3 big reasons why Singapore insurers' profitability is under pressure

Market volatility remains high.

According to a speech by Jacqueline Loh of the Monetary Authority of Singapore's, as a result of economic, financial and environmental systems coming under stress at the same time, insurance companies are now operating in extremely trying conditions.

Specifically, insurers' profitability is under pressure simultaneously from all 3 sources. Firstly premium income, which is correlated to weak economic growth and excess capacity.

Secondly investment income, amidst a low yield environment and higher market volatility; and thirdly, claims and expenses, given increasing claims for natural catastrophes.

She noted that going forward, there is no doubt that a longer-term and more sustainable approach is needed to achieve long-term profitability. 

Here's more from her speech:

In light of this unprecedented mix of challenges, the insurance industry is responding as follows:

Firstly, focusing more on improving underwriting profitability. Against a backdrop of low yields, insurers can no longer rely on investment income to compensate for poor underwriting results.

Insurers now recognize the need to strengthen their underwriting capabilities, in order to improve underwriting profitability.

Following the spate of natural catastrophes in Asia-Pacific in 2011 for instance, many insurers have imposed more stringent underwriting and risk controls such as event limits and policy exclusions.

Steps have also been taken to close data and risk modelling gaps, which will enable more accurate measurement and in turn, better management of risk exposures.

Second, optimizing investment and product portfolios. For in-force businesses for which policy terms cannot be changed, insurers are primarily seeking to optimize their investment and hedging strategies. For new products and policy renewals, insurers are also looking to re-price their policies or adjust guarantee levels.

And third, enhancing operational efficiency. Apart from improving premium and investment income, insurance companies are also streamlining processes to lower operational and claims expenses.