Structure of the Insurance Industry Textbook PDF

1 Structure of the Insurance Industry Learning Outcomes................................................................................................................... 2 Why This Topic is Important....................................................................................

1 Structure of the Insurance Industry Learning Outcomes................................................................................................................... 2 Why This Topic is Important...................................................................................................... 2 Introduction............................................................................................................................... 2 1.1 Insurance Market Overview......................................................................................... 3 1.1.1 Different Types of Insurance Structures.............................................................................................. 3 1.1.2 Insurance Intermediaries and Alternative Distribution Channels...........................................13 1.1.3 Importance of the Customer................................................................................................................17 1.1.4 Importance of other Stakeholders......................................................................................................17 1.1.5 Importance of Business Ethics and Integrity in Insurance Market.........................................21 1.1.6 The London Market..................................................................................................................................29 1.1.7 The Insurance and Takaful Market in Malaysia...............................................................................31 1.2 Structural Trends and Factors.................................................................................... 33 1.2.1 Company Growth and Mergers and Acquisitions........................................................................34 1.2.2 Main Trends and Drivers.........................................................................................................................35 Summary.................................................................................................................................. 37 Bibliography............................................................................................................................ 39 Review Questions.................................................................................................................... 40 1  Structure Of The Insurance Industry 1 CHAPTER Learning outcomes Learning Outcomes After completing this chapter, you should be able to: Describe the various business entities and their respective roles in the insurance industry in Malaysia. Identify the various distribution channels and understand the importance of safeguarding the confidence of customers and other stakeholders. Understand business ethics and the moral principles and policies governing the way individuals and corporates conduct their business. Be aware of the changes in the UK and global insurance market, technology advancement, product, and contract wording development. Understand market trends and the impact of legal and regulatory requirements in shaping the insurance industry landscape in Malaysia, including mergers and acquisitions. Why This Topic is Important This topic is important to build better understanding of organisational structures and operations of insurance companies and enterprises. Introduction The insurance sector in Malaysia has been an integral part of the financial services industry regulated by The Central Bank of Malaysia, also called Bank Negara Malaysia (BNM). Historically, insurance started in the form of general insurance covering business cargoes and premises dating way back to the 18th century, during the British colonial days. Such businesses were handled by British field underwriters acting on behalf of insurance companies based in the United Kingdom. The early insurers were British, and they introduced practices and protection plans which were new to this region. Subsequently, in the early 20th century, life insurance was introduced to Malaysia by foreign life insurers, who opened branch offices in Malaysia. After declaration of independence in 1957, new licenses were issued to domestic players, both in the life and general insurance sectors, to boost local participation in the industry. With the implementation of the Insurance Act 1963 which was subsequently replaced by the Insurance Act 19961, progressive changes were made to the insurance regulatory framework that governs insurance business operations in Malaysia. A new category of insurance companies adhering to Islamic (Syariah) principles merged with the implementation of the Takaful Act 1984.2 1 Insurance Act 1996, Laws of Malaysia, Act 553, Gazetted on 26 Sep 1996. 2 Takaful Act 1984, Laws of Malaysia, Act 312, amended up to 1 October 2008. 2  Structure Of The Insurance Industry 1 Insurance market overview CHAPTER “Takaful Malaysia” was incorporated on 29 November 1984 as the first Takaful Operator in Malaysia. New legislation was introduced under the Financial Services Act 2013 (FSA) replacing the Insurance Act 1996 and the Islamic Financial Services Act 2013 (IFSA) replacing the Takaful Act 1984. For the first time, the regulation and supervision of financial institutions in Malaysia was housed under a single legislative framework to provide greater clarity and transparency in administration. The new laws which came into force on 30th June 2013, governs insurers and takaful operators in Malaysia. 1.1 Insurance Market Overview In the early days, the insurance market in Malaysia was dominated by foreign players, who set up branch offices in the region. For example, “American International Assurance Company Limited” (AIA), whose Head office was based in Hong Kong, had opened a branch in Malaysia in 1948. However, essential decisions on operations management were made by its Head office. In order to improve financial discipline and corporate governance, foreign insurance companies were granted new licences by Bank Negara Malaysia (BNM), in relation to the domestication of their foreign branches in Malaysia in compliance with the requirement of the Insurance Act 1996. For example, the AIA branch was locally incorporated in 2008 and renamed “AIA Berhad”. From the perspective of shareholding or ownership, insurance companies in Malaysia except for The Malaysian Cooperative Insurance Society Limited (MCIS) were proprietary in structure. MCIS originally a cooperative or mutual organisation underwent transformation of its legal structure from mutual ownership into a proprietary structure in 1998. The licenses issued by Bank Negara Malaysia allowed the business to deal with development of insurance products and marketing them with its own distribution channels in addition to outsourced channels. In the general insurance sector, distribution is done using its own single- tier tied-agencies, or outsourced to independent brokers and banks. In the life insurance sector, the distributors are wider. Life insurance products are sold not only within the insurers’ own tied agency system but also the banks, Independent Financial Advisors (IFAs), Corporate Agencies and, to a lesser extent, the brokers. 1.1.1 Different Types of Insurance Structures The insurance market consists of the Life and Non-Life insurance sectors. Life Insurance is a contract between an insurance policyholder and an insurer where the insurer promises to pay a sum of money to the designated beneficiary upon the death of an insured person or after a set period. Non-Life (also known as General Insurance) provides coverage for losses that are incurred from a specific financial event; for example, property, motor, accident, and health insurance. In conventional insurance, the insurer bears the risk associated with the insured. In contrast, Takaful is based on the theory of shared risk. “Family Takaful” is the Islamic alternative to Life insurance, whereas “General Takaful” is the Islamic alternative to conventional General Insurance. 3  Structure Of The Insurance Industry 1 CHAPTER Insurance market overview Insurance companies are classified in accordance with their legal form or structure in terms of the shareholding or ownership; for example, there are proprietary, mutual, and captive companies. A. Proprietary Companies A company doing business in Malaysia can either be a private or a public company incorporated pursuant to the Companies Act 2016. The name of the private company should end in ‘Sendirian Berhad’ or abbreviated as ‘Sdn Bhd’ meaning private limited, whereas the name of a public company should end with ‘Berhad’ meaning limited. Both categories are deemed to be proprietary companies limited by shares. A proprietary company is a limited liability company with a subscribed or guaranteed capital. The ownership lies in the hands of shareholders who contributed to the original and subsequent capital in terms of authorised and issued share capital. Any profits made by the operations of a proprietary company belong to its shareholders who are the proprietors of the company. The majority of insurance companies in Malaysia come under the category of public limited company. Public limited companies enjoy an increased ability to raise additional capital to maintain regulatory capital requirements to meet solvency margins. An obvious advantage is that shareholders’ liability for the losses of the company is limited to their share contribution only. B. Mutual Insurers Globally, mutuals refer to policyholders as members, which implies both customer and owner. A mutual insurance company is therefore owned by its policyholders, or members. Unlike proprietary companies, where the shareholders receive their share of the profit by way of dividends, in the mutual company, the insurance policyholder may enjoy benefits such as lower premiums or higher life insurance bonuses, as profits are returned to the policyholders or owners. A mutual insurance company owned by its policyholders, relies on its policy premiums as its main source of income. This means that if it is unable to raise enough funds it could be put out of business as it does not have the option of issuing shares of stock to generate income. Conversion from mutual to proprietary is necessary to heed regulatory capital requirements to ensure that risk exposures of an insurance company are backed by an adequate amount of high-quality capital. Example Mutual to Proprietary Company The Malaysian Cooperative Insurance Society (MCIS), established in 1954, was registered under the Co-operative Societies Act 1993 as a cooperative or mutual organisation to transact life and general insurance business in Malaysia. When the new Insurance Act 1996 came into force in 1997, it required private insurance companies including the MCIS (which was the sole cooperative insurer in Malaysia) to be incorporated as a public limited company under the Companies Act 1965. 