Functions Within Insurance Organisations PDF

FUNCTIONS WITHIN INSURANCE ORGANISATIONS 4 CHAPTER Marketing process which might give them a competitive advantage. From the customer’s perspective in general insurance, the maturity stage will be reached if all risk exposures arising from the customer’s assets or bu...

FUNCTIONS WITHIN INSURANCE ORGANISATIONS 4 CHAPTER Marketing process which might give them a competitive advantage. From the customer’s perspective in general insurance, the maturity stage will be reached if all risk exposures arising from the customer’s assets or businesses are covered. In short, there is no more up-selling or cross-selling needed. Decline stage At some point, the market for a product begins to shrink and this is known as the “decline stage”. This shrinkage may be due to the market becoming saturated, such as medical plans where all the targeted customers who can buy the product have already purchased it, or because the competitors have launched a better or improved version of the same product. 4.1.5 Communications and Promotions Communications and promotions are closely related. A promotion is a tactic used to develop the insurer’s business or to increase sales, typically creating an incentive for prospective policyholders to act. Communication is sending messages that the insurer wants to convey to the prospects. While closely related, these are two different things. 傳達 有前途的候選人 Example Communications and promotions A takaful operator selling motor insurance has decided to launch a campaign to refund excess profit sharing to the certificate holder if the claims ratio happens to be lower than expected. The campaign is expected to drive more sales using this unique potential cash-back feature. The campaign is designed as a promotion. However, to get the message to the prospects, a communication strategy needs to be executed. This takaful operator may use mass media as the communication tools and also use statement mail to existing certificate holders of other insurance plans for this promotion. The marketing strategies for promoting insurance business must reinforce branding and focus on immediate action by prospects. In the previous example, the takaful operator offers a refund of profit sharing. While getting something for free is an incentive to act, it is not an incentive to act now. How do you get your prospect to act now? Insurers normally use a limited offer in terms of total cash to be refunded or in terms of time. The insurer’s promotional strategy addresses the whatand when. However, communications to prospects need to address a few more areas to have a complete marketing communication. Answering the who, what, when, where, and why form a single, unique marketing communication strategy. In addition, where will the messages be received by the prospects? There are hundreds of channels of business communication available, including multimedia, mass media, the insurer’s website, radio and TV advertising, and directory listings. Selecting the best channels to use is essential to a profitable marketing communication strategy that creates the desired results. In communication, the why of the message being sent must be clear. Finally, how will the communication be made, in order to deliver a clear message? 110  FUNCTIONS WITHIN INSURANCE ORGANISATIONS 4 Marketing CHAPTER Promotions and communications are essential to growing a profitable insurance business. A complete marketing system must also have a communication feedback loop. Insurers need to track the results of their marketing communications to know what works and what doesn’t, in a systematic way. Main Methods and Their Uses Promotion and communication methods can be divided into 2 main categories. One category is non-controllable which is by recommendations, word-of-mouth or through the perception of the public. The other category is controllable which includes advertising, sales promotion, personal selling, and general publicity. The method to be used depends on the objective of the promotion which can either be: To create product awareness To generate enquiries To generate desire for a certain product To overcome some prejudices or incorrect perception To remind the public of an on-going product To simply provide information Generally, each method of promotion, whether it is above the line or below the line, has its strengths and weaknesses. Method Strengths Weaknesses Advertising – Newspapers Able to cover nationwide; more Can be costly especially in local detailed; customer can keep the regionalised newspaper where the information. cost per reader will be high. Advertising – Magazines Similar to newspapers and can Competitors may also be reach specific readers such as advertising in the same magazine parents in a parenting magazine. and time; need to book any advertising slot well ahead. Advertising – Cinemas Good for regional campaigns; Limited exposure as cinemas are targeting younger age market getting out of the main stream. such as below age 30. Advertising – Billboards Good visibility in chosen locations; Limited information displayed relatively cheap; encourages and difficult to gauge the impulse purchase; can be used to effectiveness. reinforce other medias. Radio Target nationwide or specific Non-visual; message is short and listeners of specific channels; listeners may ignore radio ads. catching listeners in the cars during peak hours. Television Target nationwide and can go Very expensive; message is short on repeats for reinforcement;can and many audiences are channel focus on high visual impact. surfers. 111  FUNCTIONS WITHIN INSURANCE ORGANISATIONS 4 CHAPTER Human resources Method Strengths Weaknesses Internet Wide exposures and niche Too many ads in the internet and markets can be targeted in certain too many websites. websites or platforms;relatively low cost. Direct mail to existing Very low cost as it is attached to Not personalised as many policyholders annual statements and well within products require face-to-face control for cross-selling or up- explanation. selling. Booths in malls or fairs Interactive as visitors can make Long hours of human resources enquiries. placed at the booth for days. Charity work at communities Good exposure on Corporate Usually not for product branding. Social Responsibility for company branding. Press conferences or releases Access to reporters or journalists Some press releases do not get who will write about the insurer through the newspaper editors and/or its products launched. and don’t get to be reported;some are reported in a misguided or misinformed manner. Sponsorship in industry or Good company branding Usually not for product public events such as football positioning. positioning. tournaments. Open days during certain events Good company branding Limited exposure to the market as such as festive periods. positioning. such events are more passive. n Table 4-1 Methods of promotion 4.2 Human Resources In the insurance industry, human resources are a key component of the entire value chain. They consist of a set of individuals making up the workforce of the organisation. Particularly in the life sector, the outreach to the insurance market depends heavily on the individuals forming the multi-channel sales force. The entire value chain starts from the employees behind the scenes developing the products, down to the sales personnel who sell them and the claims department staff who handle the claims under the sold policies. We will now discuss various aspects of the insurance industry in relation to human resources and not just the usual issues surrounding the human resources department. 4.2.1 Development and Scope of The Human Resources Management Function The role of the “Human Resource (HR) Management”function in the insurance industry is to plan, develop, and administer policies and programmes designed to make optimum use of the human resources. Its objectives are to ensure effective utilisation of human resources, build desirable working relationships among all members of the insurance organisation, and maximise individual development. 