TOPIC 4 INSURANCE INDUSTRY IN MALAYSIA

The insurance industry in Malaysia first started in the 18th century. The
insurance industry then was based on the British system because it was
introduced and managed by British trading companies and agencies. There
were few locals involved due to lack of expertise.
There were agency houses like Harrisons and Crossfield, Boustead and
Sime Darby act as an agent to accept risk and settle claim to insuring
trade.

In the early 1960s, insurance and reinsurance business continue to growth.

Upon the achievement of independence, there was an effort to establish
domestic insurance companies. The early 1960's saw the growth of many
life and general insurance companies. Malaysia insurance and reinsurance
companies are monitored by Insurance Act, 1963 and it has been replaced
by Insurance Act 1996.
The government stepped in to remedy the situation by introducing the
Insurance Act, 1963. The office of the Director General of Insurance was
given the task of regulating the insurance industry. Today, the Governor of
Bank Negara is also the Director General of Insurance.
What bodies are playing a significant role in the life insurance industry in
Malaysia?

They are:
1. Director General of Insurance
This office is set up under the Insurance Act of 1963 to regulate and
supervise the life insurance industry in Malaysia. At present, the
director general of insurance is also the governor of Bank Negara.
Thus, we often use the term Bank Negara and director general of
insurance interchangeably.
2. Life Insurance Association of Malaysia (LIAM)
3. National Association of Malaysian Life Insurance Agents
(NAMLIA)
This association represents the life insurance agents of the registered
life insurers in Malaysia.
4. Malaysian Insurance Institute (MII)
This is a non-profit organisation that conducts courses for the staff
and agents of the insurance industry.
RE-INSURANCE
The practice of insurers transferring portions of risk portfolios to other
parties by some form of agreement in order to reduce the likelihood of
having to pay a large obligation resulting from an insurance claim.
The intent of reinsurance is for an insurance company to reduce the
risks associated with underwritten policies by spreading risks across
alternative institutions.
The reinsurer may be either a specialist reinsurance company, which

only undertakes reinsurance business, or another insurance

company.
General Re-insurance Business in Malaysia consist of:
i.
ii.
iii.
iv.
v.

Asia Capital Reinsurance Malaysia Sdn. Bhd.

Malaysian Reinsurance Berhad
Munich Re-insurance Company Branch
Swiss Reinsurance Company Ltd.
The TOA Reinsurance Company, Limited

INSURANCE SUPERVISORY AUTHORITY AND MANDATORY

ASSOCIATION
1. BANK NEGARA MALAYSIA
Under section 35 of the Insurance Act 1996, the Central Bank was
made responsible for its administration and the Governor to be the
Director General of Insurance.
The move was made necessary because of the need to exercise
greater control of the industry.
PERSATUAN INSURANCE AM MALAYSIA (PIAM)
Persatuan Insurans Am Malaysia (PIAM) was formed in May 1976 in
compliance with section3(2) of the Insurance Act 1963. (This
provision has been superseded by section 22 of the Insurance Act
1996).
By virtue of the Act, all general insurers shall be member of an
association of insurers approved by the Central Bank of
Malaysia, i.e. Bank Negara Malaysia. PIAM is an association of
general insurers which has been approved for this purpose.

Thus, PIAM membership is compulsory for all general insurers

in Malaysia.
The main objectives of PIAM are:
to promote the establishment of a sound insurance structure in
Malaysia in cooperation and consultation with Bank Negara
Malaysia ;
to promote and represent the interests of members in or connected
with Malaysia by all means and methods consistent with the laws and
Constitution of Malaysia;
to render to members where possible such advice or assistance as
may be deemed necessary and expedient;
to take note of events, statements and expressions of opinion
affecting members, to advise them thereon and represent their
interests by expression of views thereon on their behalf as may be
deemed necessary and expedient;
to work as far as possible in cooperation with other similar
associations elsewhere in the world;
to circulate information likely to be of interest to members and to
collect, collate and publish statistics and any other relevant
information relating to general insurance;
to work in conjunction with any legal body or any chamber or

committee or commission appointed or to be appointed for the

consideration, framing, amendment or alteration of any law relating to
insurance;
to organize and manage arrangements and matters of common
interest, concern or benefit to members or any group of members and
to collect and manage funds for the same;
to make rules, regulations and bye-laws in accordance with these
Articles in consultation with Bank Negara Malaysia.
Inter-Company Agreement on General Insurance Business
The purpose of this agreement is to regulate and control the conduct
and activities of every person engaged in general insurance business.
2. LIFE ASSOCIATION OF MALAYSIA (LIAM)
The Life Insurance Association of Malaysia (LIAM) or Persatuan
Insurans Hayat Malaysia is a trade association registered under the
Societies Act 1966.
LIAM has initiated various efforts through self-regulation, continuing
education and professional skills development to enhance the
professionalism of the agency force and promote greater discipline
and sound business practices among member companies.
LIAM is the formation of Malaysian Life Reinsurance Group Berhad

(MLRe), the first local life reinsurance company.