4  Structure Of The Insurance Industry 1 Insurance market overview CHAPTER This was in view of the difficulty of a cooperative or mutual organisation to raise additional capital (from policyholders or members of a Cooperative Society) for purposes of business expansion or to comply with higher capital adequacy requirements imposed by regulators. The process of conversion of the business from mutual to proprietary is known as demutualisation. C. Captive Insurers A captive insurance company is a wholly owned subsidiary insurer set up by large national or multinational companies, to underwrite certain of its own or its group’s insurable risks. Its primary purpose is to insure the risks of its owners. In Malaysia, such captive insurers are normally in the general insurance sector and mainly operate from offshore locations. Labuan is home to several important captive insurers; for example, “Energas” is a pure captive of Petronas, Malaysia’s national oil and gas company. The company underwrites mainly on- and offshore engineering, as well as marine and property risks for its parent and affiliated companies. Advantages of Captive Insurance companies: Tax efficient method of transacting risk transfer. Avoiding direct insurers’ overheads and acquisition costs. Obtaining a lower overall risk premium level by purchasing reinsurance at a lower cost than that required by the direct insurer. Exerting much greater control over coverage for specific and unique risks, which are difficult to insure, and decision-making process in respect of underwriting, loss control, operations, and management of such risks. Example The Labuan Domicile for Captive Insurance In setting up the captive, AirAsia announced the rationale and motive of doing so, which reflects the common benefits and purposes of captive insurance: “The Labuan captive unit will directly insure AirAsia’s international aviation, maritime and liability risks. AirAsia will pay its insurance premiums to the captive unit instead of paying through local insurers. With the setup of its own captive business, AirAsia said it will have a choice of which risks and how much risk the company intends to retain within the group, thus giving greater flexibility in managing its risks. The Labuan captive business will have inherent tax and investment advantages, and it offers AirAsia an opportunity to set up a profit centre within the group.” – (https://conventuslaw.com/report/malaysia-labuan-a-leading-domicile-for-captive- insurance/ 4 April 2023) 5  Structure Of The Insurance Industry 1 CHAPTER Insurance market overview D. Takaful Takaful (in Arabic means “to protect” or “to guarantee”) is the concept of Islamic insurance based on the principle of mutual assistance. Participants own the Takaful funds which are managed by the operator. Participants give up individual rights to gain collective rights over the contribution and benefits. A company is known as an operator, which acts as a trustee, manager, and entrepreneur in providing insurance based on a system of operation that is in accordance with Islamic law or Shariah. Takaful practices are free from the elements of “riba” (interest) and other un-Islamic elements but revolve around the elements of Mudarabah (i.e., profit and loss sharing), Tabarru’ (donation), and other Shariah justified elements. The business structure is based on either the Wakalah or Mudarabah model based on the Tabarru’ or brotherhood concept which is like the pooling of risks. The Islamic Financial Services Act 2013 (IFSA)3, which repealed the Takaful Act 1984, came into effect on 30 June 2013 to provide for the regulation and supervision of Islamic financial institutions, payment systems and other relevant entities, and the oversight of the Islamic money market and Islamic foreign exchange market to promote financial stability and compliance with Shariah and for related, consequential, or incidental matters. Section 16(1) of the IFSA, which states ‘A licensed takaful operator, other than a licensed professional Retakaful operator, shall not carry on both family takaful business and general takaful business’ required composite takaful operators like “Takaful Malaysia” to separate its family takaful and general takaful business to establish separate public limited companies within 5 years from the date of the new law coming into force. All Takaful Operators in Malaysia are required to be registered members of the Malaysian Takaful Association (MTA)4 before they can commence operations. MTA was established with the primary purpose of implementing self-regulation within the Malaysian Takaful industry. As of August 2023 MTA represents 18 member companies, of which 11 are Family Takaful, 4 General Takaful and 3 Retakaful Operators. Family Takaful Operators 1. AIA PUBLIC Takaful Bhd 2. AmMetLife Takaful Berhad 3. Sun Life Malaysia Takaful Bhd 4. FWD Takaful Berhad 5. Etiqa Family Takaful Berhad 6. Great Eastern Takaful Berhad 7. Hong Leong MSIG Takaful Berhad 3 Islamic Financial Services Act 2013, Laws of Malaysia, Act 759, gazetted 22 March 2013. 4 Malaysian Takaful Association – http://www.malaysiantakaful.com.my/Members-Listing.aspx 6  Structure Of The Insurance Industry 1 Insurance market overview CHAPTER 8. Prudential BSN Takaful Berhad 9. Syarikat Takaful Malaysia Keluarga Berhad 10. Takaful Ikhlas Family Berhad 11. Zurich Takaful Malaysia Berhad General Takaful Operators 1. Etiqa General Takaful Berhad 2. Syarikat Takaful Malaysia Am Berhad 3. Takaful Ikhlas General Berhad 4. Zurich General Takaful Malaysia Berhad Retakaful Operators 1. Malaysian Re Retakaful 2. Munich Re Retakaful 3. Swiss Re Retakaful E. Reinsurers Reinsurance is a mechanism used by Direct or Captive insurance companies, to reduce their risk exposure on large and/or specialised risks by transferring part of the insured risks to a reinsurer. A reinsurer can be a direct insurer or a professional reinsurer. A professional reinsurer is one who accepts only reinsurance business and does not transact direct business with the insuring public. Professional reinsurers specialise in general, life and a combination of risk management and other insurance support services. F. Life and General Insurance Business The Financial Services Act 2013 (FSA)5 which repealed the Insurance Act 1996 came into force on 30th June 2013. FSA is an Act to provide for the regulation and supervision of financial institutions, payment systems and other relevant entities, and the oversight of the money market and foreign exchange market to promote financial stability and for related, consequential, or incidental matters in Malaysia. An insurance company is also described as a financial service provider (FSP) or a licensed person under the Act. Section 16(1) of the FSA states that ‘A licensed insurer other than a licensed professional Reinsurer, shall not carry on both life business and general business.’ Therefore, existing composite insurance companies (i.e., writing both life and general insurance business) are required to comply with the regulation, within 5 years from the date of implementation of the FSA. They are required to set up separate ‘public limited companies’, with a minimum paid-up capital of RM100 million for each sector of the life and general insurance business. The section of the Act is in place to ensure insurance companies can manage their risks more effectively and policyholders are better protected. 5 Financial Services Act 2013, Laws of Malaysia, Act 758, gazetted 23 March 2013. 7  Structure Of The Insurance Industry 1 CHAPTER Insurance market overview Life insurance companies are financial institutions that provide insurance policies to individuals and groups to help them manage the risk of financial loss due to death, disability, or other life events. Life insurance also caters for corporate customers by providing Group and Business Life insurance. Group Life insurance is a single contract that provides coverage to a group of people, usually employees of the same organisation or company, whereas Business Life insurance is a policy that a company purchases for its employees, partners, or stakeholders to provide financial protection for the business in case of death or critical illness to minimise disruption and continue operations. Life products are usually long-term in nature, based on historical mortality and morbidity rates. The sales and marketing of life products are usually more aggressive compared to general products, as individual persons need to be convinced on the need for protection, hence the development of various distribution channels including the traditional multi-tier agency model to enable life insurance companies to have a wider outreach. General insurance companies provide non-life insurance policies to individuals and businesses. These policies cover a wide range of risks, such as property damage, liability, and personal injury. General insurers, who have a large portfolio of their business in motor vehicle insurance, are labelled as “motor-based” insurers. General insurance products are short-term in nature, usually one year. Therefore, coverage needs to be renewed on a yearly basis. Newly established insurance companies are managed on a centralised basis, as expertise may be lacking at the regional level. Under such structures, the operations in various countries are run as marketing or distribution arms of the holding company. Some insurers decentralise their operations by giving extended autonomy to run on their own, in terms of routine operations, as they are capable to do so. The various levels of autonomy depend largely on the capability and expertise in existence, as well as the various regulatory requirements stipulated in each country of operation. 