One key question is how the agency cost and regulatory compliance perspectives can be reconciled when designing corporate governance regimes for insurers. Regulators should also avoid imposing over-burdening costs. This part first examines corporate governance practices of selected insurers in Singapore, based on public information, to provide an overview of such practices. Then, the chapter investigates corporate governance regime for insurers in Singapore from two perspectives. First, the chapter considers whether Singapore’s regulations are sufficiently flexible to meet different types of insurance services providers in the Singapore market. Second, the chapter assesses the effectiveness of key corporate governance regimes in improving the ability of boards to make proper management decisions, supervising senior management teams and ensuring compliance with insurance regulation.
3.1 Corporate Governance Practices of Selected Insurers in Singapore
How do insurers in Singapore respond to the corporate governance regulations identified? Market practices must be examined to better understand corporate governance among insurers in Singapore.
However, extracting precise data for all insurers registered with the MAS is extremely difficult. Information on the corporate governance practices of insurers registered in Singapore is surprisingly lacking in the public sphere. The annual returns submitted by insurers to the regulatorFootnote 72 do not contain any information regarding the board of directors and senior management. However, many insurers are either branches or wholly owned subsidiaries of other firms. They may be incorporated as private companies, and thus their information is not required to be made in public as their shares are not traded publicly in the stock market. Information for captive insurers is even scarcer, as they are subject to less regulatory requirements. Thus, acquiring a full picture of the corporate governance practices of all insurers in the market is challenging.
Table 1 provides limited data from public reports by some insurers in Singapore.
The list of financial institutions available on the website of the MAS indicates that at end of May 2020, there were 17 direct life insurers, 51 general direct insurers and 8 composite insurers registered in Singapore, in addition to 35 reinsurers (including life, general and composite reinsurers) and 77 captive insurers (of all kinds).Footnote 73 The number of direct insurers that can be successfully identified as providing corporate governance information in the public sphere from the total (as shown in Table 1) is very limited.
Based on this limited sample of information, we make the following observations. First, there is obviously room to improve the transparency of corporate governance data, given the importance of corporate governance in terms of agency problems and regulatory compliance. The MAS publishes annual returns submitted by insurers on its website, and therefore basic information on the financial conditions of these insurers is already in the public space. Further basic information (such as a list of board members) on insurers’ corporate governance practices could be disclosed on the same platform. If an insurer is already compelled to disclose financial information about its insurance business and funds, it should have no valid grounds to reject the disclosure of its basic corporate governance practices.
Thus, it is suggested that the regulator request insurers to submit additional information about board composition, independence and other critical governance benchmarks. Even if an insurer is a wholly owned subsidiary of a parent insurer, there are still advantages to improving transparency as it serves many customers in the local market. Although concerns over agency costs for such subsidiaries may be reduced, the proper management of insurance funds and regulatory compliance can still be an issue.
Second, the companies in the limited sample all appear to generally comply with the minimum board independence requirements and the rule against chairman-CEO duality. However, one interesting pattern observed in the limited data is that insurers that are public companies (e.g. Great Eastern Life or NTUC Income) tend to have larger boards and more independent directors than those incorporated as private companies (indicating that they are subsidiaries of another financial holding company or an overseas insurer).
The differences in terms of compliance strategies (if the limited data represent the whole population of insurers registered in Singapore) are understandable. If an insurer is a wholly owned subsidiary of another foreign insurer, the board of the subsidiary is likely to have less management power when most important decisions are probably determined by the board of the parent company. Thus, there is no need for a larger board in the subsidiary insurer in terms of making management decisions. Large boards also increase operational costs.
However, insurers that are public companies (sometimes listed for trading on the stock exchange) may face more scrutiny from other shareholders and the market. If the insurer is not a subsidiary, the board is expected to play a more significant role in making management decisions. Thus, it is understandable that they have larger boards of directors, and consequently more independent directors. One study in 2016 has shown that the average number of independent directors on the board of the top 50 companies listed in the Singapore Exchange was about 5.7 persons.Footnote 74 The number of independent directors in Great Eastern and NTUC Income (the first companies in Table 1) are comparable with other large companies listed in Singapore’s stock market.
The question for regulators is to determine the optimal size of the board and the level of board independence. Although there may be less concern over agency costs if an insurer is a wholly owned subsidiary of a parent insurer, the board must still play its role in regulatory compliance. Thus, would a small board serve its purpose in terms of regulatory compliance? This question is addressed in the following two sections.