112  FUNCTIONS WITHIN INSURANCE ORGANISATIONS 4 Human resources CHAPTER Generally, there are 2 types of individuals that are in focus. First are the usual employees handling various roles in the company who are compensated with salary packages. The second comprise the sales force and are commission-based. The first group is usually handled by the human resources department whereas the second group is handled by the department in charge of the distribution channel such as the “Agency Department”or the “Bancassurance Department” in the case of tied-agency and bancassurance distribution respectively. The major functional areas in human resource management for both groups are: Planning Staffing/Filling the vacancies or the planned manpower Employee/Sales agent development Employee/Sales agent maintenance A brief description of human resource functions is as follows: Human Resource Planning In this function, the number and type of employees or sales staff needed to accomplish organisational goals are determined. Research is an important part of this function because planning requires the collection and analysis of information in order to forecast human resources supply and to predict future human resources needs. The fundamental human resources planning strategy is staffing and employee/sales staff development. Job Analysis This is a process of determining the nature of a job and specifying the human requirements, such as skills and experience needed to perform it. The end product of the job analysis process is the “Job Description (JD)”. A JD spells out work duties and activities of employees. JDs are important sources of information to employees, managers, and other personnel because they provide information on personnel development programmes and practices. Example Job description PRIVATE & CONFIDENTIAL JOB DESCRIPTION Department Alternative Distribution Position Title Head of Training Name of Person Grade AVP13 Reporting Structure Report To: ABC 113  FUNCTIONS WITHIN INSURANCE ORGANISATIONS 4 CHAPTER Human resources Main Duties framework including segments of Direct Marketing and WSM Direct. resources. programmes within the framework of the alternative distribution framework. to alternative distribution sales channels. managers in those sales channels. implementation. to time. direct report training personnel. Performance Benchmarked on performance of alternative distribution sales Measurements force: satisfaction. Candidate’s Characteristics operations. 114  FUNCTIONS WITHIN INSURANCE ORGANISATIONS 4 Human resources CHAPTER Staffing/Filling Staffing focuses on recruiting and selecting suitable individuals for the organisation. Human resource planning and recruiting precede the actual selection of people for positions in the organisation. Recruiting is the personnel function that attracts qualified applicants to fill job vacancies. In the selection process, the most qualified applicants are selected for hiring from among those attracted to the company by the recruiting process. Tools such as “psychometric tests” enable managers to decide which applicants to select and which to reject for the given vacancies or jobs. Induction/Orientation For new employees, this is the first step toward helping a new employee adjust himself or herself to the new job and the employer. For new sales personnel, it is an induction programme to ensure product knowledge, selling skills, and adherence to the licensing procedures. For both groups, it is a method to acquaint new people with particular aspects of their new job, including pay, commission, benefit programmes, working hours, and company rules and expectations. Training and Development The “training and development” function gives employees and new sales personnel the skills and knowledge to perform their jobs effectively. For experienced staff or personnel whose jobs are undergoing change, companies often provide training programmes. Large organisations often have development programmes, which prepare employees for higher-level responsibilities within the organisation sometimes called “career development programmes”or for some identified talented ones, “management development programmes”. Training and development programmes provide useful means of assuring that employees are capable of performing their jobs at acceptable levels. Performance Appraisal/Monitoring This function is performed with employees or sales personnel to ensure that their performance is at acceptable levels. Human resources professionals are usually responsible for developing and administering performance appraisal systems at a macro level, although the actual appraisal of employee performance is the responsibility of supervisors and managers at a micro level. Besides providing benchmarks for pay, promotion, and disciplinary actions, performance appraisal information is necessary for employee development, since knowledge of results is necessary to motivate and guide performance improvements. Career Planning “Planning”for career advancement is necessary as a result of the desire of many employees to grow in their jobs and to advance in their careers. Career planning activities include assessing an individual employee’s potential for growth and advancement in the company. 115  FUNCTIONS WITHIN INSURANCE ORGANISATIONS 4 CHAPTER Human resources Compensation “Compensation” is a key cost in insurance companies. Therefore, the human resources personnel provide a rational method for determining how much employees should be paid for performing certain jobs. Compensation affects staffing, in that, people are generally attracted to companies who offer a higher level of pay or commissions in exchange for the work performed. It is related to employee development, in that, it provides an important incentive for the levels of job performance and for higher-paying jobs in the company. Benefits “Benefits”are an additional form of compensation to employees and sales personnel other than direct pay or commission for work performed. As such, the human resources function of administering employee benefits has many characteristics of the compensation function. Benefits include both the ones required legally by law and those offered at the employer’s discretion. The cost of benefits has risen to such a point that they have become a major consideration in human resources planning. For sales personnel, commissions are restricted by Bank Negara’s guidelines on Operating Cost Control.37 Labour Relations The human resources function also handles the relationship with employee unions or the unions of sales personnel. “Unions” are organisations of employees who join together to gain “more voice” in decisions affecting wages, benefits, working conditions, and other aspects of employment. With regard to labour relations, their responsibility mainly involves negotiating with the unions regarding wages, commissions, service conditions, and setting new parameters in dispute resolution and grievances. Record-keeping This function involves recording, maintaining, updating and retrieving employee and sales personnel related information for a variety of purposes. Records which must be maintained include application forms, health and medical records, employment history, seniority lists, medical or annual leaves, turnover, tardiness, and a host of other data. Complete and up-to-date employee records are very important for most personnel functions. Other than the functions mentioned above, the human resources function involves managing change, technology, innovation, and diversity. HR professionals have an all-encompassing role as they are required to have a thorough knowledge of the company and the business’s intricacies and complexities. The eventual goal of every HR person should be to develop a linkage between the employee or sales personnel and the company because the employee or sales personnel’s commitment to the company is crucial. 37 Operating Cost Control guidelines (JPI/GPI6) (revised 31 October 1995). (1992, March 16). Retrieved December 5, 2014, from www.bnm.org.my 116  FUNCTIONS WITHIN INSURANCE ORGANISATIONS 4 Human resources CHAPTER 4.2.2 The Recruitment and Selection Process The recruitment and selection of both, employees and sales personnel are necessary in building an insurance organisation, as revenues and manpower needs grow in tandem. The entire process can be structured in a few steps. Step 1 – Job Description Begin with the end in mind. Based on the position of the vacancy or the profile of the sales personnel needed, a job description (JD) is designed so that the type of person the insurance company is looking for is clearly defined. A candidate profile can be described in several aspects. n Figure 4-4 Profile of the candidate outlined in the JD Step 2 – Recruitment method and sources The ideal candidate needs to be sourced from the place with the highest probability of getting such a candidate and at a minimal cost. For example, if a junior actuary is to be recruited, the easiest and a cost effective way is to vet through the members of the local Chapter of the actuarial association. For other positions such as sales agents, the sources need to be varied. The method of recruitment depends on the source chosen. If the source is the mass market, then the recruitment method used may be mass media, such as classified advertisements, or from online recruitment agencies, such as JobStreet or JobsDB. Step 3 – Recruiting process In recruiting an employee, the process is very similar to other industries. Potential recruits are attracted to an advertisement then post or email their resume to the insurance company. As for more senior or key staff, the engagement of head hunters or executive search agencies is usually done to search for and identify suitable candidates in the market place. Thereafter, the HR department calls for initial interviews and later a final interview before the hiring decision is made. 117  FUNCTIONS WITHIN INSURANCE ORGANISATIONS 4 CHAPTER Human resources The selection of the final candidate is based on the original profile of the candidate under the JD. In this way, the selection process is very objective and unbiased. At times, some form of psychometric testing is used to identify the traits or characteristics required. The most common of these is a personality trait identification test known as “DISC”, to see if the candidate is of the Director, Influential, Stable or Compliance type. In recruitment of commission-based sales personnel, the criteria are less stringent as the numbers to be hired are normally unlimited. Candidates are identified in the initial meeting by recruiters. In this first meeting, the candidates are briefed and sold the business potential. Once interested, they are brought to business opportunity previews in the attraction meeting in order to attract them. Once attracted, the next action is to get them into commitment meeting where they sign up for licensing exams, attend basic training or start with “Joint-Field-Work (JFW)”. 