SINGAPORE has ambitions to be not just a regional insurance hub in Asia but also a global insurance hub. However, we are not there yet, nor are we alone in our aspirations. What can be done to help Singapore to leapfrog ahead?
In a keynote address in November 2013 at the 12th Singapore International Reinsurance Conference, Ravi Menon, managing director of the Monetary Authority of Singapore, outlined Singapore's vision of being "a global insurance marketplace in the heart of Asia". The vision is for the Singapore insurance industry to have the ability to accept not just regional but global risks by 2020.
Currently, there are two competitors in the race to become the next global insurance marketplace in Asia - Hong Kong and Singapore. Both Hong Kong and Singapore have similar elements in place - fairly liberalised insurance markets, sound regulations, and simple and efficient tax regimes. Both also enjoy strategic geographical locations: Hong Kong with China as hinterland and Singapore as a gateway to South-east Asia and the ASEAN Economic Community.
They also both stand to benefit from the same three key factors driving insurance demand in Asia - rising economic growth in the region (a growing middle class, urbanisation, continued industrialisation and expanding cross-border trade will lead to an increased demand for insurance solutions from businesses, as well as demand for more sophisticated personal financial services such as insurance); Asia's vulnerability to natural catastrophes; and Asia's rapidly ageing population. The increasing use of technological solutions and devices has given rise to new and emerging risks. In addition, global environmental and climate change will bring larger risks and uncertainties. All of this points to a growing demand for insurance, not only at a regional level but likely at a global level too.
CAN TAX TOOLS HELP?
To achieve its economic objectives, Singapore has traditionally used tax tools and tax incentives to complement other measures. It is no different in the insurance sector and there is no reason to eschew these tools, particularly as Singapore's tax incentives typically come with substantive business requirements and investments.
In a recent LinkedIn blog post, PwC Singapore insurance tax leader Yip Yoke Har suggested some enhancements to Singapore's current insurance incentives. Although tax incentives are not the sole reason why insurers have chosen to locate here, they have contributed to establishing a conducive business environment and should be continued as Singapore strives to become a global marketplace.
But for purposes of this discussion, let's look at how improvements targeted at innovation, people and regulation can enhance Singapore's current insurance ecosystem.
INVEST TO INNOVATE
Clearly, the insurance industry must continue to embrace technology and innovation.
The insurance sector stands to gain significantly from Singapore's push towards innovation. For example, new technologies such as the satellites to be used for the new Electronic Road Pricing system will generate a lot of valuable data on driving habits, which could provide insurers with the information they need to improve their risk calculation models. This could result in fairer premiums that better reflect the realities on the road.
As people grow more health conscious, many are turning to wearable tech to keep track on daily exercise and eating habits. Once again, valuable data is generated, and in a similar vein, can also aid in the calculation of fairer premiums.
There is also growing excitement in the insurancetech sector. We see an increasing trend towards using mobile technology in insurance distribution. We also see attempts to use big data, smart analytics and third-party databases to develop new products and to price risks. Many insurers have set up innovation hubs and digital labs in Singapore. This signals that Singapore's initiatives to attract and grow fintech in Singapore are working.
But more can be done from a tax angle to encourage research and development (R&D).
Currently, there are enhanced tax deductions in place to encourage R&D expenditure in Singapore. However, the current process of making R&D claims often involves lengthy discussions on the eligibility of the projects with the tax authority (IRAS) over the technical merits of the R&D process. To remove uncertainty for such claims, we recommend that insurancetech projects could be pre-approved by the MAS to provide certainty of R&D tax claims upfront. The IRAS can then administer the tax claims without having to concern itself with the technical aspects of the project.
Singapore needs to remain agile in order to keep attracting and building the right talent for the insurance sector here. After all, Singapore wishes to move up the value chain and write specialty lines, catastrophe risks and new and emerging risks. These activities typically require specialist skills that are likely to require a relocation of some expatriates to our shores.
Both Hong Kong and Singapore are popular locations for expatriates in Asia. Both cities are cosmopolitan, relatively safe, reliable and efficient. Both also have competitive tax regimes, Hong Kong's system being relatively flat and simple while Singapore's is more progressive with targeted tax incentives.
Currently, Singapore has a Not Ordinarily Resident (NOR) scheme that allows a qualifying expatriate (NOR taxpayer) who travels widely in the region to enjoy the benefit of time apportionment of his employment income - that is, he pays income tax on only that part of his employment income that corresponds with the number of days he spends in Singapore. We recommend that the government considers tweaking the scheme.
The five-year sunset clause of the NOR scheme should be removed. This will help Singapore businesses retain senior talent and build long-term stability.
The NOR scheme currently only benefits foreign nationals during their first few years in Singapore. Given the mobility of Singaporeans, the requirement to be non-resident for three years in order to qualify for NOR status could be removed to widen the applicability of the scheme to include Singaporeans.
The current requirement that the NOR taxpayer spends at least 90 days overseas for business purposes should be reduced to 60 days. This would make us more competitive vis-a-vis Hong Kong, where there is no minimum day limit for their time apportionment concession.
HOW MUCH REGULATION?
The global financial crisis, which started in the banking sector, has also affected the insurance sector globally, primarily through their investment portfolios' adverse performances. In addition, regulation of the insurance sector went into overdrive post-financial crisis, driven by the fear that it would slide down the same slippery slope as the banks did.
Singapore weathered the global financial crisis relatively well, but there has been feedback from the industry that compliance and regulation-related costs are rising steeply. This also includes the higher capital requirements that insurers here have to maintain to meet the required regulatory solvency. These costs, added to already climbing business and operating costs, have reportedly led to the exit of at least one insurance player recently.
The situation is no better in the tax arena. With the global focus on tax transparency and "moral obligation to pay a fair amount of tax", Singapore has stepped up its tax regulations. An increasing volume of tax compliance documentation (eg, keeping contemporaneous transfer pricing documentation and the submission of documentation to support the "capital" treatment of assets) and tax reporting (eg, FATCA) is now required.
To be a successful global insurance marketplace, we should be stable and well regulated. That said, neither under nor over-regulation will be favourable. But it's a mammoth task to come up with regulation that is "just nice" - too little will mean that consumers will suffer; too much will put unnecessary burden on insurers. Great care is needed to find that delicate (dare we say elusive?) balance between over and under-regulation.
It will take a massive collective effort from both the business community and the relevant authorities to get the necessary hardware and software ready to achieve our global ambitions. But as they say, nothing ventured, nothing gained.
- The writers are respectively insurance leader, insurance tax leader and insurance regulations partner at PwC Singapore.
This article was first published on March 24, 2016.
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