Chapter 1: Regulatory and Legal Environment of Underwriting - Asian Institute of Insurance PDF

Chapter 1 The Regulatory and Legal Environment of Underwriting Subject : Insurance Underwriting 1.1 Statutory and Regulatory Framework of The Underwriting function Insurance industry is classified under Banking & financial institution and involves the interest of the public directly and indirec...

Chapter 1 The Regulatory and Legal Environment of Underwriting Subject : Insurance Underwriting 1.1 Statutory and Regulatory Framework of The Underwriting function Insurance industry is classified under Banking & financial institution and involves the interest of the public directly and indirectly, therefore subject to greater degree of regulatory controls. An effective and efficient insurance market will support economic growth of the country, makes the government to be keen to in it’s development. Involvement: 1) Legislation – laws i.e. licensing, capital requirements, mandatory ins 2) Regulation – framework i.e. requirements, guidance 3) Direct participation – involvement i.e SOSCO, WC & EIS 1.1 Statutory and Regulatory Framework of The Underwriting function Why regulatory? Govt must look to create a situation whereby: 1) Customer can buy appropriate product at affordable prices 2) Customers are protected from malpractice & mismanagement 3) Confidence that insurance will pay claims 4) Insurers are allowed to generate return on capital investment – worthwhile 5) Participation in the market can continue 6) The market is seen to operate in an environment of openness, confidence & trust. 1.1 Statutory and Regulatory Framework of The Underwriting function Bank Negara Malaysia (BNM) – Central bank Key objectives: 1) Fostering fair & professional conduct 2) Striving to protect the rights & interest of consumers 3) Keeping close watch of solvency & market conduct to enhance professional standards and consumer confidence 4) Promoting monetary & financial stability conducive to sustainable growth of economy. 1.1 Statutory and Regulatory Framework of The Underwriting function FSA – Financial Services Act 2013 – Conventional Empowers BNM to specify standards relating to: Capital adequacy Liquidity Corporate governance Risk management Maintenance of reserve fund Insurance fund Prevents FI from being used for illegal activities 1.1 Statutory and Regulatory Framework of The Underwriting function IFSA – Islamic Financial Services Act 2013 – Takaful (Strengthen Syariah governance - end-to-end compliance policies, procedures & ops) Empowers BNM to issue standards on Syariah requirements and other specific provisions on Syariah compliance to ensure end-to-end compliance. 1.1 Statutory and Regulatory Framework of The Underwriting function Ancillary legislation A.Contracts Act 1950 Online Contracts Data message Writing requirement Time & place of dispatch and receipt of data message 1.1 Statutory and Regulatory Framework of The Underwriting function Ancillary legislation B.Companies Act 1965 Registration of a company Preparation & submission of annual account and accompanying statements Method of valuing assets and provision of depreciations Method of valuing liabilities 1.1 Statutory and Regulatory Framework of The Underwriting function Ancillary legislation B.Companies Act 1965 Commonly adopted principles include: Should respect shareholders rights & help shareholders to exercise them Should recognise that they may have obligations to other stakeholders Board needs skills and understanding to review and challenge management performance Should develop a code of conduct for their directors and manager that promote ethical & responsible decision making Should make public role & responsibility of the Board and management to provide shareholders with level of accountability Should have procedures to independently verify the financial reporting 1.1 Statutory and Regulatory Framework of The Underwriting function Ancillary legislation C.Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001 (AMLATFA) Provides for offences of money laundering and measures to be taken for prevention of money laundering and terrorism financing offences for forfeiture of terrorist’s related properties. FI to perform obligations to promptly report to the competent authority (Compliance) of any transaction: Exceeding such amount as set by the authority Where the identity of personal involved, the transaction itself or circumstance. 1.1 Statutory and Regulatory Framework of The Underwriting function What is Money Laundering? Definition of Money Laundering: “is a process of converting cash/property which is derived from criminal activities to give it the appearance of having been obtained from legitimate source”. (Vijayaraj R. Kannian, Advocate & Solicitor) Is a process by which the illicit source of asset obtained or generated by criminal activity is concealed to obscure the link between the funds and the original criminal activity. Requiring an underlying, primary, profit-making crime (i.e. corruption, drug trafficking, fraud) along with intend to conceal the proceeds of the crime or the further the crime enterprise. 1.1 Statutory and Regulatory Framework of The Underwriting function Money Laundering activity involves: 1) Placement Physical deposit of proceeds derived from illegal/criminal activities. 2) Layering Separating the illicit proceeds from their source through transactions that disguise the audit trail and provide anonymity. 