## 2013 FINANCIAL SECTOR ASSESSMENT PROGRAM — MALAYSIA: INSURANCE CORE PRINCIPLES DETAILED ASSESSMENT OF OBSERVANCE (FEBRUARY 2013) (_cr1357) ## Source details **Canonical URL:** [2013 FINANCIAL SECTOR ASSESSMENT PROGRAM — MALAYSIA: INSURANCE CORE PRINCIPLES DETAILED ASSESSMENT OF OBSERVANCE (FEBRUARY 2013) (_cr1357)](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr1357.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr1357.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr1357.pdf.json) --- ### Executive summary and overall assessment - BNM (Bank Negara Malaysia) is described as a highly respected insurance regulator with knowledgeable staff, comprehensive regulatory guidance, and effective supervision. - ICP assessment outcomes (aggregate of 26 ICPs): - Observed: 7 - Largely observed: 15 - Partly observed: 4 - Not observed: 0 - Key planned improvements and gaps: - Proposed financial institutions legislation (FSA/IFSA) expected to address BNM’s powers for group-wide supervision and protection of client monies with intermediaries. - Implementation of ICAAP and new risk governance guidance expected to close gaps in formal expectations for insurer risk management. - Cross-border coordination: BNM is not home supervisor to significant insurance groups; cross-border insurer activities small, limiting current urgency for substantive cross-border crisis coordination measures. - Special monitoring recommended for new entrants, insurers with recent changes in control, and Danajamin due to financial guarantee business risks and an incomplete regulatory framework for financial guarantee insurance. - Overall conclusion: No current potential sources of significant risk to Malaysian financial stability from the insurance industry were identified; the industry is relatively small and fragmented without major risk concentrations apparent. ### Assessment scope, methodology, and ratings framework - Assessment conducted by Mark Causevic (external expert from OSFI Canada) during April 2012. - Benchmark: Insurance Core Principles (IAIS, October 2011). - Malaysian Islamic insurance market (family takaful, general takaful, re-takaful) included in report detail but not in ICP assessment ratings. - Ratings definitions: - Observed, Largely observed, Partly observed, Not observed, Not Applicable. - Assessment basis: laws, regulations, supervisory requirements and practices in place at time of assessment; ongoing regulatory initiatives noted only as additional comments. ### Market structure, size, penetration and ownership - Sector size and share: - Insurance sector accounts for around 6 percent of financial sector assets, equivalent to 15 percent of GDP (Source: IMF). - Penetration rates (total premiums as % of GDP) — Life / Non-life / Reinsurance: - Life: 2007 = 3.6% ; 2008 = 3.5% ; 2009 = 3.8% ; 2010 = 3.9% ; 2011 = 4.0% - Non-life: 2007 = 1.5% ; 2008 = 1.5% ; 2009 = 1.6% ; 2010 = 1.6% ; 2011 = 1.8% - Reinsurance: 2007 = 0.3% ; 2008 = 0.3% ; 2009 = 0.3% ; 2010 = 0.3% ; 2011 = 0.4% - Density (USD, total premium per capita) — Life / Non-life / Reinsurance: - Life: 2007 = 221.5 ; 2008 = 223.3 ; 2009 = 233.7 ; 2010 = 253.3 ; 2011 = 261.8 - Non-life: 2007 = 90.4 ; 2008 = 97.7 ; 2009 = 101.8 ; 2010 = 106.9 ; 2011 = 114.3 - Reinsurance: 2007 = 17.0 ; 2008 = 18.5 ; 2009 = 20.2 ; 2010 = 22.9 ; 2011 = 23.5 - Employment (excluding agents, brokers and intermediaries) — Number of Employees: - 2006 = 22,989 ; 2007 = 23,848 ; 2008 = 24,152 ; 2009 = 23,359 ; 2010 = 23,329 ; 2011 = 23,865 - Market access and licensing: - No direct conventional insurance licence issued since the 1970s. - Seven reinsurance licences issued between 1995 and 2007 (one life reinsurance licence and six general reinsurance licences). - Twelve takaful and retakaful licences issued between 2005 and 2010. - Special license for government-backed financial guarantee insurer established in 2009 (Danajamin). - Ownership structure highlights: - Four out of nine life insurers are owned by the large domestic banks. - Foreign equity limits: insurers 70 percent; reinsurers 70 percent; takaful operators 70 percent; no foreign equity limit for retakaful operators. - Industry consolidation trend noted: Insurance Companies — 2000 = 53 ; 2006 = 42 ; 2011 = 36 ### Distribution channels and intermediaries - Agency dominates: - Agency channel generates 59 percent of new premiums (Life). - Agency channel generates 65 percent of gross premium (General). - Bancassurance and bancatakaful prominence: - Bancatakaful contributed 53 percent in 2011 to family takaful distribution. - Number of licensed intermediaries: - Agents: 2007: 117,752; 2008: 113,653; 2009: 116,008; 2010: 122,399; 2011: 118,783 - Brokers: 2007: 34; 2008: 34; 2009: 37; 2010: 37; 2011: 38 - Regulatory gaps for intermediaries: - Agents largely self-regulated by associations; no legislative requirement for separate fiduciary accounts for agents/brokers; BNM lacks a supervisory process specific to intermediaries (assessment: Partly Observed). ### Asset composition, market risk exposures and investment - Asset mix (2011 / 2010): - PDS: 2011 = 37.3 percent of total assets ; 2010 = 38.6 percent of total assets - Equity holdings: 2011 = 14.7 percent of assets ; 2010 = 16.5 percent of industry assets - MGS: 2011 = 17 percent of industry’s total assets ; 2010 = 15.5 percent - Fixed deposits: 2011 = 13.6 percent ; 2010 = 11.2 percent - Quality of PDS: 88.1 percent held in high-grade papers (rated ‘A’ and above). - Market risk exposures relative to capital available: - 2011 market risk exposures: 12.6 percent of capital available - 2010 market risk exposures: 12.5 percent of capital available - Equity and interest rate risks jointly formed 84.6 percent of insurers’ total market risk exposures. - Investment constraints in RBC: - maximum 5% exposure to non-investment grade debt securities - 5% limit for shares not listed on the Main Market of Bursa - absolute limit on foreign assets in jurisdictions with sovereign ratings at least equivalent to that of Malaysia (10 percent) - General insurance funds: minimum ratio of 10% liquid assets and maximum of 20% invested in immovable properties ### Profitability, claims experience, reinsurance and capital adequacy - Claims and lines: - Fire business claims ratio: 2011 = 69.5 percent (2010: 36.3 percent) - Motor third-party bodily injury (motor ‘Act’) claims ratio: 2011 = 300 percent (2010: 278.7 percent) - Overall motor claims ratio (including ‘comprehensive’): 2011 = 76.8 percent (2010: 79.5 percent) - Reinsurance retention and ceded levels: - Overall retention for general insurers: approximately 70 percent (varies by