1 Initial Meeting 2 Attraction Meeting 3 Commitment Meeting n Figure 4-5 The stages in recruitment of sales personnel 4.2.3 Appraisal and Reward Systems Both, employees and sales personnel of insurance companies must be given due compensation, incentives, and recognition wherever due. As insurance, especially the life sector, is generally run on aggressive selling and marketing, such benefits require proven appraisal and reward systems. For employees, the benefits are usually appraised under a centralised Performance Management System (PMS) where milestones and targets are set against the incentives. There are bothShort-Term Incentives Plans (STIP) and Long-Term Incentives Plans (LTIP). Short-term plans usually refer to the current financial year whereas long-term plans usually refer to a 3-year or 5-year cycle. A comprehensive PMS can run on both quantitative and qualitative appraisals. Quantitative measures are simply measurable numbers that need to be achieved. Qualitative measures are a general tagging of the situation or outcome as they cannot be measured objectively. Normally, higher weightages are given to the quantitative areas. 118  FUNCTIONS WITHIN INSURANCE ORGANISATIONS 4 Human resources CHAPTER Example Quantitative and qualitative aspects of a PMS A full year sales target of RM50m in Gross Written Premium is considered a quantitative target whereas a training framework that meets the industry and regulatory guidelines is a qualitative performance. For sales personnel, the appraisal and reward system is sales driven. The incentives given to a sales person, such as an agent, are usually based on the volume of premium brought into the company and also possibly tied to some conditions, such as the minimum number of cases and persistency rate. The appraisal for the purpose of assessing whether an agent can be promoted to the agency leader level is normally based on total production for the period before promotion, number of recruits under the person, training requirements attended, persistency rates, and other conditions. The appraisal system for sales personnel are more biased towards quantitative measurements rather than qualitative ones. Appraisal is done even if Key Performance Indexes are met as the person being appraised needs to be made aware of what he or she has done correctly. Case Study Retention incentives The turnover of sales staff in bancassurance is usually very high. Such sales staff members are usually paid a basic salary with sales incentive added to it. Unlike the traditional agents in the tied agency force, the bancassurance sales staff does not have renewal income from the renewal premiums from policyholders. As the talented pool of sales staff in the bancassurance industry is small, the poaching of sales staff from competitors is very common. This creates a problem for the bancassurance hirer as the high turnover creates a continuous problem of hiring and training new sales staff. How can this be resolved? Discussion points One effective method of retaining good bancassurance sales staff is through the implementation of a retention incentive. If a sales staff member performs very well in a particular year, a significant long-term bonus incentive is payable but is vested over the following two or three years. In short, the sales staff member must remain in the organisation in order for him or her to collect the vested incentives for the pre-determined vested period. 4.2.4 Training and Development For employees, training is a natural part of their career development, more so if they are an identified talent in the company. Usually, such tasks are carried out by the HR department. The training can be on soft skills or on knowledge or skills directly related to work tasks of the employees or the job functions of the higher position that they are being groomed for. Training expenses can be claimed against the Human Resource Development Corporation (HRDC) in Malaysia if the organisation is a contributing member. Otherwise, the training budget is an internal cost. In the insurance industry, Bank Negara has a guideline where training cost must be at least a certain percentage indicated against the overall management expense. 119  FUNCTIONS WITHIN INSURANCE ORGANISATIONS 4 CHAPTER Human resources For the sales personnel, the training framework can be elaborate, especially in the life sector. Many life insurance companies run a training department purely to train distribution channels such as the tied agencies or bancassurance. The life training can consist of: The compulsory 20-hour training to be attended in the first 6 months of a new distributor. This 20-hour training is usually called Fast Start by most life insurers and it covers both product and sales cycle together with operational process and procedures, such as primary underwriting. The compulsory agency management course called Basic Agency Management Course (BAMC) as a training requirement before being allowed to be promoted to the agency leadership level. Many other courses conducted, usually in-house by insurers covering products, sales cycles, operations, agency management, personal financial planning, or other soft skills such as time and activity management. In the general sector, training for distributors is much less as most distributors such as brokers are highly skilled personnel themselves; therefore, requiring less training other than the intermittent new product briefings. However, for both life and general, continuous professional development (CPD) learning is a must with the implementation of the CPD Guidelines38 in Sept 2004. Here, a life agent must secure at least 30 hours of training a year and the general agent requires a minimum of 20 hours of training attendance. Main Methods and Benefits The most prevalent training method used in insurance companies is the traditional classroom, face- to-face training. This is the most useful as it is cost-effective and there is unlimited interaction for maximum learning. Other methods used are: Self-study using materials such as books and videos provided by the training department of insurers. Usually, this method is used for basic training or licensing training such as Pre-Contract Examination (PCE) or Certificate Examination in Investment-Linked Life Insurance (CEILLI) where the content is mainly facts and data. The benefit of self-study is that candidates in remotes areas, such as small towns where classroom training is not available, can study on their own. Online learning is implemented for courses which are lengthy in nature such as the Registered Financial Planner (RFP)39 managed by the Malaysian Insurance Institute (MII),40 which is the educational centre for the insurance industry in Malaysia. The strongest benefit 38 Continuing Professional Development (CPD) Programme for Life Insurance Agency Force. (2004, September 1). Retrieved January 6, 2015, from http://www.liam.org.my/pdf/cpd2f5-10.pdf 39 Registered Financial Planner (RFP). (n.d.). Retrieved September 24, 2014, from http://www.mfpc.org.my/education/ registered-financial-planner-rfp 40 The Malaysian Insurance Institute – Registered Financial Planning – Conventional. (n.d.). Retrieved January 6, 2015, from http://www.insurance.com.my/index.php/admission/rfp-conventional 120  FUNCTIONS WITHIN INSURANCE ORGANISATIONS 4 Human resources CHAPTER of this method is that candidates need not attend lengthy classes and can study online in the comfort of their homes and over an extended period of time. The methodology used in training is usually based on the concept of “PESOS” as follows: Prepare – Preparing the training materials and creating a good learning environment for the students is the key starting point. Here learning objectives are explained to the students in order to focus on what is to be achieved at the end of the learning session. Explain – Explain the contents of what it is, how it is to be used, and why. This applies to both knowledge and skill-based subjects. Show – Show the student how it is done via a live demonstration and explain why certain steps are taken. Observe – Observe whether the student has learned what is explained or shown, by getting them to do a role play in the classroom or in the field via JFW. Supervise – Supervise the student after the learning by monitoring if there is a behaviour change; if not, what is the next step to be taken? 