1. Organisational Structure Both Life and General insurance companies have similar operational structures. At the top of the hierarchy is the Chief Executive Officer who reports to the Board of Directors and sometimes in a matrix structure, also reports to the Regional Office outside the country, if the insurer is a multi- national organisation. For multinational insurers with a global outreach, the overall structure may vary. Some operate on a centralised basis where many decisions, such as product design or underwriting of new cases, need to be made at the Head office at the insurer’s country of origin. CEO Internal Audit Management Sales & Legal & Human Accounts & Operations Actuarial Information Investment Marketing Compliance Resources Finance Systems n Figure 1-1 Typical organisational chart of an insurance company 8  Structure Of The Insurance Industry 1 Insurance market overview CHAPTER Operations Department Operations Management is the administration of business practices to create the highest level of efficiency possible within an organisation. In an insurance company, it covers underwriting, policy services and claims. Related to policy services is customer management, such as inbound or outbound call centres. Branch operations are likely to come under operations management as well. An application for insurance by a customer goes to the underwriting department, where the risk is assessed by an underwriter whether it be for life or general insurance. Once accepted and premium is charged, the proposal is passed on to policy services for issuance of the policy contract. Any claims occurring during the period of insurance will be handled by the claims department. Actuarial Department The appointment of an Actuary is prescribed under Section 74(1) of the Financial Services Act 2013 which states ‘Every licensed insurer shall appoint an actuary in respect of a life or general business carried on by the licensed insurer’. Regulatory requirements relating to the appointment and cessation of the appointed actuary, including duties and responsibilities of the appointed actuary, is prescribed by Bank Negara Malaysia (BNM) in its policy document (BNM/RH/STD 029-5), effective from 1 January 2015. The policy document applies to (a) insurers licensed under the Financial Services Act 2013 (FSA) and their appointed actuaries; and (b) takaful operators licensed under the Islamic Financial Services Act 2013 (IFSA) and their appointed actuaries. Duties and responsibilities of the appointed actuary:– 1. To certify the valuation of policy liabilities in accordance with generally accepted actuarial principles and valuation methods; 2. The valuation duties must be discharged in accordance with the Risk-Based Capital Framework for insurers and takaful operators and Guidelines on Valuation Basis for Liabilities of Family Takaful and General Takaful Business; 3. To prepare the Financial Condition Report of the current and expected future financial condition including plausible threats; 4. To provide recommendations to the board on the appropriateness of surplus distribution to policyholders as well as any relevant distribution to shareholders; and The deregulation of the pricing of motor and fire insurance products through the gradual disapplication of requirements under the Motor and Fire Tariffs, as per BNM’s policy document (BNM/RH/PD 029-8- effective 1 July 2016), accentuated the role of actuaries in the calculation of risk premiums using mathematical models based on statistical data. In addition, actuaries are responsible for the estimation of potential and future claim liabilities by analysing past claims data and experience to assign estimated loss reserves for outstanding claims as well as for incurred but not reported claims (IBNR). 9  Structure Of The Insurance Industry 1 CHAPTER Insurance market overview Sales & Marketing Department The distribution of insurance products has been mainly dominated by insurance agents. However, with the advent of the internet and digital marketing, distribution channels have evolved from traditional intermediaries, such as agents or brokers, to alternative distribution channels, such as bancassurance, affinity partnerships and direct marketing. Bancassurance, affinity partnerships, and direct marketing are alternative distribution channels that have emerged in the insurance industry. Bancassurance is a distribution channel where insurance is sold to the bank’s customers by their employees. While banks are increasingly customising insurance propositions to individual needs through the targeted use of public and banking data, the insurance product is designed and priced by the insurance company. Other intermediaries include Financial Advisers and Insurance Brokers who are independent professionals providing qualified advice and recommend suitable insurance products for large and specialised risks. The Marketing Department of an insurance company is responsible for strategising, creating, and implementing marketing campaigns that support business development and growth. In addition, the department is responsible for developing, creating, and implementing digital marketing campaigns that support public relations, insurance agents, and reach out to customers who are seeking ways to safeguard against the risks of everyday life. Continued training is essential in every aspect of the business; from the sale and marketing of products, to dealing with insurance intermediaries and customers. The Training Department must ensure that the training is delivered in a way that is relevant and up-to-date. One of the most modern approaches to training in the insurance industry is through eLearning. eLearning offers a variety of benefits, including ease of delivery and speed of update to stay competitive in the insurance industry. Legal & Compliance Department The department ensures compliance with all laws, rules, standards, and regulatory requirements (including any ruling of the Shariah Advisory Council) relevant to the activities of the insurer or takaful operator in all jurisdictions in which the insurer or takaful operator, or any of its branches or subsidiaries, conducts activities. Bank Negara Malaysia (BNM) has the authority to take formal enforcement action, which includes criminal, civil and administrative actions, and ranges from the issuance of warning letters, joint raids with other authorities, to taking legal action in the courts against any entity that fails to comply with regulatory standards and other requirements issued, pursuant to the laws that it administers. Enforcement actions imposed by BNM, in addition to warnings, have an important role in providing credible deterrence against non-compliance, as well as ensuring public confidence in the integrity of the financial system. 10  Structure Of The Insurance Industry 1 Insurance market overview CHAPTER Human Resources Department (HRD) The department handles recruitment and staffing, training and development, compensation and benefits, and employee relations. In addition, they handle staff events, charity projects and community work. Individuals who work in HRD typically have strong people skills and enjoy helping others succeed. Management Information System (MIS) MIS is a computer system consisting of hardware and software that serve as the backbone of an organisation’s operations. An MIS gathers data from multiple online systems, analyses the information, and reports data to aid in management decision-making. Proper handling of customer information is essential in building public trust and confidence, and in mitigating reputational damage to insurers and takaful operators who handle a significant amount of customer information. Regulatory requirements regarding measures and controls in handling customer information, throughout the information lifecycle; covering collection, storage, use, transmission, sharing, disclosure, and disposal of customer information are enforced by Bank Negara Malaysia (BNM) to protect customer information against theft, loss, misuse or unauthorised access, modification, or disclosure by whatever means, including disclosure made in verbal or written form. Finance Department Under the Financial Services Act 2013 (FSA) and Islamic Financial Services Act 2013 (IFSA), insurers and takaful operators are required to prepare financial statements in accordance with the Malaysian Financial Reporting Standards (MFRS). In this regard, the department is responsible for preparing audited statistical returns (i.e., Revenue Account, Income Statement and Balance Sheet) and risk-based capital forms for reporting to Bank Negara Malaysia (BNM) under the Insurance Companies Statistical System. Investment Management Insurance companies generally recognise the importance of separating the responsibility for managing their insurance businesses from that of managing the investments backing their reserves and capital. Due to the scale of investments on an insurance company’s balance sheet and the impact of investment results on its profitability, the management of these investments is a key function. The department is mandated to generate superior risk-adjusted investment returns relative to liabilities for the benefit of shareholders and policyholders, and to generate positive impact to benefit society, the environment, and the communities at large. Internal Audit Department Internal audit should be carried out objectively and is independent from the management of the company and the functions which it audits. Thus, the person responsible for the internal audit 11  Structure Of The Insurance Industry 1 CHAPTER Insurance market overview reports directly to the Audit Committee. A company is required to set up an effective internal audit department, staffed with qualified personnel and equipped with adequate resources to perform its duties. Internal Audit is responsible for balancing three core activities – providing assurance, advising management, and anticipating risks and opportunities– to add value and improve an organisation’s operations. Life and General Insurance Market Life and General insurance sectors in Malaysia consist of both domestic and foreign players. Life insurance companies are members of the Life Insurance Association of Malaysia (LIAM), whose objective is to promote a progressive life insurance industry in Malaysia. At the time of writing in August 2023, LIAM6 had a total of 16 members, of which 14 are life insurance companies and 2 are life reinsurance companies. Life insurance companies 1. Allianz Life Insurance Malaysia Bhd 2. AmMetLife Insurance Bhd 3. American International Assurance (AIA) Bhd 4. Generali Life Insurance Malaysia Berhad 5. Etiqa Life Insurance Bhd 6. Great Eastern Life Assurance (Malaysia) Bhd 7. Hong Leong Assurance Bhd 8. Manulife Insurance Bhd 9. MCIS Insurance Bhd 10. Prudential Assurance Malaysia Bhd 11. Sun Life Malaysia Assurance Berhad 12. Tokio Marine Life Insurance Malaysia Bhd 13. FWD Insurance Berhad 14. Zurich Life Insurance Malaysia Bhd Life Reinsurance Companies 1. Hannover Rueck SE, Malaysian branch 2. Malaysian Life Reinsurance Group Berhad Persatuan Insurans Am Malaysia (PIAM)7 i.e., the General Insurance Association of Malaysia, has 25 member companies comprising 21 direct general insurance and 4 general reinsurance companies operating in Malaysia. 