class) - Aviation ceded: 94 percent - Oil & gas ceded: 93 percent - Engineering ceded: 56 percent - Motor retention approaches 90 percent - Aggregate capital adequacy ratio (CAR): - 2011 = 222.5 percent - 2010 = 224.6 percent - Supervisory minimum capital requirement: 130 percent - Solvency positions (selected): - Life: 2009 (FYE) 320.1 percent; 2010 (FYE) 307.8% ; 2011 (Q4) 279.0% - Non-life: 2009 189.6% ; 2010 198.4% ; 2011 (Q4) 222.9% - Composite: 2009 239.1% ; 2010 236.9% ; 2011 (Q4) 243.1% - Reinsurance: 2009 218.9% ; 2010 218.1% ; 2011 (Q4) 220.4% ### Enterprise risk management, solvency framework and planned enhancements (ICP 16 & ICP 17) - Current framework and requirements: - RBC implemented in 2009; total balance sheet approach; statutory CAR metric. - Insurers required to set an Internal Target Capital Level (ITCL) above Supervisory Target Capital Level (STCL) and prepare capital management plans. - STCL: maintain CAR at 130% over a period of 1 year. - ICAAP guidance and Risk Governance guidelines planned (implementation expected late 2012) to require insurers to set ITCL, monitor capital, and account for risks beyond RBC. - MOCE required to achieve a 75% confidence level for technical provisions. - Assessment: Partly Observed (ICP 16); Largely Observed (ICP 17). - Recommendations: - Implement ICAAP and Risk Governance guidance. - Consider explicitly addressing interdependencies between and within risk categories in RBC. - Consider defining RBC in terms of level of risk protection afforded. - Establish project plans for regulatory capital framework for financial guarantee insurance (Danajamin). ### Valuation, technical provisions and actuarial governance (ICP 14) - Valuation basis: - BNM effectively uses IFRS/MFRSs (in full compliance with IFRS effective January 1 2012) as basis for solvency valuation with prescribed requirements and MOCE guidance. - Life/family takaful technical provisions: - Prospective actuarial valuation; explicit identification and quantification of options and guarantees. - MOCE to achieve a 75% confidence level; stochastic methods required for options/guarantees unless portfolio small/simple. - Discounting: prescribed risk discount rate is Malaysian Government bond spot-rate curve. - General insurance technical provisions: - Claims liabilities (case-by-case and IBNR) and premium liabilities; no explicit requirement to discount liabilities (some long-tailed portfolios do discount). - Assessment: Observed. - Recommendation: review valuation approaches for solvency in ‘normal’ stress periods to limit need for temporary adjustments. ### Conduct of business, public disclosure, fraud and AML/CFT (ICP 19–22) - Conduct of business: - Product approval follows a ‘launch-and-file’ system with 30 days wait for certain new products; IA s.161(1) imposes minimum compound 4% per annum on unpaid life death claims not paid within 60 days of receipt of intimation. - Assessment: Largely Observed. - Recommendation: enhance enforcement powers and market conduct supervision. - Public disclosure: - Insurers required to publish annual financial statements within 14 days after tabling at AGM; half-yearly interim unaudited reports to be published within 8 weeks. - BNM requires disclosure of total capital available but not a specific capital adequacy measure. - Assessment: Largely Observed. - Recommendation: enhance public disclosure regime with disaggregated information on insurer source of earnings and capital adequacy measures. - Countering fraud: - Fraud offences punishable under Penal Code s.418 (up to seven years imprisonment). - IA requires auditors to report fraud to BNM (s.82); eFIDS reporting system captures fraud data. - Assessment: Largely Observed. - Recommendation: review effectiveness and rigour of SuRF in assessing anti-fraud practices. - AML/CFT: - BNM designated AML/CFT authority; AML GP1 and AML Manual provide supervisory framework; BNM signed 34 MoUs with foreign authorities. - Assessment: Observed. - Recommendation: utilize FIU specialists for AML/CFT supervisory reviews of insurers selling higher ML-risk products. ### Group-wide supervision, cross-border activities and crisis preparedness (ICP 23–26) - Group-wide supervision: - Only four insurers part of groups with branches/subsidiaries in one or two foreign jurisdictions; foreign operations not significant. - SuRF not designed for group-wide supervision; BNM lacks explicit authority to regulate holding companies (FSA expected to address this). - Assessment: Partly Observed. - Recommendation: amend legislation to explicitly empower BNM to regulate and supervise holding companies and related entities. - Cross-border operations: - Cross-border operations in 2011: total assets RM979.8 million, representing 0.5 percent of total insurance industry assets in 2011. - Macroprudential surveillance: - BNM conducts internal stress testing but has not required periodic comprehensive industry-wide standardized scenario testing. - Life and family takaful business HHI = 0.1092 ; general sector HHI = 0.0005. - Assessment: Observed. - Recommendations: - Require periodic comprehensive industry-wide standardized scenario testing. - Establish structured internal processes for identifying and reporting emerging industry risks. - Develop more robust systemic risk indicators for insurers. - Supervisory cooperation and crisis planning: - BNM has legal power to share supervisory information (CBA s.40(1)) and established HHSF for cross-border engagement; not a signatory to IAIS MMOU. - No internationally-coordinated crisis management plans; BNM to increase expectations for insurers to maintain contingency plans and information systems for timely ad hoc reporting. - Assessment: Partly Observed. ### Resolution framework, PIDM powers and policyholder protection - Winding up and insolvency procedures: - Part X of the IA and corresponding TA/CA/Companies (Winding up Rules) define procedures for notices, liquidator appointment, valuation and application of insurance funds. - BNM may petition for winding up and may appoint liquidator upon court approval; BNM has historically avoided court winding up and prefers least-cost, minimal-disruption resolutions. - PIDM (Perbadanan Insurans Deposit Malaysia) and TIPS: - TIPS implemented 31 December 2010; administered by PIDM to protect owners of takaful certificates and insurance policies. - TIPS funded by annual premiums paid by member institutions and transfers from IGSF; eligibility requires issuance in Malaysia and denomination in Ringgit Malaysia. - Coverage: 95 percent of all Takaful certificates and insurance policy holders are protected in