3.2 Reflection on the Corporate Governance Standards
There are pros and cons on how regulators should impose corporate governance standards. One common approach is that regulators would apply a uniform approach to request insurers to follow certain minimum standards. A uniform approach for the corporate governance of insurers has both pros and cons. Uniformity may facilitate more effective supervision, as a common benchmark can make it easier for regulators and the market to evaluate and assess corporate governance standards in the same market. Equal treatment may also be beneficial, as a smaller insurer is still susceptible to agency costs and the possibility of business mismanagement, so minimum standards should still apply.
However, a uniform approach to insurers’ corporate governance standards may have some disadvantages. First, given the diversity of insurers in the market, a uniform requirement applicable to all kinds of insurers may not be the most efficient as it invariably must ignore the variety of firm characteristics. For example, some insurers may be publicly listed companies with thousands of shareholders and prospective investors in the capital market, and others may be wholly owned subsidiaries of parent insurers or captive insurers for an industrial group. In terms of agency costs, higher standards may be more appropriate for the former than the latter. However, a uniform approach does not capture the difference in terms of ownership structure (or other characteristics). Therefore, there is a possibility that regulators impose requirements that are unfit for certain insurers.
Second, the impact of compliance resources differs depending on the type and size of the insurer. Smaller insurers may not be able to compete with larger competitors in attracting suitable board member candidates as the costs may be too high.Footnote 75 Hence, a uniform approach may be more advantageous for larger insurers if the compliance costs are too high. Over-regulation may increase compliance costs and might lead to some insurers setting up businesses in other countries. This could damage Singapore’s competitive advantage in terms of being a global insurance hub. In contrast, under-regulation may cause ineffective corporate governance. Regulators need to carefully balance the costs and benefits to make the most optimal requirement.
Singapore, as an international financial centre, faces challenges in implementing corporate governance standards to insurers. First, the retail and wholesale markets in Singapore are distinct. Some insurers serve local customers, regardless of whether they are individuals or businesses. However, many insurers, reinsurers or brokers conduct, negotiate and offer risk protection at a wholesale level. The management and regulatory compliance of local insurers thus directly affect domestic customers. Imposing higher standards on insurers serving retail customers may therefore be preferable.
In contrast, there should be less need to overly regulate insurers in the wholesale market. As they do not deal directly with retail customers, there are fewer prudential and consumer protection concerns. In the small world of reinsurance, the market may be able to deal with specific concerns (e.g. agency problems) without more intrusive regulations. A more flexible approach in the wholesale market may also help Singapore become an insurance risk trading centre without creating unnecessary regulatory burdens.
Moreover, some insurers are registered as local companies while others are registered abroad. Locally registered insurers may be purely local firms (e.g. MS First Capital Insurance) or part of a local financial group (e.g. Great Eastern Life Assurance as part of the OCBC Group, or UOB Overseas Insurance as part of the UOB group). Others may be local wholly owned subsidiaries of a foreign insurer (e.g. Chubb Insurance Singapore or MSIG Insurance (Singapore)). However, some foreign insurers prefer to set up branches (Allianz Global Corporate & Speciality SE, Singapore Branch, or Aetna Insurance Company Ltd, Singapore Branch) rather than create subsidiaries to conduct business in the city-state.
From the perspective corporate governance, being a local firm or a branch can make a huge difference. Regardless of the ultimate owner, a locally registered company must follow Singapore’s company law and MAS regulations in terms of corporate governance. A locally incorporated company must be governed by a separate board, although many insurers (particularly wholly owned subsidiaries of foreign insurers) may choose not to make public information about the board and senior management. In contrast, if the commercial presence of a foreign insurer is through a branch, the insurer remains a foreign-incorporated company and there is no need to have a separate board of directors for the Singapore business. In addition, the power of the MAS to enforce rules against the board of a foreign company is more limited as the MAS in principle cannot exercise its regulatory power in another country. Thus, enforcing corporate governance standards on foreign firms with branches in Singapore will be more challenging.
Last, Singapore is also home to many captive insurers. These are insurance companies set up by another company or industry group to underwrite the risk of the owner or the group. They are typically set up in offshore tax havens, but Singapore is one of the largest centres of captive insurers in Asia. Various exemptions are provided in Singapore law to attract them. For example, captive insurers are not subject to the same capital requirements as other direct insurers provided they meet the minimum paid-up capital requirement.Footnote 76 The fund solvency requirement is also more relaxed.Footnote 77 The MAS exempts captive insurers from some reporting requirements, although this measure reduces transparency in the captive sector. Nevertheless, the nature of captive insurers means that there are limitations on their ability to underwrite non-in-house risk.Footnote 78
Captive insurers typically underwrite risks only from the same industry group, so there may be a lower demand for regulatory compliance. If a captive insurer is wholly owned by its parent company, there is less concern over agency costs. Thus, captive insurers may not need to be subject to the same corporate governance requirements as other direct insurers or re-insurers.
