Speaker Name & Country :

Topic:

Hassan Scott Odierno

Malaysia

Expanding risks in the era of the ASEAN Economic

Community (AEC)

Learning goals for this presentation

Understand why we should be interested in AEC, where
we could be insurers in ASEAN, foreign insurers interested
in entering the market, ourselves as actuaries or regulators.
Understand the major aspects of AEC relating to insurance
and how this will affect our opportunities and risks.
Learn how special pools can be used for microinsurance
and specialized risks.
Understand the challenges of regulators and how to identify
the ideal insurer.
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Why should insurers care about the AEC?

If ASEAN acted as one economy, the resulting grouping
would effectively be a USD2.6 trillion economy, 7th largest in
the world.
The population would be 622 million, 3rd largest in the world
with over half below age 30.
Although there has been no talk of using one currency such
as with Euro, the eventual flexibility of selling throughout
ASEAN under AEC opens up many opportunities.
Opportunities are great, but with opportunities come risks. It is
the job of the actuary to quantify this risk.
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Huge variations within the AEC

Countries such as Brunei, Laos and Cambodia have less
than 10 insurers, but in Indonesia and Philippines there
are well over 100 insurers each.
Insurance penetration as well ranges from almost nothing
in Laos, Myanmar and Cambodia to over 5% of GDP in
2015 total premiums for Singapore, Thailand and
Malaysia.

Share of ASEAN 2015 total premiums of

USD87.9 billion

Indonesia,
17%

Malaysia,
16%

Philippines,
6%

Vietnam,
3%
Other,
0%

Thailand, 25%
Singapore,
32%

Brunei, 0%

Cambodia, 0%
Laos, 0%
Myanmar, 0%

2016 Swiss Re Sigma Report (Brunei from AMBD)

One goal is a single market and

production base
Will it be ideal to have one central location for an insurer
rather than be in each country, or perhaps decide on the
location on a departmental level and what new operational
risks does this create? (Free flow of goods and services)
A much larger universe of potential investments, which is
great but expands investment and ALM risk as well (Free flow
of investment and capital)
Will actuaries move freely through ASEAN or will certain
countries monopolize the supply of actuarial talent? How
about foreign actuaries? (Free flow of skilled labour)
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Where are the qualified actuaries

in ASEAN?
Proportion of Fellows by country
(646 total)
Vietnam, 2%
Philippines,
Indonesia, 2%
3%
Thailand, 9%

Malaysia,
23%
Singapore,
62%

Data from SOA website plus websites of the Singapore, Malaysia and Thailand actuarial associations.
These are globally recognized qualifications, not local actuarial qualifications

Where are the qualified actuaries

in ASEAN?
Proportion of Actuaries practicing in
Singapore by nationality
Australia & NZ
6%

Others
10%
Singaporean

33%
Euro & UK
9%

China, HK,
TW
15%

Malaysian
27%

Data from the website of the Singapore actuarial association, assume same proportions for fellows as total
association members

Where are the qualified actuaries

in ASEAN?
Actuaries by Qualification
FCAS, 6%
FIAA, 16%

FSA, 39%

FIA, 39%

Data from the websites of the Singapore, Malaysia and Thailand actuarial associations. For Malaysia had to
scale by bodies of total membership

Another goal is a highly competitive

economic region
Infrastructure development is highlighted, but this will
change risk factors for motor insurance and even health
insurance as mobility increases.
Consumer protection is key, which for insurance is the
specialty of the actuary.
Focus on e-commerce which increases cyber and other
risks.
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Helping small industries prosper is a

goal rather than large corporations
Initiatives that encourage
SMEs to participate in
Equitable economic
regional and global value
development
chains

Integration into the

global economy

Enhanced participation in
global supply networks

AEC 2015 progress and key achievements

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AEC over the next 10 years

Promote financial inclusion through micro, small and medium
enterprises (MSME)
Expand the scope of financial access and literacy as well as
distribution such as digital payment services
Intensify the implementation of financial education programs to
encourage the take up of financial services
Promote the expansion of distribution channels which improve
access to and reduce cost of financial services, including mobile
technology and microinsurance
AEC blueprint 2025

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AEC over the next 10 years

Promote deeper penetration in insurance markets through ASEAN
Insurance Integration Framework (AIIF)
Greater risk diversification
Deeper underwriting capacity
Improved and strengthened insurance sector supervision and
regulatory frameworks
Maritime, Aviation and Transit (MAT) seen as the starting point
Catastrophe insurance and reinsurance also seen as a priority
AEC blueprint 2025

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AEC over the next 10 years

Promote the development of sovereign bond

markets and corporate issuances

AEC blueprint 2025

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AEC over the next 10 years

Several healthcare initiatives are explicitly mentioned:
Promotion of a strong healthcare industry

Continue opening up of the private healthcare market and

public private partnerships
Promote strong health insurance systems in the region

AEC blueprint 2025

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Same same, but different

Quiz on ASEAN
Need your cellphones for this!

