By Lorna Tan, Finance Correspondent

LIFE insurers have been reminded by the financial industry regulator to be on guard against potential risks to their business, including fraud and unsafe investments, given the financial crisis.

Monetary Authority of Singapore deputy managing director Teo Swee Lian issued the reminder in her address as guest of honour at the Life Insurance Association (LIA) annual general meeting at the Shangri-La Hotel yesterday.

She emphasised the importance of taking pre-emptive measures such as strengthening the solvency positions of the financial institution early and 'stress testing' to test the risk of failure.

Said Ms Teo: 'The sudden and sharp falls in global asset markets have emphasised the importance of sound risk management in financial institutions.'

Insurers should take steps to strengthen their solvency positions early before market conditions worsen, she said.

To assess their resilience to market falls, MAS already requires life insurers to take an annual stress test that includes prescribed scenarios.

However, relying on these scenarios is not sufficient. Ms Teo urged insurers to also consider scenarios that could be potentially devastating for their own business profiles.

'Insurers should consider doing 'stress to failure' tests so that they are aware of the combination of stress conditions that could lead to insolvency.'

These so called 'stress to failure'' scenarios are events, however unlikely, that could cause a financial institution to crash.

Insurers were also warned of the potentially increased risk of fraud amid tough times and the importance of reviewing controls and having in place a fraud management function to prevent loopholes that fraudsters can exploit.

Ms Teo said while insurers should continue to develop new innovative products, they should not 'charge' into investing in complex products they have no expert knowledge of - with a slim hope of generating higher returns. As such, insurers should only underwrite risks that are within their core expertise.

She suggested that insurers provide more regular updates to policyholders on the impact of the financial turbulence on their policies in order to calm fears. This would help to prevent customers from surrendering their policies based on rumours rather than on facts.

At the AGM held before the luncheon, Mr Darren Thomson and Mr Tan Hak Leh were elected president and deputy president of LIA, respectively. Mr Thomson is president and chief executive of Manulife Singapore while Mr Tan is managing director of Great Eastern Life.

The upgrading of advisers' knowledge is a top priority of both MAS and LIA.

Both Ms Teo and Mr Thomson emphasised the importance of continual training to equip advisers with the skills to help Singaporeans plan more effectively.

LIA will also focus on raising awareness of the need to be adequately insured.

Last year, the life insurance industry grew by 3 per cent. Mr Thomson is hopeful that it will maintain the same growth rate this year.

This article was first published in The Straits Times.