3) Integration Integrating the laundered proceeds into the economy as normal funds. 1.1 Statutory and Regulatory Framework of The Underwriting function Ancillary legislation D.Competition Act 2010 Legal framework to curtail the anti-competition practice in Malaysia and applies to any commercial activity in and outside Malaysia. Transaction outside Malaysia but impacting market competition in Malaysia. Main areas of regulations: 1) Prohibition of anti-competition agreements Agreement between parties in the same level with intention to price- fixing, sharing market or sources etc. 2) Prohibition of the abuse of a dominant market position Abuse their dominant position to in any market for goods and services. 1.1 Statutory and Regulatory Framework of The Underwriting function Ancillary legislation E.Personal Data Protection Act 2010 To protect individual personal data i.e. NRIC no., name, address, email address etc. Data Protection principles: 1) The general Principles 2) Notice of Choice 3)Disclosure 4)Security 5)Retention 6) Data Integrity 7) Acess 1.1 Statutory and Regulatory Framework of The Underwriting function Trade or Market associations in the Insurance Industry A. Malaysian Insurance Institute (MII) B. Persatuan Insurance Am (PIAM) C. Association of Malaysian Loss Adjusters (AMLA) D. Labuan International Insurance Association (LIIA) E. Financial mediation Bureau (FMB) / Ombudsman for the Financial Services (OFS) F. Malaysian Insurance and Takaful Insurance Brokers Association (MITBA) 1.2 The relationship Between Underwriting, Capital & Solvency Requirements Long term investment for rainy days i.e. pay unexpected large Capital claims Shareholders Working Capitals Operating Expenses Surplus & Acquisition Dividen 1.2 The relationship Between Underwriting, Capital & Solvency Requirements Cash control in important – due to unpredictability of claim occurring All insurers – required to have actively manage their risk to ensure they have sufficient assets and cash available. Need to estimate their liabilities and future income as accurately as possible – historical report. It is difficult to predict the timing and quantum of loss and future income. Need cushion of asset over and above those anticipated liabilities. 1.2 The relationship Between Underwriting, Capital & Solvency Requirements Management of Capital Ways in which insurers manage and protect its capital is recognized as vital to its long-term success and profitability and is a core indicator of its strength and reliability. Insurers must have clear understanding of how much: capital it has at any time, needs to support its targeted volume and lines of business it needs to meet both current and future regulatory capital requirement what it plans to do in the event having: o Too much capital for its planning business volume o Too little capital for its plan – underwriter’s ability will be affected – limitation in authority to accept business, RI & CO may needed to write relatively low level risk. - difficulties in maintaining creditability with intermediaries 1.2 The relationship Between Underwriting, Capital & Solvency Requirements Capital adequacy Requirements – Insurance Act 1966 PART III - Minimum Paid Up Capital Insurer & Takaful operators (TO) – RM100 Million Insurance broker – RM 500k Loss Adjuster – RM 150k PART VI - Valuation of Assets Basis for various category of assets i.e. moveable properties, securities, bond deposit etc PART VII – Structured Method Basis of more uniformed, structured and detailed method of providing for insurance claims to be adopted. BNM to review IBNR made by insurers. 1.2 The relationship Between Underwriting, Capital & Solvency Requirements Capital adequacy Requirements – Insurance Act 1966 PART IX – Margin of Solvency Sets out the solvency margin requirement and the manner in which the solvency margin has to be maintained in respect of its business. Surplus of assets over liabilities = cushion against unexpected fluctuations in claims; underwriting & investment losses and under-reserving for claims against the insurer. UW ensure each risk accepted will make profit: Higher risk = higher premium Higher risk = greater capital requirement to support the risk 1.2 The relationship Between Underwriting, Capital & Solvency Requirements Risk Based Capital Approach (RBC) Specifies elements that insurers must put in place for active management of capital adequacy. Basic requirements: 1) Individual target capital level (TCL) that reflects its own risk profile, 2) A capital management plan that takes into account its strategic business direction and the changing business environment, 3) Processes that monitor and ensure the maintenance at all times, of an appropriate level of capital which is commensurate with its risk profile. 