Statistics from lifeexpectancy.com

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A new type of Insurance needed

The focus of the AEC has been on helping the micro and
SME operations of ASEAN to succeed rather than being
pushed out in favor of huge corporations
These small operations will be able to connect to global
supply chains through improved infrastructure, digital
commerce and minimum red tape.
Insurance will be needed for these small groups.
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A new type of Insurance needed

The many small operations will require microinsurance
type solutions, something many insurers have struggled
with.
Here the development of ASEAN wide takaful type pools
can help with microinsurance as well as risk diversification
These pools can also be organized along affinity lines to
minimize the need for selling, and thus keeping costs to a
minimum.
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High Risk Population in Malaysia

According to the International Diabetes Federation
statistics for Malaysia for 2014 the incidence of
diabetes is almost 15% of the population at age 35,
growing to over 30% at age 60. These are ages where
the breadwinner is depended on to earn wages for
childrens education and retirement funds for himself
and his dependents. Unfortunately it is very difficult to
get insurance if you have diabetes.
In ASEAN there are over 45 million people with
diabetes!

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Diabetes pool run by

Malaysian Diabetes Association
Participant

Contribution
Actual Management
Expenses of the
Association

Diabetes
Fund

Benefits

Wakalah fee for TPA or

Takaful operator

Surplus

Malaysian
Diabetes
Association for
its members

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Extension to agricultural or
catastrophe pools
This concept can be easily extended to agricultural or
catastrophe pools, where the value of diversification to
multi-country risks is obvious.

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Challenges for Regulators

There will need to be consistency in regulations throughout
ASEAN:
Currently the less developed nations are not yet under a
Risk Based Capital (RBC) regime as is being developed
globally in tandem with IFRS 4. This will need to be put in
place to avoid regulatory arbitrage

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Challenges for Regulators

The regulator in each country will need to monitor the
practices in its country of course, but some issues will
require either trust in the home regulator or perhaps be
seen as intruding into other jurisdictions. Related to this is
how to spot and encourage ideal insurers to enter the
market rather than allowing cutthroat competition to cripple
the market.

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What are the characteristics of a

model insurer?
Shareholders with
a deep pocket

Well diversified
business
portfolio

Profitable
portfolio

Responsible
management with good
corporate governance
and risk management
process

Sufficient
capital
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Operational and
Sustainability

Free Capital Index

Life Insurance
Risk Indicators
Premium Growth

Shareholders
Profitability

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Operational and Sustainability

1. Nature of shareholders wholly owned bank operations would be the
most ideal, individuals the least.
2. Fund performance as benchmarked against valuation assumptions
and reported in the analysis of surplus.
a) For Ordinary Life business
i. Mortality surplus or deficit
ii. Interest surplus or deficit
iii. Expense surplus or deficit
b) In addition for participating policies, assessment of bonus
sustainability. Frequent reduction in bonus would not be ideal.
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Free Capital Index

CAR is the capital adequacy ratio of the company (total capital

available / total capital required) and ITCL is the internal target
capital level of the company

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Premium Growth
Several criteria to consider:
1. APE (100% of regular premium plus 10% of single
premium) growth exceeds expense growth in the year
2. More than 50% of APE from regular premium
3. There is growth in renewal premium from year to year
(this reflects policy persistency)

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Shareholders Profitability
Shareholders profitability would indicate the companys ability
to generate its own capital rather than having to rely on
shareholders willingness to finance new capital.
Benchmark would be against ITCL.

(Surplus Arising in the Year attributable to shareholders

from the risk and policyholder funds)
ITCL
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Family Takaful Issues

Takaful is not as portable as conventional insurance. Takaful in
say Brunei has subtle but very important differences from
Malaysia. Takaful as practiced in Indonesia is also very different.
The ability to develop specialty Takaful funds throughout ASEAN
is an exciting prospect, but regulations will need to allow for
fundamental differences by Takaful model.

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General Insurance Issues

Operational and Sustainability
1. Liquidity Ratio - This ratio can assess the ability of the insurer to
honor its obligations to the policyholders given the short-tailed
nature of General Insurance claims.
2. Receivables Ratio - It is a good indicator in assessing the
companys operational efficiency when it comes to collecting the
premium income and reinsurance claims. Poor/high ratio is a sign
of a lack of appropriate system/process in place.

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General Insurance Issues

Profitability
1. Net Claims Incurred Ratio - This ratio provides an indication of
the underwriting profitability of the insurance business written.
2. Combined Ratio - The combined ratio not only considers the
underlying profitability of the business, but it also takes into
account the operational expenses (i.e. management expenses
and commission) associated in running the business.
3. Operating Margin Ratio - This ratio takes into account the
investment income generated by the assets of the insurer on top
of the earlier two components.
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General Insurance Issues

Diversification
Level of diversification is a factor, but this must be balanced
with the need to become specialized for some classes of
business, especially commercial lines.
Allowing for diversification benefits is much more common in
general insurance as opposed to life insurance, as the risks
associated with each class of business are more diverse than
for life insurance. The challenge will be quantifying this
diversification benefit when multiple countries under AEC are
involved.
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Conclusions
AEC, slowly but surely, is coming. We are one region but with many
differences.
A new type of insurance will be needed to cater for the smaller
operations envisioned in the AEC. Takaful type pools can be a
solution.
There are so many challenges for regulators in particular. They will
need to keep an eye on the big picture: finding ways to encourage
risk diversification and flow throughout ASEAN.
Regulators will also need to understand what is a model insurer to
encourage good behaviour. We do not need ASEAN becoming a
free for all with poor practices and insurer failures crippling the
industry.
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QUESTIONS?
hassan.odierno@actuarialpartners.com

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