The current state of Singapore’s corporate governance regime can thus be considered in light of the challenges faced from the diversity of insurers.Footnote 79 As discussed in Sect. 2.3, this regime is in general a uniform approach consisting of minimum requirements. The minimum requirements are largely in line with the common requirement for listed companies in the stock market. Hence, the minimum corporate governance requirements should not cause too much over-burden on insurers if the requirements are also commonly complied with by firms in the capital market.
However, the MAS also made some adjustments for some degrees of differential treatment. The application of corporate governance rules by the MAS differ according to the size of the business. A larger insurer (presumably serving more customers) is subject to a higher standard, and smaller insurers receive more leniency. If a larger insurer is majority owned by another insurer, the threshold for board independence is also lowered to one third (rather than half the board).Footnote 80 In addition, insurers that are subsidiaries of other insurers may also be exempt from the requirement to have particular committees at the board level.
A further question is whether Singapore’s approach effectively allays concerns from having a uniform approach with some degrees of differential treatment. From the agency cost perspective, granting exemptions for insurers that are wholly subsidiaries should have addressed some concerns discussed above. Most insurers registered with the MAS are within the Tier 2 category and thus are subject to lower corporate governance requirements.
However, size may not be a suitable benchmark if viewed from the perspective of regulatory compliance. Imposing higher requirements for larger insurers (i.e. Tier 1 insurers) is understandable, as any lapse in compliance is likely to affect a larger number of customers. However, the argument that smaller insurers should enjoy lower regulatory compliance is not convincing. After all, any lapse in compliance or occurrence of corporate scandals still hurt retail customers and a small insurer’s shareholders.
The MAS regulations currently require a Tier 1 insurer to ensure that at least half the board are independent directors, but the threshold drops to one third for Tier 2 (i.e. smaller) insurers. The one-third threshold is the same as the minimum requirement for other listed companies, as prescribed by the Code of Corporate Governance.Footnote 81
Thus, the lower threshold of board independence for Tier 2 insurers is arguably compatible with the general corporate governance standards for non-financial firms, and therefore lowing corporate governance standards for smaller insurers should not cause a concern, even if a smaller insurer is a public company that has many shareholders under the current corporate governance framework in Singapore.
However, the general Code of Corporate Governance requires a firm to have at least half of the board as independent directors under some circumstances (e.g. when the chairman and chief executive are the same person).Footnote 82 This requirement is also stated in the Guidelines on Corporate Governance for Financial Holding Companies, Banks, Direct Insurers, Reinsurer and Captive Insurers which are Incorporated in Singapore,Footnote 83 but not in the ICGR, which was issued in the same year. The guidelines have not been updated in the Code of Corporate Governance for listed companies, which was revised in 2018. In addition, the guidelines only apply to insurers incorporated in Singapore, and do not apply to branches of a foreign insurer. Thus, there may be gaps in terms of board independence requirements.
In addition, it is not clear why a large insurer that is a subsidiary of a bank or another insurer may be exempted from having some board-level committees. Compliance costs may be saved if the function of the committees (e.g. nomination) is accomplished by the parent company’s board of directors. If the insurer is large, arguably it should still be subject to the full set of corporate governance requirements, even if it is a wholly owned subsidiary of another bank or insurer, to ensure better regulatory compliance for prudential or business conduct reasons. The MAS could consider this in future.
3.3 Effectiveness of Corporate Governance Regimes in Regulatory Compliance
The board of directors is the ultimate decision-maker for major corporate decisions and supervises the senior management team, but it also takes responsibility for numerous regulatory compliance issues, ranging from prudent regulations and risk management to the conduct of business and AML/CFT.Footnote 84 The effectiveness of corporate governance requirements in Singapore in terms of compliance with insurance regulations should thus be investigated. General issues are raised in this section, which may apply not only to the Singapore market, but also to those of other countries.
Current corporate governance regimes in Singapore could be open to some general criticism in terms of regulatory compliance. One general question is whether board independence regime is sufficient to support and improve the quality of regulatory compliance by an insurer. The concept of board independence and some other commonly seen corporate governance regimes (such as audit and remuneration committees) are closely linked to address the agency problem and corporate scandals (such as accounting frauds). Having more outsiders on the board may provide more diverse views, and an outsider may also be more willing to speak up and less likely to collude with the management. Therefore, the regime could improve the monitoring of the management and reduce agency costs.
However, whether corporate governance regimes based on the concept of board independence is much less explored. One study of banks in Tunisia also shows that board independence plays an important roles in enhancing credit quality of loans.Footnote 85 Another research shows that financial performance of banks were better during the financial crisis for financial institutions with more independent directors on audit and risk committees.Footnote 86 Therefore, there are evidence suggesting that having some independent directors on the board should also improve the board’s monitoring function and thus help to achieve better regulatory compliance.
