INSURANCE INTERMEDIARIES BILL

Order for Second Reading read.

The Deputy Prime Minister (BG Lee Hsien Loong): Mr Speaker, Sir, I beg to move, "That the Bill be now read a Second time."

The Bill proposes to license insurance intermediaries (agents and brokers) carrying on business in Singapore. Currently, there are 150 insurance brokers and 28,000 insurance agents in the Singapore insurance market. Except for six brokers who are registered under section 36(6) of the Insurance Act (Cap 142) for the purpose of placing business with Lloyd's in London, the rest of the brokers and agents operate under self-regulatory systems maintained by their relevant trade associations.

While self-regulation has been satisfactory so far, MAS has felt the need to supervise brokers' activities and to enhance the quality and professionalism of insurance brokers in Singapore. Licensing would enable MAS to have oversight of insurance brokers' activities and conduct, thus furthering the protection of policyholders' interests and ensuring proper development of the insurance industry. Countries like the United Kingdom, Australia, Hong Kong, Malaysia and certain states in the United States have, similarly, enacted legislation to govern insurance brokers' activities.

Rather than incorporating the new requirements for licensing of brokers in the Insurance Act, the Government proposes the enactment of a separate legislation. The rationale is that the activities of insurance brokers are substantially different from those of insurance companies. In drafting the proposed legislation, MAS has had several rounds of consultation with relevant trade associations. The insurance industry generally welcomes and supports the proposed licensing of insurance brokers.

I will highlight the key provisions of the Bill. Clause 3 of the Bill makes it an offence for any person to act as an insurance agent for a registered insurer unless he has a written agency contract with that insurer. Similarly, clause 12 prohibits any person from carrying on insurance broking business unless it is registered with MAS.

All licensed insurance brokers are required, under clauses 17 and 21, to maintain minimum paid-up capital and net asset value of 50% of minimum paid-up capital at all times. These requirements are necessary so as to establish the brokers' commitment to operate in Singapore and to ensure that they possess a minimum level of financial assets. Further, to protect the insuring public against wrongful advice and against suffering any financial loss due to brokers' negligence in carrying out their duties, all brokers are required to have professional indemnity insurance covers.

As insurance brokers are holding clients' and insurers' moneys in trust, it is imperative that brokers maintain proper accounts of these moneys. Clause 22 requires all brokers to maintain separate bank account(s) with a bank(s) licensed under the Banking Act. All premium receipts and claim moneys received by brokers on behalf of their clients must be duly deposited into these accounts and only specified withdrawals can be made.

It is customary for insurance intermediaries to collect premiums from policyholders for payment to the insurers. Similarly, insurance claim payments may be made to claimants through the intermediaries. In order to protect policyholders' and claimants' interests, clause 4 stipulates that where premiums are paid by a policyholder to an insurer through an intermediary, the payment will be considered as a discharge of the policyholder's liability to the insurer up to the amount of the payment. However, where an insurer transmits claim payments to a claimant through an intermediary, the insurer remains liable to the claimant for those moneys.

Clause 24 restricts a registered insurance broker from receiving, and prohibits insurers from giving, any remuneration to the broker that is tied to the broker's business volume, for example, production bonuses which are paid on achieving certain levels of business volume. This clause is to minimise conflict of interest between brokers and their clients as well as to enable brokers to uphold their independence and professionalism. If an insurer offers production bonuses to a broker, this may influence the broker to place more of its business with that insurer, against its duty to source for best covers for its clients.

The Bill also provides for the control of appointment of key persons, that is, chief executive officers and directors of broking firms. Clause 25 requires brokers to seek MAS' approval before allowing any interested party to acquire 20% or more of its voting share capital.

Clauses 28 to 33 allow MAS to require returns, inspect insurance intermediaries or any persons suspected of carrying on insurance broking business in Singapore, issue directions and wind up the affairs of a registered broker. MAS is also empowered under clause 41 to make regulations generally for carrying out the provisions of the Act.

The Bill carries a transitional provision to deal with persons who are employed in the insurance broking business before the enactment of the Act. To ensure that the proposed licensing does not pose undue difficulties on existing brokers, they would be given six months to seek and obtain the necessary approvals from MAS to continue conducting their business.

Sir, I beg to move.

Question proposed.

Mrs Lim Hwee Hua (Marine Parade): Mr Speaker, Sir, I rise in support of the Bill which would help raise the professional standards of intermediaries and hence the insurance sector at large. Equally noteworthy are the provisions to be put in place so that the insured, that is the end-users, are adequately protected.

There remains a need to clarify the extent of recourse available to an insurance company in the event of default by an intermediary with specific reference to the broker intermediary.

