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Interview with a Regulator: Promoting a sound risk culture

Source: Asia Insurance Review | Oct 2016

With Macau taking centre stage as the host of the 28th EAIC this month, we bring you an exclusive interview with Ms Maria Luisa Man, Executive Director of Monetary Authority of Macao, highlighting the key issues in the regulatory pipeline as well as its focus and priorities going forward. 
Q: From the 2015 Profit and Loss preliminary figures, the life industry has shown tremendous growth (more than 50% based on Gross Premiums). What is your assessment of this amazing growth? 
Based on the information collected, the significant growth in the life industry is mainly driven by the growth in the sales of endowment products. The key driver of such growth is the demand on the wealth management under the low interest rate environment and bancassurance business solicited by banks’ high net worth customers.
Q: The non-life sector is much smaller and is eclipsed by the life sector every year, what is your assessment of this?
The non-life sector in the Macao SAR has always been small as compared to the life business. 
   In the past decade, life revenue occupied approximately 70% share of the market. Since 2014, a substantial growth has been experienced in the life business, while the general business could hardly keep up the same pace, leading to an enlarged gap between the two sectors. 
   In 2015, life business showed a remarkable performance by a surge of 74% in the revenue, which represented 85% of market share. The significant growth is, again, due to the robust business development relating to endowment products for the high net worth consumers. In the long run, the great challenge facing the life sector will be a drop in the revenue as a result of the rising interest rate trend causing the change in demand on the wealth management. 
   The non-life sector, on the other hand, manages a mild growth at 6.4% despite the economic downturn of the Macao SAR. The insurance sector, though no longer enjoying the dramatic growth as in the past years, achieves a stable and healthy development which is indeed a good point viewed by prudential regulator. 
   With the support of the Central Government, the Macao SAR has the opportunity to establish regional co-operations with the Mainland. And flowing from these co-operations, it is envisaged that opportunities for the non-life sector will continue to grow in the coming future, not to mention that a non-life insurer licence was granted recently demonstrating that there are still untapped opportunities in the non-life sector.
Q: Both the life and non-life sectors’ penetration rates are still low (life at 1.4% and non-life at 0.4% in 2015 as per Swiss Re’s sigma figures), what plans does the regulator or the industry have to increase the rates?
One of the main reasons for the low insurance penetration in the Macao SAR is due to low awareness of the benefits of insurance for the general public. 
   Over the years, the Monetary Authority of Macao (AMCM) and the insurance sector have jointly organised publicity campaigns such as exhibitions to promote public education. We hope that, through these publicity campaigns, the public would have a better understanding of the purpose of insurance, and how different types of insurance can add value to their personal life, family and business. 
Q: Legislators had approved the first reading of a Bill to set up the Non-Mandatory Central Provident Fund. What is your view of this? 
The setting up of Central Provident Fund will have profound consequences for individuals and society. In the second quarter of the 2016, the Government submitted the bill to the Legislative Assembly, which demonstrated the Government’s commitment to strengthen the retirement protection of the working population of the Macao SAR. 
   With the Central Provident Fund coming into force, insurers providing fund management services to retirement plans will probably need to adapt to the new platform as set up by the Social Security Fund. Nevertheless, with the increasing awareness of the general public to the importance of retirement protection, it is expected that life insurers will stand a good chance to have an expansion in its fund management business.
   Are there any regulations that are in the pipeline? If so, can you elaborate about them? 
On the regulatory front, there is the continuous need to protect consumer’s interest, strengthen insurer’s solvency position, address the rapid change of economy and complexity of insurance products and enhance prudential supervision. 
   In order to be in line with the international regulatory requirements and respond to the changes in the economic structure and consumer behaviour of the Macao SAR, it is necessary to exercise effective supervision by implementing the appropriate and relevant supervisory tools. For this purpose, several regulations are now in the process of review, namely, the revamp of the Macau Insurance Ordinance (MIO) and the Insurance Agents and Brokers Ordinance. 
   Since both laws have been enacted for years, despite the fact that Insurance Agents and Brokers Ordinance has been amended in 2001 and 2003 respectively, the changes in the insurance market requires a higher standard of professionalism from the intermediaries. 
   The scope of the amendments of MIO include increasing the insurance company’s capital requirements, strengthening the standard on corporate governance and “fit and proper” requirements, intervention measures and consolidated supervision. 
Preventing mis-selling activities 
As for the Insurance Agents and Brokers Ordinance, the main revision is primarily to raise the professional standards of the intermediaries by introducing the Continuous Professional Development (CPD) programme.
   Similar to the guidelines issued in the past, such as “Customer protection declaration for purchasers of life Insurance”, “Guidelines for issuing insurance policies to non-residents in the Macao SAR”, “Standard illustrations for non unit-linked life insurance policies”, insurers are required to reinforce standardised disclosure and declaration requirements to avoid mis-selling activities. 