MLRe is a joint venture between the members of LIAM and the
Reinsurance Group of America Incorporated, making this a rather
unique arrangement as the life insurance companies participate both
as clients and shareholders of MLRe.
LIAM has a total of 18 members, of which 16 are life insurance
companies and two are life reinsurance companies.
It is a statutory requirement under section 22 (1) of the Insurance Act
1996 (or section 3(2) (e) of the repealed Insurance Act 1963) for all
life insurance/life reinsurance companies to be members of LIAM.

Objectives of LIAM
To promote public understanding and appreciation of life insurance;
To improve the image of the life insurance industry through self
regulation;
To give support to the regulatory authorities in developing a strong
and healthy industry;
To enhance the professionalism of staff and agents through
continuous training and education;

 To liaise and work with local and foreign life insurance organizations
towards achieving common.
3. MALAYSIAN INSURANCE AND TAKAFUL BROKER
ASSOCIATION (MITBA)
The Malaysian Insurance and Takaful Brokers Association (MITBA), is
the only national body of insurance and takaful brokers, and was
registered with the Registrar of Societies on 3 December 1974.
MITBA is the collective voice of the industry, advising members,
regulators, consumers, trade associations and other stakeholders on
key insurance issues.
MITBA also provides training, technical advice, guidance on
regulation and business support.
Its role is to elevate the status of insurance and takaful brokers
through professional development and by establishing improved
standards of qualifications and ethical practices.
The main objectives of the Association are:
to elevate the status, safeguard and advance the interests, procure
the general efficiency and proper professional conduct of members.
Towards achieving these objectives the association has drawn up a
Code of Ethics and Conduct, Insurance Brokers Accounting
Standards, Brokerage / Fee Sharing Guidelines, Clients Charter, and
the Insurance Introducer Agreement for all members to observe.

All these documents were drawn up under the guidance of Bank

Negara Malaysia and approved by the Registrar of Societies.
With the implementation of the above documents, the level of
professionalism of insurance and takaful brokers in Malaysia has
been further improved;
to ensure that employees of members are professionally qualified,
conversant with insurance laws and practices, and acquainted with
current developments as they affect the insurance industry in general
and insurance brokers in particular;
to provide a platform for the promotion of discipline, professional
conduct and etiquette of members;
to promote the healthy growth of the insurance industry in line with
national objectives.
ISSUES IN THE INSURANCE INDUSTRY
1. Liberalisation of the sector to increase competitive pressure
In April 2009, the government announced a liberalisation plan for
Malaysias insurance sector, including the increase of the foreign
equity participation threshold in insurance companies to 70% and
allowing foreign incorporated insurance companies and takaful
operators to establish branches nationwide without restrictions.

Currently, including composite insurers, there are 32 licensed general

insurers, eight takaful operators and six general reinsurers in
Malaysia.
The liberalisation of the sector is expected to intensify competition in
an already fragmented industry, where the top seven general insurers
accounted for 48% of conventional direct premiums collected during
2009.
Further consolidation in the insurance industry is unavoidable, given
the visible benefits of economies of scale in underwriting, capital
management, investment portfolio diversification and operations.
It is expected that the smaller and less profitable players to be
acquisition targets, especially for interested foreign insurers given the
relaxation of foreign equity participation.
The industry saw few consolidations in recent years, including
i.

the acquisitions of PanGlobal Insurance Berhad by Tokio Marine

ii.

Insurance Malaysia Berhad in 2009

the acquisition of Malaysian Assurance Alliance Berhads general

iii.

insurance business by AMG Insurance Berhad in 2010.

The most recent one is the strategic merger between the general
insurance arm of Hong Leong Assurance Berhad with MSIG
Insurance (Malaysia) Berhad (MSIG) which was announced in June
2010. After this merger MSIG is expected to become the second

iv.

largest general insurer in Malaysia.