full. - PIDM Act (2011) and resolution tools (section 99): - PIDM empowered to designate a bridge institution, arrange transfers of policies/certificates, and exercise comprehensive resolution and intervention powers upon BNM notification under section 98. - Danajamin summary: - Established 2009; Ownership: Minister of Finance Incorporated 50%; Credit Guarantee Corporation Malaysia Berhad 50%. - ‘AAA’-rated; Paid-up capital RM1 billion; Callable capital RM1 billion; Capacity to underwrite up to RM15 billion based on existing capital. - As at December, 2011 Danajamin provided guarantees to 16 companies totalling RM5.3 billion, where Danajamin exposure is 83.4% or RM4.4 billion. - Recommendations: - Consider more clearly defining ‘non-viability’ triggers within legislation. - Continue coordination between BNM and PIDM and harmonize protection available to consumers of insurance and takaful products. ### Key selected recommendations (high-level) - Finalize proposed FSA/IFSA to: - Strengthen group-wide supervision powers and protections for client monies (including fiduciary account requirements). - Incorporate clear licensing criteria and suitability requirements for significant owners. - Enhance enforcement powers and transparency of enforcement criteria. - Implement ICAAP and Risk Governance guidance to formalize ERM expectations and ITCL/STCL frameworks. - Develop and implement a regulatory capital framework for financial guarantee insurance (following Danajamin). - Enhance public disclosure with disaggregated earnings and capital adequacy information. - Strengthen intermediary supervision: codify fiduciary account requirements, expand supervisory resources and introduce a supervisory framework specific to intermediaries. - Strengthen macroprudential surveillance: require periodic industry-wide scenario testing, structure internal processes for emerging risk identification, and develop robust systemic risk indicators. - Increase expectations and testing for insurer contingency planning and information systems to improve crisis preparedness and cross-border coordination. *Source: IMF staff team assessment contained in the “Insurance Core Principles Detailed Assessment of Observance, February 2013” (PDF chapter _cr1357).* ### 2013. The related ROSC was published together with the FSSA on February 28, 2013. The views ### FINANCIAL SECTOR ASSESSMENT PROGRAM MALAYSIA INSURANCE CORE PRINCIPLES DETAILED ASSESSMENT OF OBSERVANCE FEBRUARY 2013 ### Executive Summary - Bank Negara Malaysia (BNM) is described as a highly respected insurance regulator; staff are viewed as knowledgeable, regulatory guidance is comprehensive, and supervision is effective. - ICP assessment outcomes: - Of the twenty-six ICPs, none were rated “not observed.” - Four ICPs were rated “partly observed.” - Fifteen ICPs were rated “largely observed.” - Seven ICPs were rated “observed.” - Identified gaps and planned improvements: - Proposed financial institutions legislation expected to address BNM’s powers for group-wide supervision and protection of client monies with intermediaries. - Implementation of the Internal Capital Adequacy Assessment Process (ICAAP) and new risk governance guidance expected to close gaps in formal expectations for insurer risk management. - Cross-border coordination: BNM is not a home supervisor to any insurance group and Malaysian insurers’ cross-border activities are not significant; limited urgency currently to implement substantive cross-border crisis coordination measures. - Special monitoring recommended for new entrants, insurers with recent changes in control, and Danajamin due to its financial guarantee business risks and an incomplete regulatory framework for financial guarantee insurance. - Overall conclusion: No current potential sources of significant risk to Malaysian financial stability from the insurance industry were identified; the industry is relatively small and fragmented without major risk concentrations apparent. ### Assessment Scope, Methodology, and Ratings Framework - Assessment conducted by Mark Causevic (external expert from OSFI Canada) during April 2012. - Benchmark: Insurance Core Principles (ICPs) issued by the IAIS in October 2011. - Scope note: Malaysian Islamic insurance market (family takaful, general takaful, re-takaful) included in report detail but not in ICP assessment ratings. - ICP material hierarchy preserved: - ICP statements (highest level) - Standards linked to ICP statements - Guidance material - Ratings definitions used in assessment: - Observed: all applicable standards observed. - Largely observed: only minor shortcomings exist. - Partly observed: shortcomings sufficient to raise doubts about ability to achieve observance. - Not observed: no substantive progress toward observance. - Not Applicable: standards not applicable. - Assessment basis: laws, regulations, supervisory requirements and practices in place at time of assessment; ongoing regulatory initiatives noted as additional comments only. ### Institutional and Macro-Prudential Overview — Market Structure and Industry Performance - Aggregate size and share: - Insurance sector accounts for around 6 percent of financial sector assets, equivalent to 15 percent of GDP (Source: IMF). - Market characteristics: - Market offers a wide range of life, non-life and takaful products; scope for further growth and consolidation. - Takaful comprises less than 15 percent of total premiums and contributions in the insurance and takaful industry. - Current industry challenges identified by BNM: asset-liability matching in a low interest rate environment, rising claims costs, and increased volatility in global markets. - Insurance penetration and density (Malaysia 2007–2011) — Table 1: - Penetration rate (measured as total premiums as a percentage of GDP): - Life: 2007 = 3.6% ; 2008 = 3.5% ; 2009 = 3.8% ; 2010 = 3.9% ; 2011 = 4.0% - Non-life: 2007 = 1.5% ; 2008 = 1.5% ; 2009 = 1.6% ; 2010 = 1.6% ; 2011 = 1.8% - Reinsurance: 2007 = 0.3% ; 2008 = 0.3% ; 2009 = 0.3% ; 2010 = 0.3% ; 2011 = 0.4% - Density (USD) (measured as total premium per capita, expressed in US dollars): - Life: 2007 = 221.5 ; 2008 = 223.3 ; 2009 = 233.7 ; 2010 = 253.3 ; 2011 = 261.8 - Non-life: 2007 = 90.4 ; 2008 = 97.7 ; 2009 = 101.8 ; 2010 = 106.9 ; 2011 = 114.3 - Reinsurance: 2007 = 17.0 ; 2008 = 18.5 ; 2009 = 20.2 ; 2010 = 22.9 ; 2011 = 23.5 - Source: Bank Negara Malaysia - Employment (excluding agents, brokers and intermediaries) — Table 2: - Number of Employees: 2006 = 22,989 ; 2007 = 23,848 ; 2008 = 24,152 ; 2009 = 23,359 ; 2010 = 23,329 ; 2011 = 23,865 - Source: Bank Negara Malaysia - Market