
Singapore's open,
competitive economy
Having a very open, competitive
economy heavily dependant on exports – especially hi-tech products
– Singapore’s economy boomed during the years of robust global
economic growth.
So did the life insurance industry,
which saw new business premium income rocket from S$1.18 billion in
1998 to a peak of S$9.68 billion in 2007. Despite high volatility,
this represented an impressive CAGR of 26.3 percent over the nine
year period.
However, the open nature of Singapore’s
economy also resulted in it feeling the full impact of the global
financial crisis. Indicative of the impact, data from Statistics
Singapore show GDP in real terms fell from 7.3 percent, 8.4 percent
and 7.8 percent, in 2005, 2006 and 2007, respectively, to 1.1
percent in 2008.
The impact of the crisis was even more notable
on a year-on-year quarterly basis with Statistics Singapore
reporting that real GDP slid from a growth rate of 6.7 percent in
the first quarter of 2008, to 2.5 percent in the second quarter,
zero in the third quarter and -6.5 percent in the fourth
quarter.
The full brunt of the crisis was felt in the
first quarter of 2009, with real GDP on a year-on-year basis
slumping to -17.4 percent in the first quarter. A welcome recovery
is now evident with real GDP increasing by 1.6 percent in the
second quarter of 2009 and 7.1 percent in the third.
Volatility of new life
business
Among the most notable
characteristics of Singapore’s life insurance market is the
volatility of new business that has been evident for many
years.
For instance, after increasing
almost eightfold from S$1.18 billion in 1998 to S$9.4 billion in
2001, new business premium income fell sharply for two consecutive
years to S$5.25 billion in 2003, before recovering steadily to
S$7.54 billion in 2006.
New business then raced ahead by 28.4 percent
to S$9.68 billion in 2007 and continued to rise strongly into the
first quarter of 2008 before beginning a precipitous decline that
left premium income in the first quarter of 2009 standing at just
over a quarter of the level a year earlier.
Underlying premium income volatility have been
substantial variations in single premium new business, a feature
strongly influenced by inflows into single premium
investment-linked products which are subject in large measure to
investor sentiment.
During the equity market boom in 2006 and
2007, Singapore’s equity benchmark the Straits Times Index (STI)
increased by two thirds in value to a peak in October 2007.
Mirroring this, during the same period,
investment-linked products reached their height of popularity,
accounting for 65 percent of total life industry sales in 2006 and
68 percent in 2007. Over the previous five years, investment-linked
products had, on average, accounted for 42 percent of sales.
The equity market slump, during which the STI
fell by two thirds to a record low in March 2009, devastated
investment-linked product sales, which by the first quarter of 2009
had dwindled to 22 percent of sales.
Although a recovery in the market saw the STI
almost double from its March low and spark a revival in the sales
of linked products, their share of total sales declined to 20
percent in the third quarter.
However, on a positive note, Thompson
commented some LIA members are observing clients starting to move
money from cash into single-premium investment linked products.
According to the LIA, of total assets
totalling S$98 billion managed by Singapore’s insurance industry at
the end of the second quarter of 2009, non-linked business
accounted for $77.6 billion and linked business $77.6 billion.
Regulatory setbacks and
change
Adding to pressure on new sales, the
Singaporean life insurers have also had to contend with significant
regulatory change.
The most significant recent change
occurred in 2008 in the form of an amendment to the Central
Provident Fund Investment Scheme (CPFIS), for many years an
important source of new business.
In brief, CPFIS is a compulsory social
security savings scheme comprising Ordinary Accounts which can be
used for expenses such as home purchases and education; Special
Accounts for retirement savings; and Medisave Accounts for hospital
and medical insurance expenses.
A major change was implemented on 1 April 2008
when the first S$20,000 in ordinary and special accounts was
required to be held in an interest bearing CPFIS savings account
whereas before all funds could be placed in life insurance
investment products.
Notably, the SLIA reported the CPFIS sector
accounted for S$1.72 billion or 63 percent of single premium sales
and 58 percent of total sales in the first quarter of 2008. In
2007, CPFIS-sector sales accounted for 57 percent of total sales
and in 2006 54 percent.