   However, since misinformation and opaque sales practices can cause financial losses for policyholders, the AMCM is now in the process of formulating guidelines on selling life insurance business other than the linked insurance schemes. This is to comply with the requirement of Insurance Core Principle 19, which stipulates that the conduct of the business of insurance should ensure that customers are treated fairly, both before a contract is entered into and through to the point at which all obligations under a contract have been satisfied.
Cross-border sales
Lately, cross-border sales have been growing in an exponential manner as more consumers purchase products outside their home jurisdiction in order to benefit from the investment opportunities overseas. 
   In the Macao SAR, Mainland residents used to cross the border to buy investment linked assurance schemes (ILAS). The AMCM is vigilant to the potential risks from this portfolio of business, especially relating to improper product sales by agents and the mismatch of customers’ need. 
   In 2015, “Guidelines on selling of investment-linked assurance scheme products” has been issued to address the disclosures of the fees and charges as well as the various risks associated with the ILAS products. Insurers are required to strengthen upfront disclosures regarding distributor remuneration, all fees and charges and the product risk factors to consumers. We will continue to monitor the market development and review our guidelines in a timely manner in order to ensure that they are adequate and appropriate.
Q: What are your challenges in regulating a small insurance sector? 
As in many countries with a small insurance market facing resource constraints, the Macao SAR needs a flexible and practical approach in the development of an appropriate supervisory framework and consumer protection oversight. 
   The AMCM is an integrated supervisory authority of all financial institutions including insurance companies and intermediaries. The regulatory measures are both on prudential and market conduct supervision. The objective is to ensure the stability, solvency, liquidity and normal functioning of the insurance sector and to safeguard the rights and lawful interests of the policyholders. On the other hand, the insurance market in the Macao SAR is mainly dominated by branches of international market players, and considering the complexity of the products offered to the market, the regulatory framework should be able to address the different types of risks facing the insurers. 
   Having a small insurance market, one of the major challenges facing us is resource constraints. Regardless  of how small the sector is, the financial supervisor cannot give up prudence to size. The legal system has to be well constructed, supplemented by appropriate supervisory tools like the on-site and off-site inspections. 
   How to align with the international standard of supervision is a key challenge to many regulators. This is no exception to the AMCM. Legal reforms in the Macao SAR can be time consuming and consideration has to be given to the market response. 
   Bearing in mind that any regulatory changes not only affects the operations of insurance companies but may also ultimately affect policyholders’ interest, the AMCM will stay vigilant to the emerging changes in the market to gauge the potential regulatory concerns. It is definitely the wish of the AMCM to see growth in the insurance sector, but market stability is equally important and cannot be neglected. 
   The AMCM will place more importance to enhance and improve communications with market players, exchange ideas with regional and international counterparts and nurture the supervisors in terms of professionalism. In fact, with an ever-growing complexity of insurance products and the utilisation of new sales channels, adequate resources must be available to strengthen our supervisory team accordingly. 
Q: What is your wishlist for the industry? 
Given the constraints facing the insurance sector in terms of market size and human resources, and in order to achieve sustainable growth for the sector, it has to think of innovative ways to reach out to the potential customers and to develop products which can better meet the different financial needs of customers. 
   As the regulator, we hope that the insurance market can expand due to product innovation and coupled with the latest technology advancements in social media, these products can reach out to more potential customers. 
   On the other hand, insurance is a unique industry where risks and opportunities are the core of the business value. While innovations will bring significant opportunities to the market, a greater risk will also be created which may affect the financial soundness and stability of the insurance industry. 
   As such, in order to promote a sound risk culture and to boost customers’ confidence, it is also our hope that insurers should continuously strengthen their risk management functions and at the same time, have in place appropriate disclosure measures to ensure that customers are able to make informed choices.
Q: What are your priorities going forward in end 2016 and 2017?
Looking forward from now to 2017, the AMCM shall endeavour to carry out prudential supervision as usual, and, on the other hand, try to seize opportunities to enhance the regulatory legislation and comply with international standards. 
   As mentioned above, the revamp of the MIO and Insurance Agents and Brokers Ordinance will occupy the top of our list, and implementation of the CPD programme is another crucial task that needs to be completed in near future. 
   Last but not the least, strengthening the collaboration with the market players is definitely the key to the successful implementation of the works in process and in the future, in building a robust and healthy insurance sector that can respond to the needs of the insuring public.
Business Performance of the Insurance Sector of Macao SAR for the Year 2015
• In the long run, the challenge facing the life sector will be a drop in the revenue as a result of the rising interest rate trend;
• The revamp of the Macau Insurance Ordinance (MIO) and the Insurance Agents and Brokers Ordinance are in the pipeline; and
• The AMCM will place more importance to enhance and improve communications with market players and exchange ideas with regional and international counterparts. 


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