4.2.5 Supervision and Motivation The supervision and motivation of employees and sales personnel may differ in level and intensity. Employees are driven by work tasks and to a certain extent, the goals and objectives to be achieved. Supervision comes daily from their immediate superior. Usually, motivation comes intermittently during group meetings or one-to-one meetings. Supervision is simply “Inspect what you expect”. In the insurance organisation, the supervision process can be a 5-step flow as follows: Step 1 – View the current situation or result. Step 2 – Compare with the planned goals at the beginning of the year. Step 3 – Check the gaps between the current situation and the expected pro-rata goals or performance. Step 4 – Find out the causes of the gap, if any. Step 5 – Take action to rectify the gaps via counselling, training, development or using incentives or potential disciplinary actions. Methods of Employee Engagement As in other commercial companies, insurance companies are also keen on employee engagement. This is to ensure higher commitment and contribution from the employees for higher productivity and eventually profitability for the insurer. One of the key factors in effective employee engagement is that the employees must be willing to participate. Many insurers embark on employee engagement with a fact-finding exercise to see what the current thinking among its workforce is. In other words, management would like to find out what matters to the employees and if such matters influence productivity at work. This is usually done by the in-house HR department or by outsourcing the data collection to a consulting company that does both confidential and non-confidential surveys, normally using the intranet email system. 121  FUNCTIONS WITHIN INSURANCE ORGANISATIONS 4 CHAPTER Human resources Once the information is collected, the management reviews it and gets a better idea of the current thinking mode of the employees or sales personnel. In consultation with the outsourced consultant, a scheme is planned to overcome identified areas of shortcomings. Whatever the plans, there are a number of methods in employee engagement that must be adhered to. Start at the top – A successful plan on employee engagement must begin with buy-in from the most senior teams. If they are not true believers of the power of engagement, it will be an uphill battle for everyone. Highlight the early “buyers” – In order to ensure engagement captures both hearts and minds, highlight those departments or units or sections in the company that are passionate about not only the concept but also about driving change and influencing others to communicate with local business units. Aim on an exciting goal – Cascade down an exciting goal to be achieved over the next one, two or three years that will make an impact on the business. With their buy-in, start rallying the Heads of divisions or departments and the unions, if any. 4.2.6 Legislation and Best Practices Relevant to the Workplace In the insurance industry, there are numerous legislations and guidelines that form the framework that governs the running of the life and general operations, both conventional and takaful. Best practices are generated over many years of evolution in operations and work practices. Many best practices are more like transfer of technologies from matured markets, such as western countries, to Malaysia via multinational insurers who have operations in both parts of the world. Here, we look at some of the key legislations relevant to the insurance workplace in Malaysia and, wherever possible, the best practices involved. Employment Act There are a number of labour laws in Malaysia and a key one is the Employment Act 1955.41 In general, the Employment Act provides the minimum terms and conditions that apply to different categories of workers in issues relating to their well-being. The Employment Act is more relevant to employees of insurance companies and not so much to the sales personnel in the distribution channels. This is because sales personnel who are commission-based are not employees as defined under the Employment Act. This Actcovers employees of all industries and not just the insurance sector. EPF The Employee Provident Fund (EPF) is currently the largest retirement fund in Malaysia and one of the oldest in the world. It is probably the most important retirement fund for Malaysians. The 41 The Employment Act 1995, Act 265, Laws of Malaysia. 122  FUNCTIONS WITHIN INSURANCE ORGANISATIONS 4 Human resources CHAPTER operation of the Employees Provident Fund is controlled by the Employees Provident Fund Act 1991,42 which became effective on 1 June 1991. This Actreplaced the Employees Provident Fund Act 1951 which had become outdated over the years. Again, EPF only relates to employees but not the commission-based sales personnel. However, on the product level, EPF does provide tax relief to individuals who have the following life insurance related plans: Life insurance on his or her life up to RM6,000 per annum in premiums and this amount is segregated with EPF contribution on the employee portion. Education or medical insurance policies up to RM3,000 per annum in premiums. Annuities of up to RM3,000 per annum in premiums. Among its best practices, commission-based personnel are encouraged to contribute to the EPF with any amount up to RM100,000 per annum.43 This is part of the social security system provided by the EPF to all other non-employees in its voluntary contribution schemes. SOCSO The Social Security Organisation (SOCSO) is an organisation set up to administer, enforce and implement the Employees’ Social Security Act 196944 and the Employees’ Social Security (General) Regulations 1971. SOCSO provides social security protection by social insurance including medical and cash benefits, provision of artificial aids and rehabilitation to employees to reduce sufferings, and to provide financial guarantees and protection to the family. SOCSO is meant for lower-income employees and each employee contributes a certain amount deducted directly from his or her salary. In case of hospitalisation, death, disability whether temporary or permanent, the employee can submit a claim to SOCSO. OSHA 1994 The Occupational Safety and Health Act 1994 (OSHA)45 is more relevant to general insurance as some insurance plans, such as “Workmen Compensation”, cover workers. The adherence of employers in providing safe procedures and policies mitigates the cost of premiums in providing insurance cover to such workers. As part of risk management, the risk reduction techniques in workplaces encourage lower premium costs that the general insurers charge the employers. 42 Employees Provident Fund Act 1991, amended 1 January 2006, Act 452, Laws of Malaysia 43 EPF Website. Retrieved June 1, 2023 from Link: https://www.kwsp.gov.my/member/contribution/self-contribution 44 Employees’ Social Security Act 1969, amended 1 January 2006, Act 4, Laws of Malaysia. 45 Occupational Safety and Health Act 1994, amended 1 January 2006, Act 514, Laws of Malaysia. 123  FUNCTIONS WITHIN INSURANCE ORGANISATIONS 4 CHAPTER Underwriting Other Legislation Some of the other legislation includes the Industrial Relations Act 196746 and Trade Unions Act 1959. The Industrial Relations Act provides ways for settlement of trade disputes between employers and employees whereas the Trade Unions Act regulates trade union registration and the uses of trade union funds. As for commission-based sales personnel, the Industrial Relations Act is used whenever they have grievances on the terms of their contracts with the insurer under the tied-agency channel. Running parallel to the EPF, which is a compulsory defined-contribution scheme, insurance workers can also subscribe to the private retirement scheme (PRS) launched in 2012, on an optional basis. Such private saving schemes are regulated by the Capital Markets and Services Act 2007 (CMSA),47 the Capital Markets and Services (Private Retirement Scheme Industry) Regulations 2012 (PRS Regulations), and the Guidelines on Private Retirement Schemes (PRS Guidelines), which form the regulatory framework for the private retirement scheme industry in Malaysia. The various guidelines are aimed at providing a regulatory environment that safeguards the interests of contributors to PRS. PRS products are given up to RM3,000 in personal tax relief per annum in terms of contribution to a PRS scheme. 