Sir, clause 4(1) and (2) effectively discharge the insured and intending insured from any liability to make further payments to the insurer if moneys, such as premiums payable to the insurer, have already been paid by them to the intermediary. While these provisions protect the insured, albeit to the extent of moneys already paid, the insurer is bereft of any recourse under these provisions for moneys due to him.

By the same token, under clause 4(3), an insurer who pays to the intermediary, moneys such as claims or return of premiums meant for the insured party, remains liable to the insured until receipt by the insured. Likewise, the insurer has no recourse under these provisions.

Sir, this could imply an assumption of liability by the insurer for which he has little control over, particularly with respect to insurance brokers. Unlike agents over whom the insurer can exercise some level of control, brokers are a different entity altogether. Insurers have no jurisdiction over brokers' functions and actions. Although clause 2(1) gives the definitions of insurance agent and insurance broker, the Bill appears to be silent on their explicit responsibilities and liabilities vis-a-vis the insurer and the insured.

Notwithstanding the above comments for which I seek the Deputy Prime Minister's clarifications, I support the intent of the Bill.

Mr Tay Beng Chuan (Nominated Member): Mr Speaker, Sir, I wish to refer specifically to clause 23 of the Insurance Intermediaries Bill which states in no uncertain terms that:

"No registered insurance broker shall, in the course of its business as such, negotiate any contract of insurance with the insurer (whether directly or through an insurance intermediary), except with a registered insurer acting in the course of his business as such."

References to "contract of insurance" are further spelt out in subclause (3) as not applicable to the reinsurance or business relating to risks outside Singapore. Notwithstanding the fact that Singapore intends to provide local insurers the opportunity to write business, the restriction creates a position where Singapore shipowners are forced into paying uncompetitive local rates for certain specialised insurance. Marine hull insurance is an example which I will elaborate on.

I am personally involved in the shipping business and am conversant with the procedures whereby insurance intermediaries obtain quotations on marine hull insurance. The quotations by the overseas insurers on marine hull insurance can sometimes be only 50% or one-third of the quotations obtained from local insurers and yet the insurance intermediaries will be bound by clause 23 of the Insurance Intermediaries Bill to engage local insurers even if their rates are extremely uncompetitive vis-a-vis the overseas insurers as long as they have supplied the quotations.

Subclause (5) does provide for exceptions where the MAS will grant approval by reason of exceptional nature of the risk or other exceptional circumstances. However, in practice, the shipping industry has not benefited from such approvals from MAS. Singapore's financial industry has been undergoing deregulation and liberalisation with the removal of barriers to full foreign participation in the domestic banking sector. Similarly, measures would be taken to liberalise the insurance sector to fully develop Singapore as a regional financial hub.

The Insurance Intermediaries Bill does not appear to make sufficient provisions for this. If local insurers supplying uncompetitive rates are given undue protection under this Bill, Singapore's shipowners would be greatly disadvantaged. I believe that it is imperative for the Singapore shipping community to take advantage of the most competitive rates available worldwide. At the same time, the local insurance intermediaries should be given the liberty to source quotations from overseas insurers. It appears to me that the principle embodied in clause 23 is tantamount to protectionism of the local insurers. Surely, this is contrary to the fundamental tenets of an open economy which Singapore champions.

I also wish to refer to clause 24 of the Bill which relates to the restriction of receipt and payment of any gifts, gratuities, benefits or other rewards (however described) for the services of a registered insurance broker. In other words, insurance intermediaries, specifically registered insurance brokers, will be prohibited from receiving an "incentive bonus" from the insurance companies which they deal with.

Many small and medium-sized insurance broking firms are receiving such an "incentive bonus" from the insurers in Singapore. Moreover, this form of remuneration is acceptable and has always formed part of the remuneration received by insurance brokers. The incentive bonus paid to the insurance brokers has not caused problems to the insurers, neither has it prejudiced the insuring public. If clause 24 is passed, this would mean the loss of an estimated 20% of income to each affected insurance broking firm, resulting in possible retrenchment of their employees and translates into the loss of an important source of revenue.

Mr Speaker, Sir, a regulatory framework is indeed necessary. However, over- regulation in business practices will unfortunately stifle business initiative. Singapore businesses need to have a certain leeway to survive, thrive and excel in the global marketplace. Where appropriate, they should be allowed to operate within a reasonable market practice.

I propose that MAS conducts a thorough review of the insurance industry and how it is performing its role of serving the rest of the business community with a view to amending those laws which are no longer appropriate for the promotion of Singapore as an international business hub.

Mr Speaker, Sir, with the exception of clauses 23 and 24, given the foregoing reasons, I support the Insurance Intermediaries Bill.