access and licensing: - Access to Malaysian insurance market is restricted; BNM issues a limited number of insurer licences. - No direct conventional insurance licence has been issued since the 1970s. - Reinsurance, takaful and retakaful licences issued selectively since 1995 to enhance domestic capacity and develop takaful. - Seven reinsurance licences were issued between 1995 and 2007 (one life reinsurance licence and six general reinsurance licences). - Twelve takaful and retakaful licences were issued between 2005 and 2010. - A special license for a government-backed financial guarantee insurer was established in 2009 (see report box on Danajamin). - Ownership and foreign limits: - Foreign equity limit for insurers: 70 percent (higher considered on a case-by-case basis to facilitate consolidation/rationalisation). - Foreign equity limit for reinsurers: 70 percent; reinsurers may be established as branches. - Foreign equity limit for takaful operators: 70 percent. - No foreign equity limit for retakaful operators. - Industry consolidation: - Trend toward consolidation, particularly in the general insurance sector encouraged by BNM. - Number of licensed insurers (selected years) — Table 3: - Insurance Companies: 2000 = 53 ; 2006 = 42 ; 2011 = 36 - Life: 2000 = 7 ; 2006 = 8 ; 2011 = 9 - General: 2000 = 36 ; 2006 = 26 ; 2011 = 21 - Composite: 2000 = 10 ; 2006 = 8 ; 2011 = 6 - Reinsurance Companies: 2000 = 11 ; 2006 = 6 ; 2011 = 7 - Source: Bank Negara Malaysia ### Key Findings, Risks, and Recommendations - Broad supervisory assessment: - Seven ICPs observed — mostly supervisory activities and practices. - Fifteen ICPs largely observed — shortcomings mainly about formalizing expectations into guidelines, clarifying approaches, enhancing transparency, and expanding the supervisory tool kit. - Four ICPs partly observed — material shortcomings that need addressing (noted areas include group-wide supervision powers and client monies protection). - Risk monitoring priorities: - Monitor insurers to prevent imprudent practices, with particular attention to: - New entrants. - Insurers with recent changes of control. - Danajamin due to nature of financial guarantee insurance and incomplete regulatory framework. - BNM indicated intent to strengthen regulatory framework for financial guarantee insurance. - Regulatory and supervisory improvements to pursue: - Finalize proposed financial institutions legislation to strengthen group-wide supervision powers and protections for client monies held by intermediaries. - Implement ICAAP and risk governance guidance to formalize expectations for insurer risk management. - Enhance transparency and expand supervisory tools where minor shortcomings were identified. - Continue to seek continuous improvements beyond ICP minimums given rapid sector change. ### Institutional Engagement and Information Sources - Assessment relied on a comprehensive self-assessment and supporting documents provided by authorities: reports, studies, public statements, websites, unpublished guidelines, directives. - In-depth discussions and briefings with BNM officials and industry stakeholders informed the analysis. - Assessment acknowledges that ICP evaluations are point-in-time and may change as legal, supervisory or market conditions evolve. *Source: IMF staff team assessment contained in the “Insurance Core Principles Detailed Assessment of Observance, February 2013”* ### 12. Four out of nine life insurers are owned by the large domestic banks and ### _cr1357 - 12. Four out of nine life insurers are owned by the large domestic banks and ### Ownership structure of Malaysian insurers and takaful operators - Four out of nine life insurers are owned by the large domestic banks. - Domestic parties account for most ownership of the Malaysian general insurers. - Foreign-owned insurers rank as or amongst the largest insurers in the life and non-life sectors. - Domestic banks have major presence in the takaful market; the dominant takaful operator is a subsidiary of a large domestic bank. - Table 4 (majority ownership, more than 50%) summary by category: - Life: Domestic Banks 1; Non-financial entities 1; Public sector 2; Insurance group -; Foreign insurance group 3 - Non-life: Domestic Banks 4; Non-financial entities 7; Public sector 1; Insurance group 2; Foreign insurance group 8 - Reinsurance: Domestic Banks 3; Non-financial entities -; Public sector -; Insurance group -; Foreign insurance group 4 - Composite: Domestic Banks -; Non-financial entities 1; Public sector -; Insurance group 1; Foreign insurance group 4 - Takaful: Domestic Banks 1; Non-financial entities 2; Public sector -; Insurance group 1; Foreign insurance group 2 - Retakaful: Domestic Banks 5; Non-financial entities -; Public sector -; Insurance group 1; Foreign insurance group 4 - Note: Includes reinsurers and retakaful operators; includes financial holding companies with substantial banking activities; Danajamin included in public sector. ### Cross-border operations - In 2011, cross-border operations of domestic insurers involved total assets of RM979.8 million. - RM979.8 million amounted to only 0.5 percent of total insurance industry assets in 2011. - These operations spanned four countries near the Malaysian borders. ### Distribution channels and intermediaries - Agency is the primary distribution channel for both life and general business. - Agency channel generates 59 percent of new premiums (Life). - Agency channel generates 65 percent of gross premium (General). - Number of licensed agents and brokers remained level over the past 5 years. - Bancassurance has gained prominence; insurers leverage banks’ network and customer base. - Bancatakaful is the main distribution channel in the family takaful sector, contributing 53 percent in 2011. - Table 5: Number of Licensed Intermediaries - Agents: 2007: 117,752; 2008: 113,653; 2009: 116,008; 2010: 122,399; 2011: 118,783 - Brokers: 2007: 34; 2008: 34; 2009: 37; 2010: 37; 2011: 38 ### Composition of insurance fund assets and market risk exposures - PDS (private debt securities) remained the majority of assets: - 2011: 37.3 percent of total assets - 2010: 38.6 percent of total assets - Bulk of PDS (88.1 percent) held in high-grade papers (rated ‘A’ and above). - Equity holdings reduced: - 2011: 14.7 percent of assets - 2010: 16.5 percent of industry assets - Increased holdings in MGS and fixed deposits: - MGS: 17 percent of industry’s total assets (2011) - Fixed deposits: 13.6 percent of industry’s total assets (2011) - 2010: MGS 15.5 percent; fixed deposits 11.2 percent - Market risk exposures maintained: - 2011 market risk