6 Member Companies. (n.d.). Retrieved June 1, 2023 https://www.liam.org.my/life_insurance_companies/ 7 Persatuan Insurans Am Malaysia – MEMBERS. (n.d.). Retrieved June 1, 2023, from http://www.piam.org.my/index.php/ members 12  Structure Of The Insurance Industry 1 Insurance market overview CHAPTER General Insurance Companies 1. AIA Bhd 2. AIG Malaysia Insurance Bhd 3. Allianz General Insurance Company (M) Bhd 4. AmGeneral Insurance Bhd (acquired by Liberty Insurance Bhd in July 2022) 5. Generali Malaysia Insurance Bhd 6. Berjaya Sompo Insurance Bhd 7. Chubb Insurance Malaysia Bhd 8. Etiqa General Insurance Berhad 9. Generali Insurance Malaysia Berhad 10. Great Eastern General Insurance (Malaysia) Berhad 11. Liberty Insurance Berhad (transferred to AmGeneral Insurance Berhad effective 1 April 2023) 12. Lonpac Insurance Bhd 13. MSIG Insurance (M) Bhd 14. Pacific & Orient Insurance Company Bhd 15. Progressive Insurance Bhd 16. QBE Insurance (M) Bhd 17. RHB Insurance Bhd 18. The Pacific Insurance Bhd 19. Tokio Marine Insurans (M) Bhd 20. Tune Insurance Malaysia Berhad 21. Zurich General Insurance Malaysia Bhd General Reinsurance Companies 1. Hannover Rueck SE, Malaysian branch 2. Malaysian Reinsurance Berhad 3. Swiss Re Asia Private Ltd., Malaysia branch 4. The Toa Reinsurance Company, limited Kuala Lumpur branch 1.1.2 Insurance Intermediaries and Alternative Distribution Channels Changes in customer preferences, and the emergence of new intermediaries that leverage on technological innovation, are reshaping the way insurance companies are transacting insurance and takaful businesses. The deregulation of operating cost control limits and the implementation of the Balanced Scorecard (BSC) Framework for agents, financial advisers, and brokers (effective from 1 Jan 2018) will accord insurers greater flexibility to manage operating expenses commensurate with their business strategies and encourage greater innovation and competition. A. Agents Agents represent the insurance company and operate under the terms of an agency agreement with the insurer. Depending on the terms of the agency agreement, an insurance agent may be authorised to solicit insurance business, collect premiums, and issue cover notes on behalf of the insurance company. Agents are expected to provide after-sales service which includes assisting 13  Structure Of The Insurance Industry 1 CHAPTER Insurance market overview customers in claim submissions and responding to any queries or complaints. Agents are required to undergo vigorous training and continued professional development each year to maintain their contracts. An agent is any natural person (including a natural person working under Agency Leader Corporation or Corporate Agency or any other arrangements) who solicits or obtains a proposal on behalf of an Insurer or Takaful Operator (ITO). ITOs must ensure all its appointed agents are registered with the relevant industry association i.e., Life Insurance Association of Malaysia (LIAM),General Insurance Association of Malaysia (PIAM) or Malaysian Takaful Association (MTA) to promote, market, and distribute insurance or takaful products. The entry requirements for the agency force, both in the life and general insurance sectors, are to pass the Pre-contract Examination for Insurance Agents (PCEIA) and Takaful Basic Examination (TBE) for the takaful sector. With regards to selling investment-linked insurance and takaful products, the agent must pass the Certificate Examination in Investment-linked Life Insurance (CEILLI). Presently, there is uniform consensus in the industry that the pre-contract examinations are too simple and theoretical, both in the life and general insurance sectors, and in order to ensure agents are competent, qualified and act professionally in the best interest of their customers, there is a need to raise entry requirements. Effective 1 January 2024, there are additional qualification requirements, for the agency force as follows: 1. For life insurance agents– to pass either Module 2 of the Registered Financial Planner (RFP) offered by the Malaysian Financial Planning Council (MFPC); or Module 2 of the Certified Financial Planner (CFP) offered by the Financial Planning Association of Malaysia (FPAM); or Fellow Certified Life Practitioner (FCLP) offered by the National Association of Malaysian Life Insurance and Family Takaful Advisors (NAMLIFA). 2. For family takaful agents– to pass either Module 2 of the Shariah Registered Financial Planner offered by the MFPC; or Module 2 of Islamic Financial Planner (IFP) offered by the FPAM. Life Insurance and Family Takaful Business adopt a 3-tiered structure for its agency organisation, comprising an agency manager, agency supervisor and ordinary agent. They receive remuneration in the form of basic commission, overriding commission, production and persistency bonus, allowance, and salary. An agent can only represent one life insurer and one takaful operator as principals at any one time. A General insurance or takaful agent can either be an individual or a corporate agency. The commission rates vary with the class of business and range from 10% to 25% maximum. In addition to the normal commission, profit commission or performance bonus is payable, 14  Structure Of The Insurance Industry 1 Insurance market overview CHAPTER based on the underwriting profit or distributable surplus in the agent’s portfolio. A general insurance or takaful agent can represent two general insurances or two takaful operators as principals at any one time. B. Brokers Brokers are independent intermediaries who operate as experts in insurance and can offer various personal and commercial insurance products with a range of insurers. Insurance brokers must be approved by Bank Negara Malaysia (BNM) under the Financial Services Act 2013 and/or the Islamic Financial Services Act 2013 and become members of the Malaysian Insurance and Takaful Brokers Association (MITBA)in order to conduct business in Malaysia. Brokers have a fiduciary duty to act in the best interest of their clients and recommend an appropriate insurer based on price, product features, service, and security, negotiating with the insurer on the client’s behalf. They are paid commission on the premiums by the insurer, also described as brokerage. Brokers act as an advocate on behalf of their client when reporting potential claims and provide guidance through the claims process to ensure claims are settled promptly and fairly. C. Bancassurance/Bancatakaful Bancassurance and Bancatakaful is a business model where banks and insurance/takaful companies collaborate to offer insurance/takaful products to bank customers. It has strategically diversified and expanded the reach of insurance/takaful products to a wider customer base and evolved into a significant distribution channel for insurance and takaful businesses, particularly for life insurance and family takaful products. This in turn has contributed towards the broader objective of reducing the protection gap in Malaysia. Staff of Bancassurance/Bancatakaful partners or appointed third-party service providers involved in the marketing and providing advice on insurance/takaful products must pass the following examinations and obtain the relevant qualifications before they are allowed to sell/market Bancassurance/Bancatakaful products: a) Pre-Contract Examination for Insurance Agents (PCEIA) and the Takaful Basic Examination (TBE) for distribution of insurance and takaful products, respectively, and b) Certificate Examination in Investment-Linked Life insurance (CEILLI) for distribution of investment-linked products. BNM regulatory requirements (which came into force from 1 January 2023) are intended to: (a) Ensure bancassurance/bancatakaful remains as a viable channel that is widely accessible for consumers to purchase insurance and takaful products; (b) Promote sound market conduct practices that safeguard consumers’ interest through needs- based sales, disclosure, and enhanced transparency; and (c) Promote market competitiveness and preserve consumer choice. 