Acquisition of CIMB AVIVA Assurance by Sun Life Insurance from
Canada from Khazanah.
Note: Less than 45% of the Malaysian population have life or
family takaful policies. More M & A due to FSA

The current M&A market remains vibrant particularly in the financial

services sector. The Financial Services Act (FSA), which came into
effect in June 2013 together with the Islamic Financial Services Act
(IFSA), is likely to drive M&A activity in the coming years, particularly
within the insurance industry.
Among the requirements of the FSA and IFSA is the separation of
composite licences for general and life insurance businesses. This is
expected to generate M&A activity through restructuring And
consolidation efforts in the insurance and takaful sector.

A case in point is the integration of AIA's takaful business through the

transfer of assets from AIA Takaful Berhad to AIA PUBLIC Takaful
Berhad which was a landmark deal for the Malaysian insurance
sector as it is the first business transfer under the IFSA.

It has also been an active year for M&As, involving, among others,

the following:
AIA Group Limited (AIA) completed its US$1.8 billion (MYR5.78
billion) acquisition of ING Group N.V's (ING) Malaysian insurance and
takaful business. The acquisition combined INGs Malaysian
operations and AIAs existing Malaysian business, previously the third
and the fourth
largest in Malaysia respectively, to create the largest life insurance
firm in the country.

2. Self Regulation in Insurance

Self-regulation has been introduced by the insurance industry with the
two-fold objective of:
i. instilling discipline and promoting healthy competition in the
industry; and
ii. providing some element of protection to insurance consumers.
Self-regulation with respect to the transaction of insurance business
has mainly been achieved through insurance associations.
For general insurance business, the main associations are:
General Insurance Association of Malaysia (commonly known as
PIAM);
Malaysian Insurance and Takaful Brokers Association (MITBA) and

 Association of Malaysian Loss Adjusters (AMLA).

For life insurance business, the main association is:
Life Insurance Association of Malaysia (LIAM).
To facilitate self-regulatory measures taken by these associations, the
Director General of Insurance has made membership of these
associations mandatory. In addition, these associations are vested
with powers to enforce the rules and regulations formulated to ensure
professional conduct of their respective businesses.
PIAM and LIAM are most actively involved in the self-regulation of
insurance business and life insurance business respectively. Other
than rules and regulations which control the conduct of their
members, the associations have initiated self- regulatory measures
such as the various inter-company agreements and guidelines.
INSURANCE AND TAKAFUL MEDIATION BUREAU
The establishment of insurer and takaful mediation bureaus
represents a self-regulatory measure taken in response to the
increasing number of insurance disputes and complaints against
insurance and takaful companies, including other financial services
providers.
In Malaysia, there are two mediation bureaus

for insurance and

takaful companies. However, their purposes and benefits are not

aligned altogether.
The basic objective of these agreements and guidelines is to regulate
the proper conduct of the business, ensure ethical and being of the
insurers and agents.
The two mediation bureaus related to the insurance and the financial
sector are:
i.

Motor Insurers Bureau (MIB)

set up with the aim to compensate innocent victims of road accidents
who cannot recover from negligent motorists

ii.

Financial Mediation Bureau (FMB)

set up with the purpose to provide dispute resolution procedures for
consumers, policyholders and insurers.
The bureaus, however, do not serve to exclude reference to legal
process provided by the law.
Why the Insurance industry is under strict government regulation.
Firstly, when a buyer purchases an insurance cover, he is buying an
intangible product, which is a promise by the insurer to pay the
insured upon a certain event occurring. The value of the promise will
depend on the ability of the insurer to fulfil its obligations. The ability
to fulfil such obligations will in turn depend on the integrity and

financial stability of the insurer. It is mainly because of this reason that

insurance has been placed under strict government regulation.
Further, insurance is a complex product which few can understand.
This is because the insurance policy, being the evidence of contract,
is usually written in legal terms and phrases, and is difficult to
understand. The inability of policyholders to interpret and understand
the policy may provide an opportunity for unfair trade practices. Such
a situation also calls for insurers to be placed under strict government
regulation.
In addition, the insurance business is considered to be effected with
a public interest because it plays an important role in society.
Insurance provides financial protection to individuals, families, and
business enterprises. If insurers fail to honour their promises, the
well-being of the economy and the welfare of the public will be
adversely affected. This characteristic of insurance has also
contributed to the strict regulation imposed on the insurance
business.
5.3.2. Pose Of Regulation
In Malaysia, regulation of the insurance business is achieved through
the administration and enforcement of the Insurance Act 1996 .The
1996 Act sets out only the broad standards and policies, leaving the
detailed requirements to be prescribed by regulations (such as the
Insurance Regulations 1996 which came into effect on 1 January
1997) or specified by way of guidelines, circulars, and codes of good