4.3 Underwriting Insurance underwriting can be described as the acceptance of risks, whether the risk of a firm or an individual. The underwriting function involves risk selection, analysis, and the setting of terms, including pricing and coverage of a risk or risks under an insurance policy. The board is responsible for determining the nature and extent of the principal risks it is willing to take in achieving its strategic objectives. It is also responsible for establishing the company’s risk appetite which can be expressed in many ways. For example, ‘our maximum net exposure on any one risk shall be no larger than 1% of the company’s capital’. The risk appetite, risk tolerance and risk capacity of an insurer can vary tremendously depending on the financial strength of the company, type of business being underwritten (for example, personal lines, SME business, large corporate risks, speciality lines, etc.), the corporate strategy and other external factors. 4.3.1 The Role of an Underwriter The underwriter’s task is to manage the common pool (of insurance funds) effectively. This includes: 46 Industrial Relations Act 1967, amended 1 March 2010, Act 177, Laws of Malaysia. 47 Capital Markets and Services Act 2007 (CMSA), amended 28 December 2012, Act 671, Laws of Malaysia. 124  FUNCTIONS WITHIN INSURANCE ORGANISATIONS 4 Underwriting CHAPTER 1. Assessment and evaluation of risk An underwriter performs: Quantitative analysis where past loss data and statistics are used to assess the level of risk exposure in terms offrequencyand severity. Qualitative analysiswhere information gathered from process workflows, open-ended questionnaires, interviews and focus group discussions are used to assess physical and moral hazard. 2. Decision on acceptance or rejection of risk An underwriter: Looks for proactive solutions to mitigate the impact of potential future claims. Negotiates with the agent or broker to find ways to cover the risk when the issues are not so clear-cut. Recommends specific and relevant risk improvement measures as a pre-acceptance condition. 3. Determine scope, terms, and conditions of cover An underwriter: Determines the type of policy coverage and insurable perils, e.g., Homeowners’ insurance to extend cover for subsidence and landslip. Establishes terms and conditions of acceptance e.g., Liability insurance ‘subject to no known claims or legal issues.’ Restricts or modifies coverage by endorsement e.g., Private Hire Car (e-Hailing) Endorsement to complement the basic private car insurance. 4. Determine rate of premium to be charged An underwriter will calculate the pure risk premium (i.e., that part of the premium necessary to pay for losses and loss-related expenses only). In doing so the underwriter should consider: The expected ultimate cost of claims, i.e., the amount of money required today to cover the future cost of claims. The level of uncertainty attaching to liability claims which can take years to settle, and the rate of inflation on the final settlement amount including legal costs. 4.3.2 Process of Underwriting TheCOVID-19 pandemic has served as the wake-up call to make insurance purchasing simpler and more digitally enabled. Using automated underwriting makes the first phase of the process much more efficient and means that insurance providers can vastly increase the number of clients that they work with. 125  FUNCTIONS WITHIN INSURANCE ORGANISATIONS 4 CHAPTER Underwriting However, unlike automated underwriting which relies on computer algorithms to analyse essential information, manual underwriting involves a human underwriter who reviews long-drawn proposal forms and other documents to decide on risk acceptance, terms, and pricing. While manual underwriting requires more paperwork and takes longer time to process, it is better suited for more complex risks, because every application comes with a new set of risk variables to assess. During the underwriting process factors, such as an applicant’s medical history, demographics, prior claims, and lifestyle choices must be considered. Hence, only low-complexity tasks can be automated to free up underwriters for more complex interactions with the customer. The control of underwriting is throughunderwriting guidelines established by an insurance company to set rules, requirements and authority limits for its agents and underwriters.The underwriter uses these guidelines to make decisions regarding the acceptance, modification, or rejection of a prospective insured. Underwriting is also used as a guard against adverse selection by identifying groups of people more at risk than the general population and charging them more premiums. 4.3.3 Reinsurance Reinsurance is an extension of the fundamental concept of insurance, that is the sharing of risks.Insurance companies, including Captives, enter into a reinsurance agreement which details the conditions upon which the reinsurer would pay a share of the claims incurred by the ceding company. In essence, reinsurance is insurance for insurance companies. There are several common reasons for underwriters to seek reinsurance, which include: catastrophe protection against a single large event, e.g., an earthquake protection against a large claim on a single item, i.e., an art museum protection of company capital protection against fluctuating claims costs from year to year stabilising underwriting results geographical spread of risks expansion of insurer’s underwriting capacity entering a new market such as marine or aviation acquiring expertise Reinsurance can be provided in various formats and there are two basic categories of reinsurance: Facultative, and Treaty Facultative reinsurance coverage is purchased by a primary insurer to cover a single risk or a block of risks held in the primary insurer’s book of business, where each reinsurance arrangement is negotiated individually between the insurer and reinsurer on a case-to-case or ad hoc basis. This format is used when the insurer wants to transfer cover that is outside of the treaty arrangements, 126  FUNCTIONS WITHIN INSURANCE ORGANISATIONS 4 Claims CHAPTER such as when an individual building value is very high or in cases where a risk is outside the scope of the treaty but is accommodated by the primary insurer. Treaty reinsurance is arranged on an entire portfolio of business, such as fire or motor class of business, where the reinsurer takes a part of all the insurances underwritten by the primary insurer. A treaty is usually an annual contract agreed in advance, and the terms are fixed. In this way, both the insurer and reinsurer have certainty over the reinsurance deal for the coming year. There are two main types of reinsurance: Proportional, and Non proportional Proportional reinsuranceis where the insurer and reinsurers take a stated proportion of each risk and share the premium and claims on the same basis. Non proportional business allows the insurer to retain the first part (or layer) of cover and transfer the balance to the reinsurers. Example Quota share proportional reinsurance An insurer provides fire insurance for a factory for RM10m and decides to share 50% with a reinsurer on an equal basis (i.e., 50% of the sum insured for 50% of the premium and 50% of all claims). This is a quota share proportional reinsurance. 4.4 Claims Claims are the first point at which consumers discover whether they have bought the right product, have value for money and, ultimately, whether they can trust their insurer to deliver on the promise bought at the very beginning. The role of the claims department is to ensure that when claims are made, the policyholder receives a fair and equitable settlement of their loss. Insurance companies have their claims management processes written down and captured in a claim manual. A claims management hierarchy is established to control financial decision-making in the settlement of claims. A ‘claims philosophy’ refers to an insurer’s approach to handling claims. It is a set of principles and guidelines that dictate how the claims department handle claims and interact with claimants. For example, Zurich Insurance has a positive and customer-focused claims philosophy. They aim to: “support their customers before, during, and after a claim with an approach that is fair, customer-centric, transparent, and personal”. 127  FUNCTIONS WITHIN INSURANCE ORGANISATIONS 4 CHAPTER Claims An insurer should understand what it wants to achieve and how it wants to be perceived in the market. For some, the priority of the claims process is about reducing leakage, i.e., by driving down fraud, while for others it is less about leakage and more about actively looking for ways to pay claims, to use the claims service as a key value proposition to the insurance product. BNM say every insurance company 4.4.1 Fair Treatment of Financial Consumers (FTFC) must have customer service. BNM policy document on Fair Treatment of Financial Consumers (FTFC) (BNM/RH/PD 028-103)48 came into effect on 6 May 2020. A key objective is to ensure financial consumers’ complaints and claims are handled in a prompt, fair and effective manner. The regulation requires Financial Service Providers (FSP) to focus on core service values and behaviours, by making internal commitments that deliver external outcomes to customers and policyholders. The policy document on Fair Treatment of Financial Consumers provides the following guidelines: 1. To provide a clear redress option such as an internal dispute resolution process that is effective, simple, and easily accessible for claimants to seek redress in a fair and efficient manner and to resolve disputes without any undue delay or burden. 