15  Structure Of The Insurance Industry 1 CHAPTER Insurance market overview D. Independent Financial Advisers Consumers in Malaysia currently find it difficult to obtain professional independent advice on financial options, including insurance, that will most effectively meet their financial needs. Different forms of representations received from various tied agents and distributors who act for, and are remunerated by financial institutions, tend to make comparisons between alternative solutions difficult for consumers. Independent Financial Advisers (IFAs) provide qualified advice and recommendations on a range of life insurance or family takaful products from any licensed life insurer or takaful operator to help consumers make informed decisions for their financial wellbeing in the long term. The designation of Financial Adviser is assigned to holders of a ‘Financial Adviser Licence’ approved by Bank Negara Malaysia (BNM) to instil public trust and confidence. Licensing criteria set by BNM include: Minimum capital funds (unimpaired by losses) of RM100,000; Applicant must possess a Registered Financial Planner (RFP) qualification as conferred by the Malaysian Financial Planning Council (MFPC) and/or other professional qualifications; Licensee must be a body corporate registered with the Companies Commission of Malaysia (with at least 51% Malaysian owned); and Professional indemnity insurance coverage of at least RM200,000 net of deductibles. As at August 2023, there were 43 approved Financial Advisers and 2 Islamic Financial Advisers in Malaysia. Refer to List of Approved and Registered Intermediaries – Bank Negara Malaysia (bnm.gov.my) for further information. E. Direct Distribution Channel Direct distribution channel refers to the distribution of insurance or takaful products through any or both of the following: (a) the head office and branch premises of the insurer or takaful operator; or (b) an online platform, whether developed as the insurer’s or takaful operator’s proprietary system or outsourced to third party vendors, whereby consumers purchase the product directly from them. Effective 1 July 2009, individuals who purchase general insurance directly from insurers will be eligible to receive premium rebates. The quantum of the rebates will depend on the type of insurance covers purchased. For motor insurance, individuals will receive 5% premium rebate in the first year of implementation and 10% thereafter. For others including businesses, insurance companies have the flexibility of providing the rebates. The direct purchase includes walk-in, through the internet, direct mailing, and the telemarketing channel. In 2019, insurers and takaful operators were required to offer commission-free standalone pure protection products through at least one direct distribution channel. 16  Structure Of The Insurance Industry 1 Insurance market overview CHAPTER Despite the emergence of direct distribution channels, insurance agents remain an important intermediary to provide personalised service for the convenience of policy owners as well as value- added services such as advice on insurance products and aiding in claims handling. However, with improvements in financial literacy and technological advancements, the growth of alternative distribution channels is expected to not only reduce the protection gap and contribute towards greater financial inclusion, but also reduce business acquisition costs. 1.1.3 Importance of the Customer In an increasingly competitive market, it is essential for insurers to develop their customer relationship skills to retain customers. For insurers to improve customer protection and loyalty, and to foster lifetime relationships, insurers need to give their customers access to the right information to empower them to make the right decisions. They should also work on improving their sales effectiveness and harnessing the power of advanced-analytics tools. In addition, insurance customer service representatives must possess certain skills such as effective communication, strong problem- solving abilities, and being detail-oriented. Financial Service Providers (FSPs) must ensure that consumers are not subject to unfair discriminatory practices. In 2019, Bank Negara Malaysia (BNM) issued a Policy Document entitled “Fair Treatment of Financial Consumers” (which came into force on 6 May 2020) to ensure fair and responsible treatment of financial consumers in their purchase and use of financial products and services, and their dealings with FSPs. The main provisions are as follows: 1. Consumer protection: FSPs must ensure that consumers are treated fairly and reasonably throughout the entire customer journey. 2. Product transparency: FSPs must provide clear and concise information about their products and services to enable consumers to make informed decisions. 3. Business conduct: FSPs must conduct their business with integrity, due skill, care, and diligence. 4. Complaints handling and redress: FSPs must have effective complaints handling and redress mechanisms in place to address consumer grievances. 5. Financial education: FSPs must provide financial education to consumers to help them make informed financial decisions. 1.1.4 Importance of other Stakeholders There are various other stakeholders or interested parties associated with an insurer in addition to the policyholder; these include shareholders, employees, intermediaries, regulators, consumers, and third-party service providers. The focus of interest and expectation usually differs for each stakeholder; for example, a fair deal is expected by the customer and a good return on investment is the aim of a shareholder. 17  Structure Of The Insurance Industry 1 CHAPTER Insurance market overview A. Shareholders Shareholder refers to a “person” (i.e., a natural person, any corporation, statutory body, local authority, society, trade union, co-operative society, partnership or any other body, organisation, association, or group of persons, whether corporate or unincorporate) that holds an aggregate interest of 5% or more in the shares of a Financial Service Provider (FSP). Shareholders, through the exercise of voting rights or representation on the board, can influence decisions by which the business and affairs of a company are carried out. It is therefore important that the shareholders are persons of integrity and good reputation, and who maintain a sound financial position in order to minimise risks that could threaten the safety and soundness of an insurer or takaful operator. A shareholder should observe the principles of sound corporate governance, particularly those espoused under Bank Negara Malaysia’s corporate governance framework and corporate governance codes issued by other bodies such as Bursa Malaysia (Stock Exchange of Malaysia) and the Securities Commission. A shareholder must have adequate control of its financial risks and maintain a sound financial position on a continuous basis so that it can serve as a source of financial strength for the company if capital support is required. In 2009, Bank Negara Malaysia (BNM) announced the liberalisation of foreign ownership8 and increase in foreign equity limits. Insurance companies and takaful operators were given greater flexibility to tie-up with foreign partners, where the foreign equity participation was increased to a limit of up to 70%. A limit beyond 70% will be considered on a case-by-case basis for players who can facilitate consolidation and rationalisation of the insurance industry. Existing foreign insurers that participate in the process will be accorded flexibility in meeting the divestment requirement. Example Foreign insurers want review of Malaysia’s ownership rules. (According to insurance news 28 March 2018 at https://www.insurancebusinessmag.com/ ) In April 2017, BNM announced that it would enforce its long-standing regulations regarding foreign ownership of insurance companies. It has instructed foreign-owned insurers operating in Malaysia to divest at least 30% of its holdings to Malaysian entities. Four major insurers – AIA, Great Eastern, Prudential and Tokio Marine – have sought to defer the deadline to comply with the ownership requirements as they were having a hard time finding suitable partners. Several insurers have received exemptions from BNM for taking over troubled domestic firms. 8 Liberalisation of the Financial Sector – Bank Negara Malaysia (bnm.gov.my) 18  Structure Of The Insurance Industry 1 Insurance market overview CHAPTER B. Regulators Bank Negara Malaysia (BNM), also known as the Central Bank of Malaysia, is a statutory body which started operations on 26 January 1959. BNM is governed by the Central Bank of Malaysia Act 2009, and is vested with comprehensive legal powers to regulate and supervise the financial system in Malaysia. The insurance industry was brought under the supervision of BNM in 1988. The close supervision of solvency and market conduct and the strengthened regulatory framework enforced in the 1990s were aimed to enhance the professional standards in the industry and consumer confidence. However, to progress further towards world best practice benchmarks in terms of efficiency, effectiveness, and stability, BNM regulatory and supervisory frameworks must: Respond to emerging issues in a timely manner; Promote a financial system that is resilient to future shocks; Set high standards of professionalism and fair conduct for financial service providers; Safeguard consumers’ interest against unfair or unethical practices, particularly in the case of vulnerable segments; Preserve the integrity and safety of the financial system; Introduce new process improvements to ensure timely and effective enforcement actions; and Continue collaborations with other law enforcement agencies to combat illegal activities. C. Third Party Service Providers With growing competition and the need to gain greater flexibility to manage business changes, outsourcing is increasingly used as a means of improving operational efficiency, reducing costs, and achieving strategic objectives. The ability to leverage expertise within financial groups and harness potential group synergies has led to financial institutions outsourcing a broader range of internal processes and business functions to their affiliates. A “Service Provider” refers to an entity, including an affiliate, providing services to an insurer or takaful operator under an outsourcing arrangement; and “sub-contractor” refers to any entity, including an affiliate, which performs the whole or a part of the outsourced activity for the primary service provider. “Outsourcing Arrangement” refers to an arrangement in which a service provider performs an activity on behalf of an insurer or takaful operator on a continuing basis, where the activity would otherwise be undertaken or performed by the insurer or takaful operator themselves. Increasing digitalisation and advancement in financial technologies have further spurred companies to adapt business models and processes through outsourcing in order to have access to, and reap the benefits of, these technologies. 