business practice.
The main purposes of insurance regulation include:
i.
The protection of public interest
Public interest is protected by ensuring that the insurer is
financially solvent and able to meet its obligations to its policy
owners and claimants.
To maintain insurer solvency

ii.
The promotion of fairness and equity
By ensuring that insurers, insurance brokers and adjusters
(collectively known as licensees under the Act) are fair and equitable
in their dealings with their clients and claimants, fairness and equity is
promoted.
To ensure reasonable rates are charged to customers
iii. Fostering of competence
Competence is fostered by the insistence placed on a high level
of professional competence and integrity of insurers, insurance
brokers and adjusters.
To ensure that players in the insurance industry are competent.
iv.
The playing of a developmental role
By encouraging the insurance industry to take an active part in
the economic development of the country, regulation plays a
developmental role.

Reasons for Insurance Regulation

The fundamental goal of insurance regulation is to protect the public.
As such, insurers are regulated for the following reasons:

INSURANCE REGULATION IN MALAYSIA

The regulator
Bank Negara Malaysia (BNM) regulates entities which carry on
insurance business, insurance broking, adjusting and financial
advisory. Insurers are licensed by the Minister of Finance on the
recommendation of the BNM. Brokers and financial advisers must be
approved by BNM, and adjusters must be registered with BNM.

Subsidiary/Branch
Branches are not permitted. Insurers must be public companies;
reinsurers, brokers, adjusters and financial advisors must be
incorporated.
There is currently a freeze on the issue of new insurance licences by
BNM, although BNM may be open to consider applications on a case
by case basis. Prior consultation with BNM is encouraged.
BNM approval is required for a licensed insurer to own an interest in

another licensed insurer or for a person to own interests in two or

more licensed insurers of different classes (if that person is not a
licensee).

FDI restrictions
70 per cent limit on foreign equity ownership.
> 70 per cent considered on a case by case basis for players who
can facilitate consolidation and rationalisation of the industry.

Control approvals
Prior written approval of the BNM or the Minister of Finance (as the
case may be) is required for a person to:
initially acquire an aggregate share interest of >5 per cent in a
licensed insurer;
subsequently hold an aggregate share interest in a licensed
insurer equal to or exceeding each multiple of 5 per cent, or the
trigger for a mandatory general offer (i.e. 33 per cent);
hold more than 50 per cent interest in share in a licensed insurer;
have control over a licensed insurer, regardless of shareholding
level; or
dispose of shares resulting in shareholding below 50 per cent or a
change in control.

In addition, a company holding > 50 per cent interest in shares in a

licensed insurer must be approved by BNM as a financial holding
company.
For an approved insurance broker or financial adviser, 5 per cent
shareholding requires notification to BNM and any change of control
requires prior written approval of BNM.

Minimum capital
minimum paid-up share capital:
insurer:
local reinsurer (life):
local reinsurer (non-life):

RM 100 million
RM 50 million
RM 100 million

minimum surplus assets over liabilities:

licensed foreign reinsurer:

RM 20 million

Group supervision
Under the Financial Services Act 2013, BNM is empowered to
exercise oversight over financial groups for the purposes of promoting
the safety and soundness of a licensed insurer.

In general, the prudential requirements applicable to licensed insurers

also apply to financial holding companies, and BNM may specify
standards on prudential matters to a subsidiary of a financial holding
company if it is of the opinion that the activities of such subsidiary
may pose risks to the licensed insurer or its financial group
BNM also has the power to issue directions to a financial holding
company, its subsidiary or the director, CEO or senior officer of such
financial holding company or such subsidiary.

Policyholder protection
The Malaysia Deposit Insurance Corporation (MDIC) administers the
Takaful and Insurance Benefits Protection System (TIPS) which
protects specific benefits under life and general insurance, subject to
specific limits for different classes of coverage.

Outsourcing
Core Activities consist of activities constituting insurance business
(ie, receiving proposals for insurance, negotiating on proposals for
insurance on behalf of an insurer, issuing of policies, collection or
receipt of premiums or settlement or recovery of claims on policies),
board and senior management oversight, investment management,
internal audit and compliance functions, risk management, strategic

planning and decision making and financial analysis.

Certain types of core activities are permitted to be outsourced except

to the extent permitted and subject to the requirements set out in the
relevant BNM guidelines. The prior approval of BNM is required for
the outsourcing of some of these core activities (eg, premium
collection, administration of claims, investment management to fund
managers and internal audit to group internal audit).

An insurer is required to notify BNM of any material outsourcing

arrangement.