exposures: 12.6 percent of capital available - 2010 market risk exposures: 12.5 percent of capital available - Equity and interest rate risks jointly formed 84.6 percent of insurers’ total market risk exposures. ### Life insurance products and pension policy potential - Investment-linked products account for one third of the total new life business. - Demand for investment-linked products reduced significantly due to global market uncertainty. - Potential of the life industry can be further harnessed through a holistic pension review that is being undertaken, including providing tax incentives to spur the private pensions industry. ### Takaful growth and composition - Takaful experienced double-digit growth over the past 5 years with average annual growth of 24 percent. - Family takaful accounted for 85 percent of total takaful funds in 2011. - Ordinary family product accounted for 79 percent of family takaful new business. - General takaful dominated by motor takaful with gross contribution of 54 percent in 2011. ### Natural catastrophe and large-loss sources - Malaysia is not a country with significant natural catastrophe risks. - Flooding events can lead to significant gross insurance losses, but commercial risks tend to be the bigger source of large losses. ### Reinsurance usage and retention ratios - Overall business retention level for general insurers is approximately 70 percent, varying widely by business class. - Reinsurance premium ceded for large/specialised risks: - Aviation: 94 percent of total premiums ceded - Oil & gas: 93 percent ceded - Engineering: 56 percent ceded - Motor insurance retention rate approaches 90 percent (motor is the dominant general insurance line). - Malaysian insurers reinsure substantial parts of risks in the global reinsurance market, directly or via Malaysian branches of foreign reinsurers. ### Profitability, claims experience, and capital adequacy - Industry and premium growth dropped off in 2011; capital adequacy remained strong. - Reinsurers recorded operating losses as business interruption claims surged due to floods in Thailand. - Fire business overall claims ratio increased to 69.5 percent in 2011 (2010: 36.3 percent). - Motor third-party bodily injury (motor ‘Act’) claims ratio rose to 300 percent in 2011 (2010: 278.7 percent). - Overall motor claims ratio (including ‘comprehensive’) improved to 76.8 percent in 2011 (2010: 79.5 percent). - Aggregate capital adequacy ratio (CAR) for general and life insurance industry: - 2011: 222.5 percent - 2010: 224.6 percent - Supervisory minimum capital requirement: 130 percent - Solvency positions (Table 6): - Life: 2009 (FYE) 320.1 percent; 2010 (FYE) 307.8%; 2011 (Q4) 279.0% - Non-life: 2009 189.6%; 2010 198.4%; 2011 (Q4) 222.9% - Composite: 2009 239.1%; 2010 236.9%; 2011 (Q4) 243.1% - Reinsurance: 2009 218.9%; 2010 218.1%; 2011 (Q4) 220.4% ### Danajamin Nasional Berhad (Box summary) - Danajamin established by the Government in 2009 as the country’s first Financial Guarantee Insurer to stimulate the domestic bond and sukuk market. - Ownership: Minister of Finance Incorporated 50%; Credit Guarantee Corporation Malaysia Berhad 50%. - Rating and capital: - ‘AAA’-rated - Paid-up capital RM1 billion - Callable capital RM1 billion - Capacity to underwrite policies up to RM15 billion based on existing capital - Licensed under the Insurance Act 1996 and regulated by BNM. - As at December, 2011 Danajamin provided guarantees to 16 companies for bond programmes totalling RM5.3 billion, where Danajamin exposure is 83.4% or RM4.4 billion. - Co-guarantee and syndicated guarantee arrangements introduced with commercial banks to match shorter-maturity tranche by banks and longer-maturity tranche by Danajamin. - Contribution: lengthened maturity profile of bonds to a maximum of 20 years (previously 10 years). ### Institutional framework and regulatory developments - Oversight primarily by Bank Negara Malaysia (BNM) and the Securities Commission (SC). - BNM supervises banking sector (conventional, Islamic, investment and development banks) and the insurance sector (including reinsurance and takaful). - BNM licenses financial advisors, insurance brokers, money brokers; oversees money and foreign exchange markets; and payment clearing and settlement systems. - SC regulates securities industry and derivatives (other than exchange rate related OTC contracts). - Other bodies: - PIDM: stand-alone deposit protection agency. - Labuan FSA: covers offshore financial activities in Labuan; LFSA chaired by the BNM Governor. - Two main pension funds are state-owned and overseen by the Ministry of Finance. - SC currently regulates nascent private sector pension fund industry using fund management regulations; separate pension regulations to be introduced soon. - Legislative reforms underway: - Proposed Financial Services Act (FSA) and Islamic Financial Services Act (IFSA) to consolidate existing regulatory laws. - Dual framework to be maintained for conventional and Islamic financial business. - Proposed changes will replace Banking and Financial Institutions Act 1989, Islamic Banking Act 1983, Insurance Act 1996, Takaful Act 1984, Payment Systems Act 2003 and Exchange Control Act 1953. - Proposed provisions to allow BNM oversight over financial groups containing one or more licensed institutions. ### Preconditions for effective insurance supervision - Legal framework based on common law with a single structured judicial system and avenues for appeal. - Alternative dispute resolution mechanisms exist to conserve judicial resources and expedite case disposals. - Accounting and audit framework: - Companies Act 1965 requires accounts based on Malaysian Accounting Standards Board (MASB) approved standards. - Public interest entities required to report using Financial Reporting Standards (FRS) in full compliance with IFRS; IFRS directly transposed into Malaysian FRS with limited local changes. - Annual audited accounts by approved auditors in compliance with National Auditing Standards, aligned with International Standards on Auditing. - Membership in Malaysian Institute of Accountants (MIA) is a pre-requisite for professional accountants/auditors; members must comply with MIA By-Laws on Professional Ethics. ### Financial market developments - Size of the debt securities market grew to 104 percent of GDP in 2011. - Financing through corporate debt securities and sukuk markets increased to account for 58 percent of total outstanding corporate financing as at end-2011. - Equity market capitalization was RM 1.2 trillion in 2010. *Source: Bank Negara Malaysia; Danajamin website; BNM FSPSR 2011.