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Supplements & Quick Reference: · Main Page · Overview · Confirmed Speakers · Available Speeches · Photos · Media Information · Sponsorships   Visit the Official Site: www.pbec2002.com Striving for Growth in a Challenging Environment PBEC 35th International General Meeting Kuala Lumpur, Malaysia May 3-7, 2002 Mr. Victor S. Apps Executive Vice President and General Manager, Asia Manulife Financial "Industry Outlooks: Corporate Governance" May 7, 2002 I am pleased to have the opportunity to participate in the PBEC's International General Meeting and, in particular, on this panel focusing on governance issues. As some of you may be aware, at Manulife we have faced a number of such issues in our Asian operations and I will spend a short time elaborating upon them. But first, I will start by giving the usual brief commercial about my company, Manulife Financial. We are one of Canada's leading insurance companies and a major provider of insurance and pension products in North America and Asia. Our funds under management are $142.2 billion and our 2001 earnings were C$1.1 billion. Manulife operates in 8 jurisdictions in Asia and the region's importance to the Company is increasing significantly. Though Manulife has been operating in Asia for over 100 years, the last few years have seen its fastest rates of growth, which can only be characterized as explosive. Manulife now has 4,000 staff and 20,000 full time sales agents in Asia. We have over 5,000 people in Japan through a significant acquisition in 1999; some 3,500 people in Shanghai where we started in 1996; and 5,000 in Vietnam where we began operations in 1999. About two thirds of our staff and agents in Asia weren't with us 5 years ago. Top line 5-year CAGR is 27% and earnings 5-year CAGR is 32%. Asia's contribution to earnings was 27% in 2001, up from under 15% five years ago. While much of Asia's earnings are currently from Japan and Hong Kong, our other operations, for example China, have a lot of potential to make meaningful contributions in the years to come. I have worked for Manulife in Asia for the last 17 years and am proud to have been part of this success. However, in spite of our success and our commitment to Asia, we continue to experience challenges relating to governance, broadly defined: whether it is the absence of the basic rule of law; faulty regulatory regimes; or restrictive rules for entry. I'd like to spend a moment addressing each of these "governance" issues. Basic Rule of Law It would be difficult for a Manulife executive talking on this subject not to say a few words about the situation in Indonesia. Our situation there speaks to perhaps the most fundamental governance issue. In Indonesia our company has been faced with an extraordinary problem in the last 18 months. There has been a deliberate and flagrant effort to extort US$40 million from us. The perpetrators of these actions have been helped by elements of the Indonesia police and judiciary. The sad truth is that, if offered enough money, certain police and judges will do just about anything. The Ministry of Finance, our regulator, is powerless to intervene and the Government of Indonesia is unable to stop the criminals. The rule of has broken down in Indonesia. A crooked judge can declare any company bankrupt and can grant absurd rulings against any company. This is a very sad situation indeed. Regulatory Regimes Governance and transparency relating to regulatory regimes vary greatly among the various jurisdictions in Asia but, in general terms, the position is poor. For life insurance good governance leads to meaningful and intelligible financial statements, confidence that balance sheet assets are fairly valued, the holding of appropriate reserves and solvency margins, meeting of reasonable policyholder expectations. It would be a major stretch to say that these objectives are being met in many Asian markets. Some of the blame falls on the companies but much of the fault lies with government regulators. Neither shareholders nor policyholders are well served by the regulatory structures in many jurisdictions. In particular the interests of policyholders have not been properly protected and at times they have been cynically ignored. The largest life insurance industry in Asia is in Japan. Here, unfortunately, the governance has been particularly weak. Life insurance companies, abetted by the regulators, have failed to meet any of the good regulatory criteria listed above. Companies now must show the market value of most but not all of their assets but they still do not have to provide for the future cost of negative spread in their policy liabilities or in their solvency margin calculations. In most other regimes in the world companies would be forced to recognize today the cost of future likely losses. The solvency margin calculations also have been criticised as weak by international standards. For years the government allowed insolvent insurers to sell new business because they did not want to face up to this reality. The inevitable result is the failure to meet policyholder expectations as company after company fails and the guarantees to policyholders are not met. Japan is an example of the regulators failing to focus on their primary role, which is the protection of policyholders. This requires the careful monitoring of solvency levels preferably using risk based capital (RBC) approaches. Similar failures to focus on solvency have led to serious problems in many other jurisdictions. The majority of South Korean life insurance companies went headlong into bankruptcy while continuing to follow faithfully all of the many regulations generated by their regulator. Similarly, many Indonesian insurers also became insolvent. But the regulator there is trying to respond with the introduction of an RBC solvency approach. Until recently, both China and Taiwan had minimum guarantee rules that severely injured the solvency situation of local insurers. Fortunately in both cases these ill-considered regulations have now been modified. Rules for Entry The final area of governance I'd like to address relates to the role of government regulators in the licensing of insurers. Unfortunately, licensing has been used in many cases to protect local insurers and keep out international insurers. This is done in the name of developing local financial institutions. Our China entry might be a good example. We were successful in getting the first license for Shanghai in 1996. However, it took 5 years for us to gain our first license. Similarly, we have recently been given approval to begin preparatory work for a second license in Guangzhou. This also took about 5 years. We are hopeful that we will get our final license to be able to sell in quite soon. The truth, unpalatable for some, is that multinational insurers rarely fail but poorly capitalised local insurers often do. The lack of a level playing field has therefore disadvantaged consumers in many Asia markets. I am happy to report that this situation is gradually changing as more and more markets appreciate the advantages of life insurance companies who pay their claims and meet their obligations. Unfortunately, good corporate governance is unlikely to improve until the governments improve their governance. The regulators set the ground rules and, even if the rules are faulty, local companies will follow them, no matter what sector they operate in. I apologise if the tenor of my remarks seems somewhat negative. However if reform is to be accomplished, one must first take note of the true nature of the problems. And all is not black. Governance is improving in many jurisdictions. In my industry, meetings of regional insurance regulators are being held at which these problems are being aired. However there is still much to be done before we arrive at the result we want. We look forward to the day when an Asian insurance consumer has as good a chance of having his reasonable expectations met as a consumer in North America or Western Europe.