Note:
The Financial Services Act 2013 provides that any guideline, direction
or circular which was issued before the enforcement of the Financial
Services Act 2013 under the repealed Insurance Act 1996, in relation
to any matter which corresponds with any provision of the Financial
Services Act 2013, shall be deemed to be standards and shall remain
in full force and effect in relation to the person to whom it applied until
amended or revoke.

At this juncture, as there has not been any announcement made in

relation to any amendment and/or revocation of the relevant BNM
guidelines, the above outsourcing requirements would still apply to all
insurers.

Impact of FSA 2013 to composite insurers and takaful operators

Banks an 11. Requirement to split the Life/Family and
General Insu1
1. Requirement to split the Life /Family and General
Insurance/Takaful business
Likely to see a number of M&A activities in the next few years.
Currently RM100 million paidup capital is required for each
company, even for composite company that writes both General
and Life / Family businesses.
From July 2018 onwards, splitting would mean a separate capital
requirement for each entity, where a composite company would
need RM200 million capital to support its General and Life /
Family businesses.
2. Requirement to setup a holding
Enable insurer / To access to money from holding company.
Capital requirements of insurance subsidiaries outside Malaysia
potentially at least as large/strong as Malaysia.
Potentially challenging to be competitive in other markets with
weaker
capital requirements compared to other local players.

 Impact on group capital requirements, corporate

governance, risk management standards etc.
1. 3 Operators in
3 Onus on Board of Directors
Criminal offence punishments; i.e. imprisonment up to 8 years or
fine up to RM25 million.

Policyholders interest is prioritized when in conflict

with shareholders interest.

1. Timeline/ Non-compliance penalty

- Five years from the date of implementation of the Act(s) or longer
as specified by the Minister of Finance, on the recommendation of
BNM.
Imprisonment of 8 years or less
A fine of RM25 million or less
Or both
DELETE ALL NOTES AFTER THIS == REPEAT

Tutorial: 4 Insurance Industry in Malaysia

1. Weekly Report.

2. Discuss the concept of self regulation and why is it important in the

insurance industry.

3. i. Why is the insurance industry under strict government

regulation?

4. Liberalisation is seen to be the way forward. Discuss.( Do research

on internet.

Article 1
Self Regulatory Measures in Insurance Industry
NST, 12 Dec 2001

In addition to Bank Negara's Customer Services Bureau, the insurance

industry has set up the Insurance Mediation Bureau (IMB) as an alternative
channel for the public to refer their disputes with their respective life (and
general) insurance companies for settlement.
Despite this move, the life insurance industry is not sitting idle. It has been
responding on its own to the growing consumer pressures by having selfregulatory measures, which have been introduced with the objectives of:
1. Instilling discipline and promoting healthy competition among companies
in the industry; and
2. Providing an element of protection to policyholders.

Many have argued the pros and cons for self-regulation, but self-regulatory

measures are essentially to instil greater self-discipline among the life

insurance companies, thus avoiding the need for stricter legislations.
While laws can be passed by Parliament to ensure that the rules and
regulations are followed, a sort of a top-down legal command, selfregulatory measures which are really bottom-up way of managing can
therefore respond to changing circumstances faster than legislations. Selfregulatory measures are not cast in stone somewhat unlike legislations,
where the process of amending a small aspect of the law is very tedious.
True, self-regulatory measures do not have the power of the law, as they
are merely voluntary. Thus in the event of life insurance companies
breaching them, policyholders cannot resort to the courts to address such
shortcomings.
Laws are interpreted by the courts but statements of practices are
interpreted by those who drafted them.
One very significant self-regulatory measure is the setting up of the Life
Insurance Association of Malaysia (LIAM), where the Insurance Act 1996
has made it mandatory for all life insurance companies to be members.
(For general insurance, there is the General Insurance Association of
Malaysia, or commonly known as PIAM).
LIAM is vested with the powers to enforce the rules and regulations that
have been formulated by the authorities, so as to ensure among others, the
life insurance companies are conducting their businesses in a professional

manner.
LIAM has also initiated on its own measures such as various inter-company
agreements and guidelines that help to regulate the proper conduct of
businesses by its members, and to ensure ethical conduct and
professionalism between insurers and agents.
In 1991, as a further step towards greater self-regulation, LIAM formulated
a Code of Ethics and Conduct for its members that deals with life insurance
selling and practices.
The Intermediation Bureau (IMB) is really a self-regulatory measure that
was set up in response to an increasing number of disputes between
policyholders and their respective insurance companies. The role of the
IMB dovetails very neatly with the CSB and the self-regulatory measures of
LIAM (and PIAM), and its significance cannot be under-estimated.