* ### 29. Malaysia has a guarantee fund for the protection of owners of insurance ### _cr1357 - 29. Malaysia has a guarantee fund for the protection of owners of insurance ### TIPS (Takaful and Insurance Benefits Protection System) - TIPS administered by Perbadanan Insurans Deposit Malaysia (PIDM) to protect owners of takaful certificates and insurance policies from the loss of their eligible benefits in the unlikely event of an insurer member failure. - TIPS, one of the components of the Enhanced Financial Consumer Protection Package established by PIDM, was brought into effect on 31 December 2010. - TIPS is funded by annual premiums paid by member institutions; part of the reserves came from the transfer of the Insurance Guarantee Scheme Fund (IGSF) from BNM to PIDM. - Eligibility: the takaful certificate or insurance policy must be issued in Malaysia by an insurer member and be denominated in Ringgit Malaysia. - Coverage: Based on the limits and scope of coverage, 95 percent of all Takaful certificates and insurance policy holders are protected in full. ### Summary of ICP compliance (Table 7 highlights) - Aggregate Level counts: - Observed (O): 7 - Largely observed (LO): 15 - Partly observed (PO): 4 - Not Observed (NO): 0 - Total: 26 - Selected ICP assessments (level and key comment): - ICP1 - Objectives, Powers and Responsibilities of the Supervisor — LO: Existing legislation clearly defines BNM as the authority responsible for insurance supervision; supervisory objectives could be more clearly defined. - ICP2 - Supervisor — LO: BNM operationally independent; transparency of regulatory expectations could be enhanced. - ICP3 - Information Exchange and Confidentiality Requirements — LO: Adequate legal/administrative framework; BNM lacks explicit power to regulate and obtain information from authorised financial or insurance holding companies. - ICP4 - Licensing — LO: Only licensed entities may conduct insurance; licensing criteria not contained within legislation; FSA expected to address this. - ICP5 - Suitability of Persons — LO: Adequate framework for Board/senior management; no requirement for significant owners to continually comply with suitability—FSA expected to address. - ICP6 - Changes in Control and Portfolio Transfers — LO: Legislation defines ‘control’; approval regime two-staged with prior approval required to commence negotiations for transfers of 5% or more. - ICP7 - Corporate Governance — LO: Broad legislative requirements; extensive BNM guidance but some key guidance due for review. - ICP8 - Risk Management and Internal Controls — LO: Wide-scope expectations via guidelines; some guidance dated and due for update. - ICP9 - Supervisory Review and Reporting — O: Integrated risk-based system using off-site monitoring and on-site inspections; BNM collects extensive information. - ICP10 - Preventative and Corrective Measures — O: Framework promotes timely preventative/corrective measures; SuRF and SIG allow early intervention. - ICP11 - Enforcement — LO: Wide range of enforcement powers; greater transparency on enforcement criteria and expanded tools recommended. - ICP12 - Winding-up and Exit from the Market — O: Extensive legislative framework; PIDM empowered to intervene upon BNM’s determination of non-viability. - ICP13 - Reinsurance and Other Forms of Risk Transfer — LO: Well-established framework for reinsurance (general insurers); key guideline due for review and does not extend to life reinsurance. - ICP14 - Valuation — O: IFRS effectively used as valuation basis for solvency, with MOCE and discounting requirements for life insurers. - ICP15 - Investment — LO: Prudential considerations set out; guidelines do not fully reflect expectations nor address group-wide risks. - ICP16 - Enterprise Risk Management for Solvency Purposes — PO: Many guidelines promoting ERM; planned near-term changes to address gaps, particularly ICAAP expectations. - ICP17 - Capital Adequacy — LO: RBC framework in place with two explicit triggers; RBC not defined in terms of level of protection; no risk capital framework for financial guarantee insurance. - ICP18 - Intermediaries — PO: Legislative empowerment to license/regulate brokers and financial advisors; agents largely self-regulated; no legislative requirement for separate fiduciary accounts. - ICP19 - Conduct of Business — LO: Consumer protection guidelines and market conduct surveillance in place; effectiveness could be enhanced with stronger enforcement and supervisory framework. - ICP20 - Public Disclosure — LO: IFRS-based disclosure requirements and BNM publishing of industry data; additional disclosures useful to analysts/market participants are limited. - ICP21 - Countering Fraud in Insurance — LO: Serious penalties exist; BNM issues guidelines and collects fraud data; supervisory practices could be enhanced. - ICP22 - AML/CFT — O: BNM designated AML/CFT authority; issued guidelines and AML/CFT supervisory reviews; BNM has signed 34 information sharing MoUs with foreign authorities. - ICP23 - Group-wide Supervision — PO: No significant insurance groups as home supervisor; BNM lacks explicit authority to regulate/supervise holding companies and related entities. - ICP24 - Macroprudential Surveillance and Insurance Supervision — O: BNM conducts monitoring and analysis supported by extensive data; more structured surveillance approach would enhance effectiveness. - ICP25 - Supervisory Cooperation and Coordination — O: Adequate legal/administrative framework for cooperation; demonstrated openness to cooperation. - ICP26 - Cross-border Cooperation and Coordination on Crisis Management — PO: Adequate framework for cooperation; BNM’s role in cross-border crisis management expected to be limited; increased insurer contingency planning and information systems recommended. ### Key recommendations (selected from Table 8) - ICP1: Amend legislation to more specifically highlight application of BNM’s principal objectives to insurance supervision (expected to be addressed in the FSA). - ICP2: Formalize a policy development framework and establish a more liberal approach to public disclosure of regulatory expectations (BNM rolled out policy development framework in May 2012). - ICP3: Participate in more extensive MoU arrangements (including the IAIS MMOU) to strengthen information protection. - ICP4: Incorporate clear and objective licensing approval criteria within legislation (proposed legislation aims to do this). - ICP5: Amend legislation to require significant owners to continually comply with suitability requirements and provide powers to address non-compliance (expected to be addressed in