19  Structure Of The Insurance Industry 1 CHAPTER Insurance market overview Examples of outsourced activities: a) The use of cloud service providers to improve business agility in responding to customer needs and to achieve economies of scale; b) Investment management activities undertaken by a third party for insurers and takaful operators. Examples of arrangements excluded from scope of outsourcing: Where a financial institution acquires services, goods or utilities which are not expected to be performed by the financial institution which entail: a) Independent consultancy service (e.g., legal opinions, tax planning and valuation), b) Leveraging common industry-wide infrastructure driven by regulatory requirements, c) Independent audit assessment, d) Co-insurance, reinsurance, and retrocession, e) Adjusting business, and f) Selling of insurance or takaful products by agent or broker. Advantages of outsourcing Where a business change process is to be set in operation; for example, building an actuarial pricing model for underwriting, the insurer can use external specialists to assist with the task and only incur the costs for the work completed. The business is guaranteed a certain level of service expected in accordance with the outsourcing agreement. The business can budget for a pre-agreed fixed cost for the service. Outsourced companies are typically specialists within their area of expertise and will bring new skills and working methods to the business. Many outsourcing contracts lead to new partnership opportunities between the business and the outsourced company, as it learns new ways of doing business processes. The business may increase its capability to develop new products and its speed to the market. The business has more time to focus on its core business areas. Disadvantages of outsourcing Any form of contract that allows the business to outsource processes will mean that a certain degree of control and direction will be lost. In the event of a service failure or security breach, there will be significant adverse impact on the provision of customer service, business operations, reputation, or compliance with laws and regulatory requirements. Extreme care should be taken with customer’s confidential information and data should be protected equally well at outsourced suppliers as it is within the business; care needs to be exercised when engaging an outsourced service provider located overseas, as data protection law restricts the transfer of personal data overseas in certain circumstances. 20  Structure Of The Insurance Industry 1 Insurance market overview CHAPTER If the business is too dependent on a limited number of suppliers, then it will be open to higher costs where competition may be lacking. If the outsourced company gets into financial problems, the business will be faced with problems of finding an alternative provider, possibly at short notice. Full understanding of customer behaviour and satisfaction can be lost if communication between the business and the outsourced company is inadequate. This is an increasing concern when businesses desire to be close to their customers and create a loyal customer base. Regulatory Requirements on Outsourcing Bank Negara Malaysia’s policy document on outsourcing (BNM/RH/PD 028-93), which came into effect on 23 October 2019 is applicable to insurers and takaful operators (ITOs), including their branch operations in Malaysia. However, the requirements do not apply to an outsourcing arrangement entered by the branches of ITOs located outside Malaysia. 1. Responsibilities of the board and senior management of ITOs include strong oversight and control over outsourcing arrangements, as would have been the case if they were performed in-house. 2. Outsourcing process and effective management of risks require having an in-depth and holistic understanding of the relationship between ITOs and the service provider, and the impact of the outsourcing arrangement to their operations. 3. Outsourcing arrangements where the service provider is located, or performs the outsourced activity, outside Malaysia exposes ITOs to additional risks (e.g., country risk). Hence, they are expected to have appropriate controls and safeguards to manage these additional risks, having regard to social and political conditions, government policies, and legal and regulatory developments. 4. Outsourcing involving cloud services requires effective measures to address risks associated with data accessibility, confidentiality, integrity, sovereignty, recoverability, and regulatory compliance. This is particularly important as cloud service providers often operate a geographically dispersed computing infrastructure with regional or global distribution of data processing and storage. 5. Approval for outsourcing arrangements must be sought in writing from Bank Negara Malaysia before entering a new outsourcing arrangement; or making a significant modification to an existing outsourcing arrangement. 1.1.5 Importance of Business Ethics and Integrity in Insurance Market Similar to any other businesses, the insurance business needs a high level of business ethics and integrity, not only in perception in the marketplace but also in actual best practices. Self-regulation has been an important drive towards the development of codes of ethics and conduct not only among the employees but also the intermediaries. 21  Structure Of The Insurance Industry 1 CHAPTER Insurance market overview For the intermediaries, the life sector has in place outlines of the Code of Ethics and Conduct9 implemented by LIAM. This Code is read by all intermediaries as they pass the licensing exams and apply for their licence from LIAM, and also by all staff of insurance companies. The code has three parts: a) Guidelines on the Code of Conduct b) Code of Ethics and Conduct for Life Insurance Selling c) Statement of Life Insurance Practice For the general insurance sector, agents are required to comply with a set of rules known as the General Insurance Agents Registration Regulations (GIARR) and a code of ethics for general insurance agents. Bank Negara Malaysia has also issued Guidelines on Proper Advice Practices For Life Insurance Business as part of best practices in handling customers. On a broader picture, the regulators have also put in place a few frameworks that focus on different aspects of customer management as follows: Money Laundering and Terrorism Financing (ML/TF) The Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001 (AMLA)10 is the primary statute governing money laundering and terrorism financing activities in Malaysia. The Act was gazetted as law on 5 July 2001 and came into force on 15 January 2002. Money Laundering and Terrorism Financing (ML/TF) are financial crimes with far reaching and deleterious socio-economic effects. Criminal networks, money launderers and terrorist financiers are highly adaptive and quick to exploit any weak links within an increasingly borderless world to obscure detection of such illicit funds. The globalisation of the financial services industry and advancement in technology, including the emergence of new players and innovative products, pose challenges to regulators and law enforcement agencies alike in curbing criminal activities. Criminals commonly use three methods of money laundering processes to hide their illegal proceeds. Stage 1 – Placement Placement is one of the ways where illicit funds are separated from their illegal source and are placed into the financial system. Examples: Placement in Financial Institutions and breaking down a transaction into smaller amounts. 9 Code of Ethics and Conduct (2nd Edition). (1999, February 1). Retrieved January 5, 2015, from http://www.liam.org.my/pdf/ code-english.pdf 10 AMLCFT+PD.pdf (bnm.gov.my) 22  Structure Of The Insurance Industry 1 Insurance market overview CHAPTER Stage 2 – Layering Layering is the second stage of the money laundering process where it involves the process of creating multiple layers of transactions to further distance the illegal funds from their illegal sources. The purpose of layering is to obscure or to make it difficult to trace the origin of the funds. Examples: Multiple transfers, Repeat invoicing, and Re-sale of assets. Stage 3 – Integration Integration is the final stage that completes the money laundering process where laundered proceeds are successfully integrated into the economy as legitimate funds. Examples: Purchasing of high value items, engaging in legal business by providing capital or loans. The Financial Action Task Force (FATF) is the global money laundering and terrorist financing watchdog. It sets international standards that aim to prevent these illegal activities and the harm they cause to society. The FATF Recommendations provide a comprehensive framework of measures to help countries tackle illicit financial flows. These include a robust framework of laws, regulations, and operational measures to ensure national authorities can take effective action to detect and disrupt financial flows that fuel crime and terrorism, and punish those responsible for illegal activity. Bank Negara Malaysia (BNM) supervises most of the Reporting Institutions (RIs) in Malaysia, which carry the bulk of the ML/TF risks. BNM is an effective, well-resourced supervisor. However, supervisory interventions have further to go to ensure RIs deepen their Risk-Based Approach (RBA) to Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT) implementation. RBA is central to the effective implementation of the FATF Recommendations. In view of the evolving risks and the potential development opportunities brought about by the era of digitalisation, some enhancements to the existing AML/CFT reporting obligations have been proposed to ensure areas of ‘higher risk’ are subject to enhanced controls, while areas of low risk are accorded some policy accommodation to ensure that the integrity of the financial system is preserved, just as development objectives are facilitated. The focus on risk is intended to ensure RIs can identify, assess, and understand the ML/TF risks to which they are exposed to and can take the necessary AML/CFT control measures to mitigate them. The AML/CFT reporting obligations imposed on RIs are risk informed, and subject to periodic review in tandem with any material changes to the international standards or the ML/TF risk situation in Malaysia. Reporting requirements imposed under the Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001 (AMLA) applies to life insurance and family takaful business, insurance and takaful broking businesses, and financial advisory businesses in relation to life insurance and family takaful. Insurers and takaful operators, insurance and takaful brokers, and financial advisers are guided by BNM to apply RBA, 