The regulatory and commercial landscape in which the Singapore life insurance industry operates will soon be changing in response to various initiatives led by the Monetary Authority of Singapore (the MAS), aimed at altering the way life insurance products are marketed and sold.
Of particular note amongst the many amendments which have recently been articulated in draft legislation, forms and notices attached to the most recent consultation paper issued by the MAS on 2 October 2014 are:
- The introduction of a regulated web aggregator to enhance market efficiency
- The introduction of a direct commission-free channel for customers to purchase basic life insurance products
- The regulation of commission payouts and caps on first year commissions
These changes arose from the proposed recommendations of the Financial Advisory Industry Review (FAIR), following which, the MAS issued a consultation paper on 5 March 2013 and most recently, the 2 October 2014 consultation paper. A total of 60 respondents from the finance and insurance industries have responded to the draft legislative proposals prior to the close of the consultation period on 3 November 2014.
A regulated web aggregator
One of the most interesting developments is the launch by the MAS of its own life insurance web aggregator. In Singapore, aggregators currently have a limited market presence within the insurance industry and the development of such a platform for life insurance has seen resistance amid concerns that the complexity of products (and in particular how those products are priced) does not easily lend itself to meaningful comparison through the aggregator format. Such concerns have been echoed by the Australian Prudential Regulation Authority which recently commented as part of its submissions to the Australian Financial System Inquiry that aggregators can result in too much focus being placed on pricing at the expense of an understanding of the full value of the services offered by insurers.
Nonetheless as access to the internet continues to rapidly increase around the globe, the popularity of web aggregator services across many industries also continues to grow, and this trend has been reflected in Singapore, where online price comparison services have recently been introduced in a number of industry sectors.
Against the backdrop of ongoing debate regarding the benefits and risks posed by aggregator services in the insurance sector, the MAS now proposes to implement a regulated web aggregator for life insurance products aimed at making it easier for the modern-day consumer to compare life insurance products, whilst the legislative amendments recently proposed by the MAS will attempt to ensure that information that is collated is accurate and that the activities of future web aggregators seeking to enter the market are appropriately regulated. For example, under the draft legislation, licenced insurers will be required to furnish accurate information, and pay a fee, to the MAS for the operation and use of the web aggregator. A failure to provide relevant information, or use due care to ensure that any information furnished is not false or misleading in any material, will constitute an offence to which financial penalties will be attached.
The MAS has acknowledged that there are practical difficulties and challenges in regulating a system that compares a large number of varying life insurance products. To address this, insurance products sold on the web aggregator will only set out standardised features commonly sought by consumers, such as premiums and credit ratings of life insurance companies. In addition, the MAS will exclude investment-linked policies, standalone critical illness products as well as products of Defined Market Segment1 insurers from the web aggregator.
The impact of a regulated web aggregator on insurers in Singapore remains to be seen. However, based on the UK experience, it is likely that insurers will have to develop their overall infrastructure, and back-office capabilities, as well as new marketing solutions to deal with the potential repercussions of providing a single customer view across various insurance products via the aggregator. Pricing of premiums will naturally become a focal point. Insurers based in those jurisdictions where aggregators are already a prominent feature of the commercial landscape would appear to have the advantage of experience in terms of gearing up for these changes, but the implementation challenge is one that will nonetheless impact all Singapore insurers.
The MAS has appointed a vendor to design and build a web aggregator with input from life insurers and consumer representatives. Design work has been completed and system development is underway. The web aggregator is targeted to be ready for consumer use by the first quarter of 2015.
A direct channel for consumers
In 2015, life insurers in Singapore will also be required to offer certain insurance products free of commission to consumers. The only fee payable for the purchase of such insurance products would be a nominal administrative charge as no advice is provided. This 'direct channel' offering is being put forward as the first of its kind with no comparable system elsewhere.
Given the nature of a direct channel system, the MAS is likely to face issues with consumer understanding of insurance products that can at times be complex. Accordingly, the MAS will limit the direct channel offering in the retail market to the following "basic insurance" products which consumers are likely to be more familiar with:
- Term life insurance products with Total Permanent Disability (TPD) cover
- Whole life insurance products with TPD cover
- Optional critical illness rider attached to term life or whole life insurance products
Other safeguards include setting the maximum sum assured for direct purchase products at SGD 400,000, with a sub-limit of SGD 200,000 for whole life products, on a ‘per person per insurer’ basis. In addition, life insurance companies must provide an avenue for customer queries to be addressed and Tier 1 life insurance companies must continue to make these "basic insurance" products available through their customer service staff or financial advisory representatives.
A concern that some insurers have expressed is that customers may expect and demand levels of service for products bought through the direct channel that are comparable to that which they currently receive through existing channels. This is an issue that the MAS has acknowledged and has flagged as a matter which needs to be addressed by them working together with industry groups to educate the market. The impact that this new direct channel will have upon agents is also something that many in the industry will no doubt be closely watching.
Distribution of commissions
Another of FAIR's recommendations was for agent commissions to be distributed more evenly over the duration of the policy. Accordingly, the MAS has proposed that commissions in respect of regular premium life policies be paid out over a minimum period of six years or the premium payment period of the policy, whichever is shorter. The objective underpinning this recommendation is to align the interests of agents and policy holders more closely by placing at risk a greater proportion of commission payments over a longer period of time. While the MAS acknowledge the impact this will have on the initial income of financial advisory representatives, it is likely that the initiative will proceed, albeit over an extended implementation period.
As part of these amendments the MAS will impose an introductory 55% cap on first year commissions, which is the practice now for most regular premium life insurance products. The remaining 45% will be paid out over the next five years or the remaining premium payment years, whichever is shorter. Notably, the 55% cap is seen by some as a welcome concession on the part of the MAS given that the FAIR panel had initially proposed a 40% cap on first year commissions.
The MAS also intends to introduce a balanced scorecard (BSC) remuneration framework that will incorporate non-sales key performance indicators such as quality of advisory and sales process and adequacy of information disclosure, with customer complaints operating as a measurement method. The BSC framework will work in tandem with the proposed changes to the distribution of commissions by penalising errant representatives and rewarding the provision of good quality advice.
Other proposed changes
Aside from the top 3 changes set out in this article, it is worth noting that the MAS have also proposed a number of other changes that will directly affect the insurance industry. For example, the MAS will be increasing the competence of financial advisory representatives by imposing higher minimum academic entry requirement and continuing professional development requirements, and will require adequate disclosures for bundled insurance products. These initiatives will be introduced in stages, with appropriate transition periods, to ensure their smooth implementation by the insurance industry.