1.2 The relationship Between Underwriting, Capital & Solvency Requirements Risk Based Capital Approach (RBC) vs Principle Based Regulation (PBR) RBC PBR Concentrate resources on Focus more on general specific firms, industries or principles rather than to market sector etc impose detailed rules. Identifies key risk oosed by Less bureaucracy and cost individual firms, markets etc Simplify the subject of Recognise the regulation, leading to lower responsibilities of consumer premium and improved & Senior management customer service. The undesirability of seeking to remove all risk of failure from financial system  1.2 The relationship Between Underwriting, Capital & Solvency Requirements Introducing Basic writing of International Business Trade and protective barriers exist overseas to discourage the establishment of an insurance company from another country. Direct entry requires – large capital, foreign majority ownership. Expl: all properties owned in Malaysia must be insured in Malaysia. Same also observed in other countries. Main driving factors for regional growth: 1) Insurers & Intermediaries follow their clients who have expanded overseas and they seek insurance coverage for their multinational operations. 2) Wish to obtain greater geographical spread of risks. 3) See foreign markets as room for expansion, a place to grow with less competition and more relaxed regulatory environment. 4) Desire to take advantage of different underwriting/economic cycles in different parts of the world. 5) Potential of profit. 1.2 The relationship Between Underwriting, Capital & Solvency Requirements Basic Underwriting Business Factors For Writing International Business; 1) Dealing in foreign currencies. 2) Foreign legal systems may lead to different interpretation of policy coverage and claims. 3) Exposure to catastrophic weather conditions not often experienced locally. 4) Political and cultural barriers, especially communication skills. 5) Lack of underwriting experience in the overseas market. 6) Lack of technical and competent employees. 1.2 The relationship Between Underwriting, Capital & Solvency Requirements Method by which a domestic insurer can expand internationally: 1) Easiest - To join a group of insurers that operates overseas 2) Purchase and interest – difficult as most country have protective legislation on majority owned companies. 3) Joint ventures between domestic and foreign insurers – helps to avoid the prejudice against foreign insurers in some countries. 4) Reinsurance offers a method for operation – direct operation is prohibited by local law. 5) Appointing foreign agents or representatives. 1.3 Implication of Granting Delegated Authority A. General Agents Acts on behalf of the insurer and are empowered to: 1) Receive proposal forms from the Insured, 2) Negotiate terms of the policy, 3) Issue cover notes, 4) Collect premiums, 5) Receive notice of loss from the Insured on behalf of the insurer. Must have 1) Qualify pre-Contract exam; 2) 20 hours of CPD – GI ; 30 hours for life agents 3) Premium production – RM20k 4) 2 principles – GI ; 1 for life 5) Fixed commission/remuneration based on line of business. 1.3 Implication of Granting Delegated Authority B. Insurance brokers Acts on behalf of the insured: 1) Expertise, 2) A professional mode of conduct, 3) Registered insurance broker, 4) Size of the broking firm, 5) Receive notice of loss from the Insured on behalf of the insurer 1.3 Implication of Granting Delegated Authority C. Financial Planners Provides financial advisory business including: 1) Analysing the financial planning needs of a person relating to insurance products, 2) Recommending the appropriate insurance products, 3) Sourcing insurance products from licensed insurer, 4) Arranging contracts in respect of insurance products, 5) Other financial services as prescribed by BNM 1.3 Implication of Granting Delegated Authority D. Bancassurance Other factors: 1) Relationship. 2) Proven multi-channel capability and customer segmentation. 3) Increasing focus onengaging with more defined and developed customer segments. 4) Marketing and branding 5) Focussed support, Ops & IT capabilities and integration 6) Robust governance 1.4 Initiatives to Gain Greater Contract Certainty Definition of Contract Certainty: “Full agreement being reached on all terms between the policyholder and insurer before the inception of cover”. 2 pro-longed approach is practiced to achieve greater contract certainty: 1) Statutory regulations According to Civil Law: Insurers remedy will depend on types of misrepresentation: a) Deliberate misrepresentation Insurers may void the contract and refuse all claims – “ab initio” 1.4 Initiatives to Gain Greater Contract Certainty b) Careless or innocent misrepresentation Insurer’s remedy will be based on what would have been done if not for the misrepresentation; insurer may refuse the contract and refund the premium or accept the contract on different terms. 2) Self-regulation within the industry Introduce by the industry with the two-fold objectives of a) Instilling discipline and promoting healthy competition in the industry b) Providing some element of protection to policyholders. Main associations set up to achieve these objectives are 1.4 Initiatives to Gain Greater Contract Certainty Main associations set up to achieve these objectives are: a) PIAM b) MITBA c) AMLA These associations has power to enforce rules and regulations formulated to ensure professional conduct of their respective business. PIAM has embarked in consumer education campaigns to promote better awareness and understanding of insurance practice, the availability on insurance products and coverage and how to handle claims. Q&A End of Chapter 1 Photo used are licensed under Creative Commons. Copyright © of Asian Institute of Insurance 2024. All rights reserved. This publication contains material protected under copyright. Any unauthorized reprint or use of this material is prohibited. 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