In the third quarter of 2009, CPFIS-sector
sales totalled S$201 million, or 10 percent of single premium new
business and 9.5 percent of total new business, according to the
SLI.
Singapore's life industry is one of
Asia's most significant
Despite its small population of 8.84
million people – 0.2 percent of Asia’s total population –
Singapore’s life industry ranks amongst the more significant,
accounting for 2.2 percent of the region’s life premium income in
2008, according to reinsurer Swiss Re.
Singapore’s significance reflects a highly
developed economy and a relatively high level of per capita
spending on life insurance.
According to Swiss Re the average life premium
paid by Singaporeans was $2,193 per capita in 2008, ranking the
city-state third in Asia behind Japan ($2,986) and Hong Kong
($2,979).
Based on Singapore’s GDP, however, Swiss Re
data reflects room for improvement. In 2008 life premiums
represented 5.56 percent of GDP, ranking Singapore fourth in Asia
behind Taiwan (11.48 percent), Hong Kong (9.66 percent) and Korea
(7.21 percent).
Singaporeans’ underinsurance has been the
subject of close attention by, among others, the LIA and the
Singapore Actuarial Society (SAS).
A joint study released in August 2009 by the
two bodies emphasised that, despite Singaporeans believing they are
risk averse with their finances, they remain ‘grossly
underinsured’.
The LIA/SAS survey, which focused on people
aged between 20 and 40, found that while 73 percent of respondents
are aware of the need to secure their financial future, only 48
percent actually have a plan to do so.
Notably, the recent swine flu outbreak appears
to have acted as a wake-up call for many people with what the
LIA/SAS survey termed “a high proportion of Singaporean
respondents” determined to review their insurance cover to see
whether it is adequate.
Putting numbers to the level of underinsurance
in Singapore, the LIA and SAS updated the results of a study
undertaken in 2006 by the Nanyang Technological University. Based
on this update the average Singaporean’s protection needs
requirement in 2007 was S$494,850, compared with existing life
insurance cover averaging S$165,630, after factoring in mortgage
insurance and CPF savings.
Based on the LIA and SAS calculations, using
an insurance cover requirement of about 11 times the average
person’s annual salary the average underinsurance level of
S$329,220 per capita, across the working population aged 20 to
64.
This shortfall was down from $361,997 in 2006.
The aggregate underinsurance gap across all age group’s in
Singapore was S$525 billion in 2007, down from S$578 billion in
2006.
The study found that, while insurance
ownership in absolute terms is highest in the 30-39 and 40-49 age
groups, the protection shortfall was also the highest due to
greater protection needs.
Specifically, in the 40-49 age group a
protection gap of about S$120,000 per person was identified, while
in the 30-39 age group the gap is about S$95,000 per person.
According to the LIA, the 40-49 age segment comprises some 646,000
people and the 30-39 segment some 614,000 people.
Increasing life insurance protection
levels
For Singapore’s 16 life insurers
(based on LIA membership) the insurance gap provides a significant
incentive to deliver appropriate protection products.
Encouragingly, the trend amongst Singaporean’s appears to be
heading in the direction of increasing their life insurance
protection levels.
Thomson observed: “The average payout for
death benefits is moving upwards, reaching its highest of $47,027
per policy this [third] quarter [2009]. While this is by no means
adequate for the average family in Singapore, at least we see a
positive trend in terms of narrowing the protection gap.”
Driving sales for the industry as a whole are
tied agents which in the first three quarters of 2009 accounted for
61 percent of new business sales, according to the LIA.
The bank distribution channel accounted for 23
percent, licensed financial advisers 11 percent and other channels,
including direct sales, made up the remaining 5 percent.
A trend towards any of the two major
distribution channels gaining ground at the expense of the other is
hard to discern.
Specifically, the share of new business
accounted for by tied agents has, since 2004, varied from a high of
70 percent in 2004 to a low of 61 percent in 2008. Bancassurance
saw its contribution over the same five-year period vary from a
high of 29 percent in 2004 to a low of 19 percent in 2007.