2. To put in place proper processes and procedures for claims handling, including clearly identified contact points made readily accessible to customers. 3. To create an environment where complaints are seen as valuable feedback to help improve business performance and prompts staff to recognise the importance of handling claims in a fair and effective manner. 4. Senior management should ensure: sufficient resources are allocated to handle and resolve complaints and claims; staff are properly trained to handle and resolve complaints and claims effectively; and timeframes for resolving complaints and claims are established to ensure that each complaint or claim is dealt with in a timely manner. 5. To conduct a thorough and objective investigation of all claims to ensure that the claim settlement offer is fair, considering relevant factors, representing the claimant’s reasonable entitlement. 6. To provide a clear explanation of the rationale for a total or partial rejection of a claim including the terms or exclusions on which the decision was based. 48 www.bnm.gov.my documents FTFC_PD_028_103.pdf 128  FUNCTIONS WITHIN INSURANCE ORGANISATIONS 4 Claims CHAPTER 7. To establish an effective monitoring and evaluation mechanism including root cause analysis and analysis of the nature and trends of claims received so that adequate measures can be taken to rectify the weaknesses identified. 8. To practice effective and timely communication with the claimant throughout the claims handling process. 9. To ensure the claimant is informed of the availability of the Ombudsman for Financial Services (OFS) which is an alternative financial dispute resolution body that resolves disputes between financial consumers and the FSP. 4.4.2 The Claims Process An insurance claim is made by a claimant who may or may not be the insurance policyholder. While most claims are made by the policyholder, a non-policyholder can still file a claim if they believe they have suffered damages for something that is insured. For example, if you were involved in a car accident, you may file a claim against the other motorist’s insurance. The claims process involves the following: Events giving rise to a claim A car accident, home fire, flood, hospital bill, etc. are events that will be reported to the insurance company or broker by the policyholder or claimant. Notification of claims and verification of facts The claimant submits the claim in the insurer’s prescribed format or claim form, providing sufficient details to verify the cause of the loss, the nature and extent of the damage. Assessment of claims A claims examiner checks to ensure the claim has complete information and compares it to the policy to verify whether the loss is covered. This involves analysing the claim in the light of: the amounts claimed; the information provided at the time the insurance was purchased; the exact terms of the policy; the legal requirements; market practise; and the insurance company’s claim philosophy. Response to claimant An insurance company’s first response to the customer is to acknowledge and/or request further information. Depending on what the claim information reveals, the insurer has one of three choices: 129  FUNCTIONS WITHIN INSURANCE ORGANISATIONS 4 CHAPTER Claims Payment; Negotiation; or Repudiation of liability (where liability of the terms of the policy is not accepted) Claim investigation To establish the facts surrounding the claim, it may be necessary to instruct internal claims investigators or external loss adjusters to undertake further investigations. Claim negotiation and settlement Insurance companies are required to agree to settlement of claims as soon as information has been provided and liability can be determined. Whilst some claims are disputed, the majority are settled to the satisfaction of all parties. However, armed with all the full facts of the case, the insurer may decide that a lesser amount should be offered than the original amount claimed. Negotiation can at times be a long-drawn-out process in cases of dispute. The resolution of disputes is achieved via negotiation with the customer, mediation, alternative dispute resolution, arbitration, or litigation. Claim recoveries As part of the claim investigation the insurer will consider if there is an opportunity to recover part or all the claim cost. Examples are third parties considered liable for the incident may be pursued; contribution or subrogation rights may exist; and/or there may be reinsurance protections in place. 4.4.3 The Claims Loss Ratio The claims loss ratio measures the claims paid out by an insurance company compared to the premiums it collects from policyholders, to evaluate the profitability of a portfolio of business. It is calculated by dividing the amount of claim incurred by the amount of premium received i.e., the ratio of claims to premiums, expressed as a percentage: Claims incurred Claims ratio = × 100 Premium For example, if Company A’s motor account had a premium income of RM100,000 and claims of RM103,000, the claims ratio would be: RM103,000 × 100 = 103% RM100,000 a claims ratio of less than < 100% indicates underwriting profit; whilst a claims ratio of more than > 100% indicate an underwriting loss. 130  FUNCTIONS WITHIN INSURANCE ORGANISATIONS 4 Risk management CHAPTER Claims ratios are very useful indicators of how an account is running. As claims are the principal cost for an insurer, the accurate analysis of past claims histories is crucial to the profitability of an insurer’s underwriting account. It is important to note that various factors can contribute to a higher-than-normal claims trend during a specified period. For instance, COVID-19-related ex-gratia payments to policyholders and higher claims for policies without a pandemic (exclusion) clause contributed to an increase in the medical insurance claims ratio in 2021. Example handle high claim ratio Managing a healthy claims ratio A general insurance company portfolio of motor vehicle Gross Written Premium (GWP) is RM10 million for the year 2013. If the motor claims for the same year are RM11 million, then the claims ratio is 110%. To manage it down, the insurer can adopt a new target market where only drivers of a certain age are taken in or vehicles exceeding a certain age are rejected in new or renewal cases. Managing the ratio down to about 50% to 60% will be healthy. 4.5 Risk Management Risk Management can be defined as the identification, analysis and economic control of those risks which can threaten the assets or earning capacity of an enterprise. These threats or risks, could stem from a wide variety of sources, including financial uncertainty, legal liabilities, strategic management errors, accidents, and natural disasters. The relationship between insurance and risk management is intertwined in that, whilst insurance is the equitable transfer of the risk of a loss, risk management is the practice of appraising and controlling risks. There is also a distinct difference in that, whilst insurance can be described as a product giving short-term protection, risk management is a long-term projection to minimise the adverse effects of risks and increase business resilience. RISK MAN AGEMENT Risk Transfer Mechanism Identify Risks INS UR A NCE Pooling of Risks Analyse Risks Large number of Prioritize Risks similar Risks n Figure 4-6 Insurance vs Risk Management 131  FUNCTIONS WITHIN INSURANCE ORGANISATIONS 4 CHAPTER Risk management 4.5.1 Risk Management Policy and Process At the broadest level, risk management is a system of people, processes and technology that enables an organisation to establish objectives in line with values and risks. It is a process, by which organisations systematically recognise, measure, and manage the various types of risk inherent within their operations. The objective of risk management is not to eliminate risk and volatility but to understand and manage it. The role of the risk management department is to structure a systematic method of managing risks and promote internal controls to ensure that the organisation is always on a strong financial footing. Step 1 – Risk identification Risk identification is the process of identifying and assessing threats to an organisation, its operations, and its workforce. For example, risk identification may include assessing IT security threats such as malware and ransomware, accidents, natural