23  Structure Of The Insurance Industry 1 CHAPTER Insurance market overview which recognises that the ML/TF risks vary across customers, countries, products and services, transactions, and distribution channels. Customer risk factors: The business relationship is conducted in unusual circumstances (e.g., significant unexplained geographical distance between the reporting institution and the customer); Non-resident customer; Legal persons or arrangements that are personal asset-holding vehicles; Companies that have nominee shareholders or shares in bearer form; Businesses that are cash-intensive; The ownership structure of the company appears unusual or excessively complex given the nature of the company’s business; High net worth individuals; Persons from locations known for their high rates of crime (e.g., drug producing, trafficking, smuggling); Businesses or activities identified by the FATF as having higher risk for ML/TF; Legal arrangements that are complex (e.g., nominee relationships or layering with legal persons); and Persons who match the red flag criteria of the reporting institution. Country or geographic risk factors: Countries identified by credible sources, such as mutual evaluation or published follow-up reports, as having inadequate AML/CFT systems; Countries subject to sanctions, embargos or similar measure issued by, for example, the United Nations; Countries identified by the FATF, other FATF style regional bodies or other international bodies as having higher ML/TF risk; Countries identified by credible sources as having significant levels of corruption or other criminal activities; and Countries or geographic areas identified by credible sources as providing funding or support for terrorist activities, or that have designated terrorist organisations operating within their country. Product, service, transactions or distribution channel risk factors: Anonymous transactions (which may include cash); Non-face-to-face business relationships or transactions; Payment received from multiple persons and/or countries that do not match the person’s nature of business and risk profile; and Payment received from unknown or unrelated third parties. 24  Structure Of The Insurance Industry 1 Insurance market overview CHAPTER Preventive Measures for Reporting Institutions: AML/CFT obligations imposed on RIs are stipulated under Part IV of the AMLA and provided in the AML/CFT Policies. RIs are required by law to undertake preventive measures to prevent their institutions from being used as a conduit for money laundering and terrorism financing activities. The obligations include the requirement to:– 1. Implement AML/CFT risk management that commensurate with the level of money laundering and terrorism financing risks; 2. Conduct customer due diligence (CDD); 3. Keep proper record on the customer and transactions; 4. Implement AML/CFT compliance programme; 5. Report suspicious transaction report (STR); and 6. Report cash threshold report (CTR) for cash transactions exceeding RM50,000 or whichever amount specified. Customer Due Diligence (CDD) In September 2020, Bank Negara Malaysia (BNM) issued guidelines to provide clarification and recommended practices in relation to identification and verification of the Customer Due Diligence (CDD) requirements under the Anti-Money Laundering, Countering Financing of Terrorism and Targeted Financial Sanctions for Financial Institutions (AML/CFT and TFS). A risk-based approach to CDD is the cornerstone of a robust AML/CFT and TFS programme which involves identifying, assessing, and verifying the identity of customers as well as understanding the purpose and nature of business relationships. The mandatory components of CDD entail the following processes: a) Identification of customer, beneficial owner and whenever applicable, person conducting transaction. The objective is to enable reporting institutions to distinguish the individual from any other person they are dealing with and whether the person is acting on behalf of another. b) Verification of the information through reliable and independent documentation, electronic data or any other measures deemed necessary. The objective is to ensure that the information about the individual is accurate and up-to-date. c) Understanding the purpose and nature of business relationship between the reporting institutions and the customer. The objective is to assess whether the business relationship is in line with the reporting institutions’ expectation and to provide the reporting institutions with a meaningful basis for ongoing monitoring. d) Electronic Know Your Customer (e-KYC) includes establishing business relationships and conducting CDD by way of electronic means, including online and mobile channels. 25  Structure Of The Insurance Industry 1 CHAPTER Insurance market overview Suspicious Transaction Report (STR) STR is a report that a Reporting Institution (RI) is required to submit to the Financial Intelligence and Enforcement Department (FIED), Bank Negara Malaysia, whenever the RI suspects or has reasonable grounds to suspect that the transaction (including attempted or proposed), regardless of the amount: 1. appears unusual; 2. has no clear economic purpose; 3. appears illegal; 4. involves proceeds from an unlawful activity or instrumentalities of an offence; or 5. indicates that the customer is involved in money laundering (ML) or terrorism financing (TF). The importance of STRs STRs provide the financial intelligence unit and, subsequently, law enforcement agencies with valuable information/intelligence of potential criminal activities. Section 20 of the Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act (AMLA) overrides any other secrecy obligation or restriction on disclosure imposed by any other laws, for the purpose of complying with the provisions under Part IV Reporting Obligations of the AMLA. Protection for persons reporting the STR and CTR: A person reporting the STR and CTR is protected from any civil, criminal, or disciplinary proceedings if it is performed in good faith as provided under Section 24 of the AMLA. The Compliance Officer must ensure that the STR is submitted within the next working day, from the date the Compliance Officer establishes the suspicion. Red flags that may trigger suspicion: RIs must establish red flags to help them and their employees identify situations which may require STRs to be submitted. These red flags vary depending on the sector and specific business the reporting institution is in. Completed STR forms must be submitted to the Financial Intelligence and Enforcement Department of Bank Negara Malaysia through any of the following channels: 1. E-mail to [email protected] 2. Mail to: Director: Financial Intelligence & Enforcement Department Bank Negara Malaysia Jalan Dato’ Onn 50480 (Kuala Lumpur) (To be opened by addressee only) 3. Financial Intelligence System (FINS) (where applicable) 26  Structure Of The Insurance Industry 1 Insurance market overview CHAPTER Personal Data Protection Act 2010 (PDPA) On 15 November 2013, the Personal Data Protection Act 2010 (PDPA)11 came into force in Malaysia with the objective of protecting the personal data of individuals with respect to commercial transactions. PDPA is one of the recognised cyber legislations in the implementation of the Multimedia Super Corridor. It is the 10th policy goal set out in the Communications and Multimedia Act 1998 (CMA), which is to ensure information security and network reliability and integrity. All individuals and organisations that process personal data in their dealings must comply with the rules set out in the PDPA. The Federal Government and the State are exempted. The PDPA provides the rules concerning good practices in the processing of personal data of living individuals and defines such individuals as data subjects. Pursuant to section 5 of the PDPA, a breach of any of the data protection rules or principles is an offense and is punishable by a fine of up to MYR 300,000, and/or up to two years imprisonment. The seven data protection principles are as follows: 1. General – Personal data shall be adequate, relevant, and not excessive. Processed with consent and for a lawful purpose. 2. Notice and Choice – Inform the purposes for which the personal data is being processed, collected, or disclosed. 3. Disclosure – Disclosure without consent is not permissible. 4. Security – Protect data from loss, misuse, unauthorised access, etc. 5. Retention – Personal data shall not be kept longer than necessary. 6. Data Integrity – Personal data shall be accurate, up-to-date, verifiable. 7. Access – The right to access personal data. Personal data means any information in relation to an identified or identifiable natural person also described as data subject. The PDPA makes a distinction between ‘personal data’ and ‘sensitive personal data.’ Examples of information that can be considered as ‘personal data’ are: A. name and address B. identification card number C. passport number D. health information E. e-mail address F. picture G. images recorded by the closed-circuit television (CCTV) H. information contained in personal files 11 Personal Data Protection Act 2010, Laws of Malaysia, Act 709, gazetted 10 June 2010. 