the FSA). - ICP6: More explicitly define approval criteria for acquisitions of significant ownership interests and portfolio transfers to reduce potential undue political interference (expected to be addressed in the FSA). - ICP7 & ICP8: Update, consolidate and codify corporate governance and risk management guidelines; consider recent updates to the Malaysian Code on Corporate Governance. - ICP11: Enhance enforcement regime by: - Better aligning Ministerial approval requirements with clearer objectives in legislation; - Enhancing range/options of enforcement tools and deterrence measures; - Increasing transparency of criteria for enforcement decisions (expected to be addressed in the FSA). - ICP14: Conduct more detailed assessments and benchmarking for MOCE determination; review valuation approaches for solvency purposes in normal stress periods. - ICP15: Review investment guidelines to include expectations on use of external credit ratings and group-wide investment aggregation risks. - ICP16 & ICP17: Implement near-term changes to address ERM gaps (ICAAP, Risk Governance) and consider defining RBC protection level; develop regulatory capital framework for financial guarantee insurance. - ICP18: Codify fiduciary account requirements for intermediaries and strengthen enforcement powers (expected to be addressed in the FSA); develop a supervisory approach specific to intermediaries. - ICP19: Strengthen enforcement powers and market conduct supervision (expected to be addressed in the FSA). - ICP20: Enhance public disclosure regime with disaggregated information on insurer source of earnings and capital adequacy measures. - ICP21: Review effectiveness of SuRF in capturing insurer anti-fraud practices. - ICP22: Utilize FIU specialists for AML/CFT supervisory reviews of insurers selling higher ML-risk products. - ICP23: Amend legislation to provide BNM explicit powers to regulate and supervise holding companies and related entities (FSA expected to empower BNM). - ICP24: Enhance macroprudential surveillance by: - Requiring periodic comprehensive industry-wide standardized scenario testing; - Establishing more structured internal processes for identifying and reporting emerging industry risks; - Developing more robust systemic risk indicators for insurers. - ICP26: Increase expectations for insurers to maintain comprehensive contingency plans and information systems capable of timely ad hoc information on risk accumulation. ### Authorities’ response (summary) - Bank Negara Malaysia welcomes the assessment and affirms ongoing efforts to maintain an effective regulatory and supervisory framework. - Many recommendations correspond with BNM current priorities; a significant number will be addressed by proposed financial services legislation (FSA). - FSA expected to provide greater transparency in licensing standards and suitability requirements for shareholders, enhance enforcement and corrective powers, and provide authority to regulate and supervise holding companies. - BNM implemented a policy development framework in May 2012 to clarify and communicate regulatory expectations and commit to regular review of regulatory standards. - BNM committed to strengthening cooperation and information exchange with other supervisors, wider participation in bilateral MoUs, enhancing cross-border crisis management capabilities, and introducing more advanced tools for monitoring systemic risks in the insurance sector. *Source: IMF staff report content provided in the supplied PDF chapter _cr1357 - 29. Malaysia has a guarantee fund for the protection of owners of insurance* ### Part X of the IA defines the procedures that need to be complied with when dealing with ### Part X of the IA defines the procedures that need to be complied with when dealing with insolvency and the winding up of insurers. ### Scope and procedures under IA, TA, CA, and Companies (Winding up Rules) - Procedures covered: issuance of notices; matters related to the appointment of liquidator; application of insurance funds; valuation basis for the assets and liabilities of the existing insurer in respect of winding up. - CA complements IA and TA by setting out the modes and circumstances for a winding up to take place (Part X of CA), applicable to both insurers and takaful operators. - Companies (Winding up Rules) lays out procedures to be adhered to when petitioning for a winding up. ### Petitioning, court process, and liquidator appointment - Under IA and TA, BNM may present a petition to the Court for the winding up of an insurer or a takaful operator when the business is being carried out in a manner detrimental to the interest of its policyholders, creditors, takaful participants, operators or the public. - Other persons may also petition the Court for the winding up of an insurer, but must also deliver that petition to BNM; BNM is entitled to appear and be heard in all proceedings relating to the petition. - Upon court approval, BNM can appoint a liquidator to handle the winding up of an insurer or takaful operator. - IA requires that the petition order shall only be made once an insurer, its employee, director or person has been given a reasonable opportunity to make a representation in writing to BNM or the Minister. - Exception: provisions allow for an order to be made first and then for the opportunity to make representation to immediately follow, if any delay would be detrimental to the interest of the insurer, its policyholder or the public generally. ### BNM’s historical practice and preferred resolution approach - BNM has not petitioned the Court for the winding up of any troubled insurance legal entity since IA came into force in 1997, or any takaful operators under TA 1984. - BNM’s operating policy: adopt the least-cost resolution method and minimal-disruption option for the resolution of troubled insurance legal entities or takaful operators. - BNM reported utilizing the power under section 59 of IA (with Ministerial approval) to assume control and to require disposal of business to resolve problems of troubled insurance legal entities. ### Protection of policyholders’ rights and application of insurance/takaful funds - IA restricts voluntary winding up of local insurers (whether or not its licence has been revoked) under CA or by the Court: not allowed except after the transfer of the whole of its business to another insurer—imposed to protect the interest of policyholders. - In the winding up of an insurer, assets of an insurance fund shall be applied to meet its liabilities to policyholders and claimants under policies of that class of insurance business. - These liabilities