In addition, the ability of the board to monitor and ensure the quality of regulatory compliance is also supported by other regulatory requirements. For example, under Singapore law, the appointment of a director on the board and some key persons (including substantial shareholders, chief executive officer, or actuaries) might require prior regulatory approval.Footnote 87 In addition, directors and key persons of an insurer need to satisfy the ‘fit and proper’ criteria.Footnote 88 In other words, directors (no matter they are independent or not) need to possess the quality of ‘honesty, integrity, and reputation’, ‘competence and capability’, and ‘financial soundness’.Footnote 89 In particular, the competence and capability requirements, combined with prior regulatory approval process, could ensure that the board and top management of an insurer should possess sufficient knowledge, experience and expertise to complete their function of supervising internal control system and ensuring compliance with regulations.
However, there are also counter arguments. First, whether the board can be effective in supervising the internal control system and various regulatory compliance functions partly depends on the information the board (and particularly independent directors) can acquire. Ideally, the board and individual directors should be able to acquire the information they need to make a judgment. However, it does not necessarily mean that information must be provided to the board without being requested. Thus, proper information flow is essential to the success of corporate governance regimes.Footnote 90 For example, directors could actively review and examine the role of compliance officer and front-desk supervisors based on their own initiative to ensure that salespersons would behave properly when promoting an insurance product to a client. Naturally, the board should be able to request information on sales practice generally or regarding an individual case to consider whether the existing regime is sufficient to meet regulatory requirements. However, when a misselling incident occurs, the board is only made aware of the incident when they are informed. Hence, there could be an information gap between what the board actually knows and what happens in practice. Such gap could undermine the board of directors to exercise their function effectively.
Second, to fully accomplish the regulatory compliance requirements imposed on the board, directors (independent or otherwise) must possess sufficient expertise not only in terms of insurance-specific issues but also in a broad range of topics such as risk management,Footnote 91 sales practices, anti-money laundering and even IT outsourcing.Footnote 92 Hence, knowledge and understanding of financial models is essential.Footnote 93 A board also has the responsibility to ensure that senior management have the appropriate skills to manage the risks posed by internal models and that the company has clear and comprehensive policies regarding the use of such models.Footnote 94 One survey in the US conducted a decade ago shows that most directors of public companies at the time were doubtful on the company’s ability to monitor a risk management plan.Footnote 95 Thus, there could be real concerns over the board’s ability and capacity in supervising the internal control and compliance systems in a specialised business like insurance.
From this perspective, board independence alone cannot address the ability of the board to handle a wide range of compliance matters. Independence may mean that directors are less likely to collude with management in terms of internal control and compliance, but board members with diverse backgrounds can also be beneficial (e.g. finance, law, accounting, etc.). One study in South Africa finds that higher board independence is actually detrimental to efficiency of life insurers in the country.Footnote 96 However, whether the same finding could be replicated in Singapore or other countries is subject to further studies.
However, in Singapore the focus of the corporate governance requirement is on board independence. While this may satisfy the need to contain agency costs, there is no clear effort to ensure that the board has sufficient expertise in terms of regulatory compliance. Although directors must be ‘fit and proper’ and have proper competence and capacity, it does not necessarily warrant that appointed directors must possess sufficient knowledge or experiences review and supervise a wide range of regulatory compliance issues especially when specific knowledge (e.g. risk management for investment) is required.
Moreover, to measure ‘competence and capacity’ of a director or chief executive officer, the MAS in Singapore relies on general benchmarks such as ‘past performance or expertise’ or ‘satisfactory educational qualification or experience, relevant skills and knowledge’.Footnote 97 Nevertheless, the looping question is what the necessary knowledge and experienced required for a wide range of compliance issues and how to keep a balanced composition of the board to strengthen its ability to oversee an insurer’s regulatory compliance. In theory, a nomination committee could select suitable candidates based on the professional knowledge of the committee members, but whether this is always true in practice should be investigated further.
Third, an over-reliance on independent directors may cause other issues. They may become overloaded, thus increasing their legal risk and reducing the possibility of hiring good candidates in the future. As Sect. 3.1 shows, insurers that are public companies in Singapore appear to have larger boards and more independent directors, while those that are wholly owned subsidiaries of another insurance or banking group tend to have smaller boards and fewer (often only two or three) independent directors. These few independent directors will then carry the full responsibility of overseeing regulatory compliance and internal processes, in addition to other corporate governance functions (e.g. reviewing related party transactions). This likelihood should be considered further by regulators in the current corporate governance requirements.