27  Structure Of The Insurance Industry 1 CHAPTER Insurance market overview Sensitive Personal Data is a specific set of “special categories” that must be treated with extra security. These categories are: Racial or ethnic origin; Political opinions; Religious or philosophical beliefs; Trade union membership; Genetic data; and Biometric data (where processed to uniquely identify someone). In addition, sensitive personal data includes data consisting of information as to an individual’s physical or mental health condition. The PDPA does not allow the processing of sensitive personal data except for the purposes specified in the Act and carried out with the explicit consent of the data subject. Data subjects are given the following rights under the PDPA: 1. The right to be told whether their data is processed by an organisation 2. The right to access personal data 3. The right to rectify personal data 4. The right to withdraw consent to process personal data 5. The right to prevent processing likely to cause damage or distress 6. The right to prevent processing for purposes of direct marketing Any individual or relevant person may make a complaint in writing to the Personal Data Protection Commissioner. The Act does not provide for any specific right to claim for damages but has created several new criminal offenses. Among the criminal offenses are the following: 1. Processing of personal data without a certificate of registration 2. Processing of personal data after the revocation of registration 3. Non-compliance with the Personal Data Protection Principles 4. Processing of personal data after consent is withdrawn 5. Processing of sensitive personal data not in accordance with the conditions that have been set 6. Selling or offering to sell personal data 7. Failure to comply with the requirements of the Personal Data Protection Commissioner to comply with the notice on direct marketing. An individual or organisation is required to comply with the rules laid down by the Act only if they are “processing” personal data. The term “processing” under the PDPA refers to doing something towards the data including collecting, recording, holding, storing, organising, modifying, disclosing, and destroying. Reading or accessing the information is also considered as “processing”. 28  Structure Of The Insurance Industry 1 Insurance market overview CHAPTER Examples of activities that can be considered as “processing” include: 1. Collecting data through forms, by phone or via the web 2. Publishing data 3. Selling data 4. Using administrative data 5. Using data for marketing purposes 6. Recording data 7. Disclosing or providing data to other organisations 8. Destroying data A data processor is an individual or organisation that processes personal data on behalf of the data user, and does not process the personal data for his own benefit or purposes. The PDPA does not apply to a data processor, but applies to the data user who can be an individual or organisation that: 1. Processes personal data, or 2. Has control over the processing of personal data, or 3. Allows processing of personal data Pursuant to section 16 of the PDPA, certain classes of data users are required to register with the Department of Personal Data Protection, such as licensed banks, insurers, private health care institutions, licensed tour operators, direct sales businesses, private higher education institutions, and certain utilities and transportation service providers. Data users who fail to do so may be liable for a fine of up to MYR 500,000 and/or a term of imprisonment of up to three years. 1.1.6 The London Market Understanding the insurance industry of a developed nation will be a useful part of this study as normally the trend of developing markets emulates those of the developed ones. One of the oldest insurance markets is in England, where insurance originated historically in the city of London. The London Market consists of insurers, reinsurers, brokers and a gathering of players called the “Lloyd’s of London” in the financial district of London, United Kingdom. The Lloyd’s is not a company but rather an insurance market catering to members located in London’s primary financial district. It is a marketplace where members, who are multiple financial backers or underwriters both individuals and corporations, come together to pool and spread risk. The Lloyd’s is governed by the Lloyd’s Act 1871 and subsequent Acts issued by the Parliament of the United Kingdom. As the oldest continuously active insurance marketplace in the world, Lloyd’s has some unusual structures and practices that differ from all other insurance operations today, including those from Malaysia. Lloyd’s itself does not underwrite insurance business, leaving that to its members. Instead, it operates effectively as a market regulator, providing guidelines and rules under which members operate and also offering centralised administrative services to those members. 29  Structure Of The Insurance Industry 1 CHAPTER Insurance market overview Lloyd’s was founded by Edward Lloyd in the 17th century as the owner of the Edward Lloyd’s Coffee House where the earliest marine policies were underwritten for merchants importing and exporting cargoes around the world. Most of the businesses underwritten at Lloyd’s are predominantly general insurance and reinsurance, although there are some forms of life insurance underwritten, although very small. Therefore, the profit made in Lloyd’s in aggregate can be volatile with some years of good profits and some years of huge losses due to a number of significant natural disasters under the general sector. The market began with marine insurance circa 1688 on Tower Street in the historic City of London. This area was a popular place for sailors, merchants and shipowners where Lloyd provided them reliable shipping news and a place of information exchange. The shipping industry community frequented the place to discuss deals among themselves, including insurance. This is how the marketplace started. The London Market today caters to large insurers and reinsurers both locals and multi-nationals. Being large, they are able to undertake large risks around the world, whether on a direct basis or on reinsurance. Membership at Lloyd’s was not like owning shares in a company. An individual joined for one calendar year only, known as the “Lloyd’s annual venture”. At the end of the year, the ongoing trading entity was effectively disbanded. However, usually the group re-formed for the next calendar year with more or less the same membership. In this way, a group could have a continuous existence going back for many years, but each year was accounted for separately. There would have been many separate incarnations of the group, each one a separate trading entity that underwrote insurance for one calendar year only. As claims take time to be reported and paid, the profit or loss for each group of members at Lloyd’s takes three years to close for accounting purposes and declaring a result. For example, a 2013 group would ordinarily declare its results following the end of December 2015. Members of the group will be paid any underwriting and investment profit during the 2016 calendar year in proportion to their participation in the group. Conversely, they will also need to reimburse the group during 2016 for their share of any losses. Lloyd’s groups underwrite a diverse range of policies, both direct insurance and reinsurance, covering casualty, property, marine, energy, motor, aviation, and many other types of risks including niche risks such as “key body parts of celebrities”. Being a matured insurance market and historically where insurance started, London has the requirements of an international market due to the following reasons: It has well-developed and matured legal and regulatory frameworks. With numerous changes and amendments to improve the framework for the insurance industry over many years, its experience and know how is a key factor in ensuring practices are sound and of international best practices. It is an established international financial centre. Since insurance is linked to various other industries, the proximity to other industries especially in the area of finances is critical in ensuring width and depth in international market penetration. 30  Structure Of The Insurance Industry 1 Insurance market overview CHAPTER It is a base for numerous multinational insurers. Having the Head offices of insurers in this locality is a key requirement as strategic directions around the world are driven from here. Usually, operations in less developed markets tend to emulate those of matured or developed countries. Example London as a financial centre Prudential of UK has its Head office based in London but it has operations around the world covering Europe, United States, and Asia. Its operations in the US, called Jackson Life, is a significant player contributing strong revenues to the holding company in London. In its 2013 financial year,12 Jackson Life contributed GBP1,243m IFRS operating profit to the Group’s overall IFRS operating profit of GBP2,954m. Its Asian operation under Prudential Corporation of Asia is a key player in the Asian region, and the region contributed GBP1,000m IFRS operating profit to the Group as Asia grew significantly. Strategic and operational directions continue to come from its Head office in London. It features a convergence of talents. As a financial centre and centre of tertiary education, it attracts a multitude of international talents around the world. This supports the human resources needed for the insurance industry. It has political stability. Having long years of political stability provides solid confidence on long-term business commitments in terms of currency stability, sanctity of contracts, and so on. It has excellent communication and travel facilities. With strong and stable communication such as high speed internet broadband and world-class airport facilities and connectivity, doing business is on a first-class platform. 1.1.7 The Insurance and Takaful Market in Malaysia Following the global impact of the COVID 19 pandemic, the last two years (i.e., from the beginning of 2020 to 2021) witnessed the rapid acceleration and adoption of digital channels as an alternate to the traditional face-to-face marketing, communication, and engagement with consumers of insurance products and services. From the second half of 2020, the easing of movement restrictions led to higher sales as public awareness increased on the importance of insurance and takaful protection. In the life insurance and family takaful sectors, deferment of premium payment under the COVID-19 Relief Programme provided eligible policy owners a deferment period of 3 months to pay the premium for their insurance policy. During the deferment period, there was continued coverage despite an absence of premium payments and applied to products with the premium holiday feature already in place, such as investment-linked products. This flexibility was available 12 Annual Report 2013. (n.d.). Retrieved December 5, 2014, from http://www.prudential.co.uk/~/media/Files/P/Prudential- Corp/financial-reports/2013/prudential-plc-ar-2013a.pdf 31  Structure Of The Insurance Industry 1 CHAPTER Insurance market overview to policyholders if the investment value in the unit fund remained sufficient to meet the necessary insurance cost during the premium holiday period. According to BNM Financial Stability Review ?