disasters, and other potentially harmful events that could disrupt business operations. Step 2 – Risk assessment Risk analysis involves establishing the probability that a risk event might occur and the potential outcome of each event. Risk evaluation compares the magnitude of each risk and ranks them according to prominence and consequence. Step 3 – Prioritisation and treatment Risk prioritisation is the process of identifying risks and making risk informed decisions about which ones are the most severe, so they can be addressed first. Prioritisation should be based on the likelihood of a risk and the potential harm it poses to the organisation. Risk levels are typically defined as: Tolerable risk – considered to have limited or no harm; the probability of occurrence is expected to be sufficiently low to cause no concern. Low risk – likely to have minor adverse effects; the probability of occurrence is expected to be low enough to cause minimal concern. Medium risk – defined as impacting the targets, cost, or timeline;the chance of it occurring is high enough to warrant close control of risk factors contributing to it. High risk – considered to have a high likelihood of happening, and the outcome will harm the budget, and timetable. Intolerable risk – identified as having a very high probability of happening and high criticality;the resultant consequences on cost, schedule, and performance would significantly harm the budget, timeline, and development. Step 4 – Risk mitigation and monitoring Risk mitigation refers to the process of planning and developing methods and options to reduce threats to project objectives. A project team might implement risk mitigation strategies to identify, 132  FUNCTIONS WITHIN INSURANCE ORGANISATIONS 4 Risk management CHAPTER monitor and evaluate risks and consequences inherent to completing a specific project, such as new product creation. Risk mitigation also includes the actions put into place to deal with issues and effects of those issues regarding a project. 4.5.2 Risk Response Strategies and Treatment There are five commonly accepted strategies for addressing risk: 1. Risk avoidance Avoidance is a method for mitigating risk by not participating in activities that may negatively affect the organisation. Not making an investment or starting a product line are examples of such activities as they avoid the risk of loss. 2. Risk reduction This method of risk management attempts to minimise the loss, rather than completely eliminate it. While accepting the risk, it stays focused on keeping the loss contained and preventing it from spreading. An example of this in health insurance is preventative care. 3. Risk sharing When risks are shared, the possibility of loss is transferred from the individual to the group. A corporation is a good example of risk sharing — a number of investors pool their capital and each only bears a portion of the risk that the enterprise may fail. 4. Transferring risk Contractually transferring a risk to a third-party, such as insurance to cover possible property damage or injury, shifts the risks associated with the property from the owner to the insurance company. 5. Risk acceptance and retention After all risk sharing, risk transfer and risk reduction measures have been implemented, some risk will remain since it is virtually impossible to eliminate all risk (except through risk avoidance). This is called residual risk. 4.5.3 Beneficial Function of Risk Management 1. Business can thrive in a volatile environment instead of choosing a safer option.For example, investors can confidently deepen investments in emerging markets or extend supply chains to new markets because risk management explicitly addresses uncertainty and assumptions. 2. Ensures responsible management by strengthening policies and programmes in line with best management practices to enable the enterprise to meet increasing regulatory pressures and safeguard investors’ and consumers’ interests. 133  FUNCTIONS WITHIN INSURANCE ORGANISATIONS 4 CHAPTER Legal and compliance 3. Encourages a proactive and adaptive methodology responsive to change, instead of reacting in the face of a crisis; for example, when business is disrupted, the organisation can respond in a structured and systematic way to ensure continuity of services with the least amount of interruption. With an effective business continuity plan and back-up system, it is possible to continue “business as usual” and revenue generation. 4.6 Legal and Compliance The Legal and Compliance function in insurance companies can be one or two separate departments although they both work very closely together. As the insurance industry is highly regulated in view of the financial impact it has on the nation’s economy, ensuring that insurance organisations operate soundly within such regulatory and legal framework is an important aspect of their business. Therefore, the legal and compliance departments play a key role in every insurance company to ensure adherence to the various legal frameworks of the country as well as the regulator’s guidelines. 4.6.1 The Role of Legal and Compliance The Legal department’s role is to ensure that all actions executed by the insurance company are within the laws of the country. This includes drafting and reviewing all contracts with business partners, outsourced parties, financial arrangements, reinsurance arrangements, matters pertaining to intellectual properties, reviewing of sales agreements or compensation contracts, reviewing sales materials, interpreting changes in legislations, resolving disputes/litigation matters, and so on. The staff in this department usually consists of employees with at least a law degree. The Compliance department’s role is to ensure that the Board of Directors, Management, and employees are in compliance with the rules and regulations of regulators, such as Bank Negara, and that the company policies and procedures are being followed with behaviour in the company meeting the agreed standards of conduct and practices. 4.6.2 The Process of Adherence to the Legal and Regulatory Framework The process of compliance with the legal and regulatory framework can be outlined in the following steps. Step 1 – Understanding current frameworks The entire insurance organisation must have a certain level of understanding of the current legal and regulatory framework, as a starting point. Information can be obtained easily from the Bank Negara website or the archive folders of the Legal and Compliance Departments. The membership to Kijangnet,49 as a resource site to employees of insurance companies, is always open. 49 Home Page. (n.d.). Retrieved September 22, 2014, from http://kijangnet.bnm.gov.my/portal/server.pt 134  FUNCTIONS WITHIN INSURANCE ORGANISATIONS 4 Actuaries CHAPTER Step 2 – Develop internal policies and procedures In meeting the current frameworks, internal policies and procedures are designed and implemented to ensure all employees are aware of such frameworks and are in compliance with every aspect of the business operations. Step 3 – Design check and balance tools As part of the continuous monitoring of the entire organisation, “check and balance” tools are designed to ensure that any deviation from the implemented policies and procedures are detected early enough for remedial actions to be taken. Step 4 – Communicating to others in the organisation The responsibility of compliance is not just that of the Compliance department but of everyone and this constant message is needed to be spread across the entire organisation. This is achieved through working with the HR Department and the heads of various key departments in executing compliance training programmes. This includes reporting regularly to the Corporate Compliance Committee of the Board on compliance matters. Step 5 – Handling non-compliance cases This involves responding to any alleged violations of rules, regulations, and policies and procedures by evaluating or recommending investigation procedures. It includes acting as an independent review and evaluation body to ensure that compliance issues within the company are being appropriately evaluated, investigated, and resolved. 