BG Lee Hsien Loong: Mr Speaker, Sir, Mrs Lim Hwee Hua asked about the assumption of liabilities of insurers on behalf of brokers. She said that she could understand why insurers would assume liabilities on behalf of agents, but does not see why they should do so on behalf of brokers.

Clause 4 of the Bill holds insurers accountable for liabilities of agents and brokers in respect of premiums collected from policyholders by the intermediaries and claim payments made to claimants through intermediaries. It deems premiums received by an intermediary as having been received by the insurer, but the insurer remains liable to the claimant for any claims monies made through an intermediary. Basically, this is a consumer protection measure, because it seeks, firstly, to protect consumers from paying premiums a second time where an intermediary does not pass the money on to the insurer. And, secondly, to ensure that the claimants will receive their payments where an intermediary fails to transmit the claims money. The boundary between the insured and the insurer is put on the side of the intermediary. The intermediary is on the insurer's side.

This provision is applicable to both brokers and agents, as it is also found in the Australian Insurance Agents and Brokers Act, 1984. It is deliberately designed to apply to both brokers as well as agents, because whether or not an insurance broker is only the agent of the insured depends on the facts and circumstances of a particular case and the type of the insurance business, and the common law rule is that in some cases, the broker may actually be acting as an agent for the insurer.

Mr Tay Beng Chuan raised two questions. The first one has to do with basically marine hull insurance. First, may I clarify that there is no restriction whatsoever on a person who wishes to place insurance risk directly with an overseas insurer. If the rates are more competitive, you may choose to go there, and that includes shipping companies or anybody else. But an overseas insurer is not licensed to operate in Singapore. An unlicensed insurer is not allowed to write domestic Singapore risks. This restriction is similar to that of most jurisdictions, including the US. So clauses 7 and 23 of the Bill essentially ensure that neither brokers nor agents are allowed to assist unlicensed insurers to write domestic Singapore risks.

Where there is a lack of expertise or capacity in the local insurance industry, MAS will grant exemption for the risks to be placed directly with overseas insurers. And the majority of risks that have been granted exemptions are marine hull and liability risks. The statistics for the last three years show this. For example, in 1998, we received 160 applications for exemptions for lack of expertise or capacity locally. Out of these 160 applications, 158 were approved. For marine hull and liability, we received 49 applications last year, and all were approved.

We recognise the need to develop marine hull and liability expertise and to increase the local capacity so as to help develop Singapore's international maritime hub. So we have taken the lead to attract specialist maritime insurers to Singapore and we have also provided tax incentives for their offshore marine and hull liability business.

The Member suggested that we should undertake an overall review of the insurance industry and the legislation which applies to it. This is indeed what we are in the process of doing. MAS is currently reviewing our admission policy on insurers and we hope we will have some clear conclusions within a few months. But even if we are to open up the insurance market in Singapore, no overseas unlicensed insurers will be allowed to operate in Singapore unless they are registered with MAS. This upholds the principles of insurance regulations of the international regulators, because if they are not licensed and they operate here and something goes wrong, the Government will be responsible. If they are overseas and you go and look for them, that is you are taking it on yourself, but they are not operating in Singapore.

The Member also raised a question of gifts, gratuities, benefits and other rewards from insurance brokers. I presume that when Mr Tay refers to "incentive bonus", he means everything received by the broker other than the brokerage or the fee. Clause 24 of the Bill seeks to prohibit brokers from receiving any payments from an insurer including gifts, except as remuneration for services rendered in arranging a particular contract of insurance or settling a claim. And the payment in such cases cannot vary according to the number of contracts, the amount of premiums or sums insured that are placed with a particular insurer.

The clause prohibits the giving of production bonus which is tied solely to the broker's business volume. This bonus is paid to brokers for achieving certain levels of business volume with a particular insurer. The rationale for the prohibition is that when an insurer offers such production bonuses to a broker, it is likely to influence that broker to place most, if not all, of its business with that insurer, whereas, in fact, the broker has a duty to his client to source for the most appropriate cover and terms for his client. Such a restriction is also found in the Australian Insurance Agents and Brokers Act, 1984. Again, the objective in the Australian legislation is to ensure that the broker's impartiality is not influenced by incentives or volume-based remuneration and to ensure that the broker's obligation to his client is not compromised.

Under the Bill, other than volume-based incentive bonuses, brokers are not prohibited from receiving other types of incentives such as profit commissions and persistency bonuses.

Question put, and agreed to.

Bill accordingly read a Second time and committed to a Committee of the whole House.

The House immediately resolved itself into a Committee on the Bill. - [BG Lee Hsien Loong].

Bill considered in Committee; reported without amendment; read a Third time and passed.