4.7 Actuaries The actuarial department in an insurance company normally consists of a department Head who is also usually the company’s Appointed Actuary, and a team of actuarial assistants. The Appointed Actuary is a key position in the organisation as the regulator views his signature of approval as an internal approval authority. The other team members may be fully qualified professional actuaries or associates, being members of actuarial societies such as the Actuarial Society of Malaysia (ASM).50 An actuary is a professional who analyses the financial consequences of risk by using mathematics, statistics and financial theories to study uncertain future events, especially those of concern to insurance and pension schemes. They assess the probabilities of those events, design creative ways to manage the probabilities, and reduce the impact of adverse events that actually do occur. Actuaries have strong analytical skills, business knowledge and understanding of human behaviour in order to design and manage programmes that control risk. 50 Actuarial Society of Malaysia. (n.d.). Retrieved September 22, 2014, from http://www.actuaries.org.my 135  FUNCTIONS WITHIN INSURANCE ORGANISATIONS 4 CHAPTER Actuaries 4.7.1 The Role of Actuaries in an Insurance Company In both the life and general insurance sectors, the traditional function of actuaries is to calculate premiums and reserves for insurance policies covering various risks. Premiums are the amount of money paid by the policyholder to the insurer in return for cover over potential losses, expenses, and profit. Reserves are provisions for future liabilities and indicate how much of funds should be set aside now to reasonably provide for future payouts. Particularly in the general insurance sector, the analysis often involves quantifying the probability of a loss event, called the “frequency”,and the size of that loss event, called the “severity” or “magnitude”. In addition, the length of time before the loss event occurring is also important, as the insurer will not have to pay anything until after the event has occurred. In the life insurance sector, the analysis often involves quantifying how much a potential sum of money or a financial liability will be worth at different points in the future. All these calculations require mathematical formulae and theories, involving various assumptions and parameters. Forecasting future interest rates and yields also plays a role in determining future costs, especially in the life insurance sector. Actuaries also design and maintain products and systems. They are also involved in financial reporting of an insurance company’s assets and liabilities. The reserves mentioned earlier are usually placed under the liabilities side of the balance sheet. 4.7.2 Impact of Actuaries’ Performance within the Legal and Regulatory Framework According to Section 83 of the Insurance Act 1996 (repealed and replaced by the Financial Services Act 2013), a licensed life insurer shall appoint the Appointed Actuary for each financial year and the appointment has to be approved by Bank Negara Malaysia. This is in view of the importance of this position in which the Appointed Actuary would need to report to Bank Negara on the insurer’s financial condition at the end of each financial year. Failure to appoint the Appointed Actuary will result in a penalty of RM3million. The candidate appointed to this position must be a resident in Malaysia and also be a fellow of a number of Actuarial institutes or societies recognised by Bank Negara. At the end of each financial year, the Appointed Actuary must value the liabilities of the insurer, together with its financial condition and within 90 days, certify and submit the report and certificate to Bank Negara. Failing to execute this, under Section 85 of the Act, will cause a fine of RM1million to be imposed. This certainly reflects the seriousness of the regulator in ensuring that life insurers are being managed and run in a financially sound manner. In the area of product development, under Section 142, the Appointed Actuary needs to certify new products and submit them together with all related sales materials to Bank Negarafor approval 30 days before they are launched and sold to the public. Within the said 30 days, Bank Negara will either revert with approval or recommend changes to the product features or any financial aspects of the plan to the insurer. 136  FUNCTIONS WITHIN INSURANCE ORGANISATIONS 4 Other functions CHAPTER The Appointed Actuary is expected to ensure that the premium rate for a new product is suitable and in accordance with sound insurance principles and complying with good practices. In using an actuarial basis for determination of premium rates, they must keep the commission payable in the product within the maximum allowable rate of commissions. Bank Negara may also instruct an insurer to appoint an independent Actuary to assess the product’s policy terms and premium rates in a report to be submitted to Bank Negara. The cost of such appointment shall be borne by the insurer. In view of the numerous checks and balances and the hefty penalties that can be imposed within the regulatory and legal framework, the role of actuaries in the insurance industry is highly important. Any misconduct on the part of the actuary can cause financial mismanagement in an insurer and, possibly, poorly-developed products sold to the public. 4.8 Other Functions In a typical insurance company, there are many departments other than the key ones mentioned earlier. These include agency sales, agency training, agency administration, bancassurance, direct marketing, call centres, customer service centres and branch operations. Following are the other key departments that critically support the running of the company. 4.8.1 Information Technology (IT) The Information Technology (IT) department is usually a part of the MIS division. This department provides the technical support to the MIS team in the form of procuring, maintaining and upgrading both the software and hardware involved in MIS. The IT team consists of system analysts and programmers. The system analyst’s role is to analyse, design and implement the information systems. They also evaluate the suitability of information systems in terms of their intended results and liaise with end users, software vendors and programmers in order to achieve these outcomes. They work on cost analysis, design considerations and implementation timelines. Although they may be familiar with a range of programming languages, operating systems and platforms for computer hardware, they are not normally hands-on in the actual hardware or software development. The programmer’s role is to design computer programmes to assist the MIS in generating various reports or information extraction needed by the end users from other departments. Sometimes, due to the high workload, such programming may be outsourced to third party providers. 4.8.2 Internal Audit The Institute of Internal Auditors (IIA) defines Internal Auditing as: “An independent, objective assurance and consulting activity designed to add value and improve an organisation’s operations. The internal audit activity helps an organisation accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes.” 137  FUNCTIONS WITHIN INSURANCE ORGANISATIONS 4 CHAPTER Other functions As a part of the insurance organisation, the Internal Audit Department provides the Board of Directors and the senior management with information, appraisals, recommendations and counsel regarding the company activities and operations after examining them. In conducting the examination, the department implements an approved audit plan and performs the following tasks in accordance with its overall strategy: Reaffirm the existence of assets and recommend proper safeguards for their protection. Assess the sufficiency of the system of internal controls and recommend improvements in such controls. Evaluate compliance with policies, procedures and sound business practices within the legal and regulatory framework. Review operations or campaigns to ascertain whether results are consistent with established objectives and whether such activities are being carried out as planned. Initiate investigation in reported occurrences of fraud, embezzlement, theft, waste or misbehaviour. As an internal auditor, staying and being independent is essential to the effectiveness of the internal audit function. In carrying out the duties and responsibilities objectively without fear and favour, the Head of Internal Audit issues reports to the CEO and also meets with the Audit Committee of the Board of Directors periodically, to report on the plans for audit activity and its results or any other information required. The Head of Internal Audit has direct access to the CEO and the Board, should matters of immediate significance arise which demand such attention. 4.8.3 Strategic Planning In many large insurance companies, there is a department or section handling the company’s strategic planning. Sometimes, the department is called “Management Support” or simply the “Strategic Planning Department”. The role of this team is to oversee the entire process, from drafting to the progressive execution of the strategic plan, in accordance with the guidance from the Board of Directors and the CEO. Their role includes: Designing the detailed strategic plan after receiving guidance from the Board or CEO. Liaising with Regional Offices, if any, to ensure alignment of strategies. Presenting the entire plan to the Board for approval. Once finalised, to cascade the plan down to senior management, middle management and support staff. Monitoring the progress of the implementation of the plan. Receiving feedback and executing modifications and enhancements. 138