have priority over unsecured liabilities other than preferential debts (wages etc., as specified under CA section 292(1)). - TA provides that in the event of a winding up, the assets comprised in the takaful fund shall be applicable only to meet such part of the operator’s liabilities and expenses as is properly so attributable. ### Regulatory triggers, SIG process, and non-viability determination - BNM has a regulatory framework to determine the point at which it is no longer permissible for an insurer to continue business; intervention and resolution powers are implemented within its SIG process, which stipulates different levels of supervisory actions and oversight for different SIG stage ratings. - Insurers that BNM assesses as ‘stage 5’ would not be viewed as viable. - Factors BNM considers in determining whether an insurer has ceased to be viable or is likely to cease to be viable: - The institution is not following sound business and financial practices and further regulatory directives would not reasonably improve the institution’s prospects to restore or preserve its financial soundness; - The shareholders are unlikely to restore the institution’s capital to the regulatory level within a reasonable time frame and failure to do so would jeopardise the interests of the policyholders or takaful participants; - The institution is dependent to an excessive extent on loans, advances, guarantees or other financial assistance to sustain its operations; or - The institution has lost the confidence of policy holders, takaful participants and the public. - These factors are also set out in the Strategic Alliance Agreement signed between PIDM and BNM to ensure institutions are placed into resolution in a timely manner. ### BNM–PIDM coordination and PIDM Act (2011) powers - BNM works closely with PIDM in practice to evaluate the condition of problem institutions and possible resolution considerations; information sharing arrangements exist between BNM and PIDM to facilitate a cooperative process for intervention and resolution strategies. - The revised PIDM Act (2011): - Widens PIDM’s mandate to intervene or resolve troubled institutions which have ceased to be viable or which BNM considers likely to become non-viable in the best interest of the policyholders and takaful participants. - Aims to ensure prompt payments are made to policyholders and takaful participants to minimise disruption to the provision of benefits. - Specifies circumstances in which PIDM can take comprehensive resolution and intervention actions against an insurer facing severe financial difficulties. - If BNM is of the opinion that an insurer has ceased to be viable or is likely to cease to be viable, BNM may notify PIDM under section 98 of PIDM Act. - Upon receiving written notification from BNM, PIDM is empowered to intervene and resolve troubled insurers by exercising various powers under the PIDM Act. *Source: _cr1357 - Part X of the IA defines the procedures that need to be complied with when dealing with (PDF).* ### section 99(1) of PIDM Act. ### section 99(1) of PIDM Act ### Resolution powers and tools (PIDM Act, section 99) - PIDM empowered to designate a bridge institution to temporarily assume the commitments of a non-viable institution as a resolution option (section 99 of PIDM Act). - PIDM empowered to arrange transfers of policies/certificates from a distressed insurer/takaful operator to another insurer/takaful operator. - Purpose of options: - Secure continuity of insurance/takaful coverage for policyholders/takaful participants (especially life insurance and family takaful). - Minimise disruption of timely provision of benefits to policyholders/takaful participants/claimants. - Upon BNM’s determination of insurance non-viability, PIDM is empowered to intervene and resolve troubled insurers, with the aim of minimizing costs to the financial system. - Recommendation / regulatory consideration: - Consider more clearly defining ‘non-viability’ triggers within legislation to ensure greater understandability and consistency in intervention and resolution practices. ### Policyholder/claimant compensation (TIPS) - TIPS replaces the existing IGSF administered by BNM and operates as an explicit compensation scheme for consumers of insurance and takaful in the event of an insurer or takaful operator failure. - Maximum coverage limits under TIPS are estimated to provide protection of about 95% of policyholders/claimants in full. - Under TIPS, the maximum level of protection is predetermined to provide greater certainty, assurance and full protection to the vast majority of policyholders and takaful participants. ### Supervisory collaboration and regulatory balance - Collaboration between BNM and PIDM in implementation of intervention and resolution powers provides check and balance in the regulatory framework and minimises regulatory forbearance in addressing troubled insurers. - BNM indicated that proposed legislation will aim to better harmonize the protection available for consumers of insurance and takaful products. ### Reinsurance and other forms of risk transfer (ICP 13) — key requirements and practices - Legislation requires reinsurance/retakaful arrangements to be consistent with sound insurance/takaful principles (IA s.57, TA s.23). - BNM has powers to rectify unsuitable reinsurance arrangements based on IA criteria (e.g., not technically appropriate to the portfolio). - Board responsibilities: BNM guidance on corporate governance outlines Board role in underwriting, reinsurance and claims management. - Market characteristics: - Reinsurance utilisation higher in general insurance; direct life insurers generally maintain high retention levels. - Key prudential and administrative guidance: - Guidelines on General Reinsurance Arrangements (introduced in the 1990’s) — includes retention appropriateness, security of reinsurers, spread to avoid concentration, contract terms, and placement issues. - Insurer Boards required to confirm in an annual ‘written declaration’ to BNM that reinsurance arrangements are adequate and reinsurers are of good security. - Guidelines on the Role of Insurers and Brokers in Reinsurance require full transparency; treaty documents and facultative reinsurance policies should be received within 90 days of inception of risk. - Overseas placement safeguards: - For overseas placements, foreign reinsurers must have a minimum rating of ‘A’ by an accredited rating agency, or have a combined paid-up capital and surplus of at least US$150 million. - Collateral/reserve deposit required for placement with foreign reinsurers not licensed in Malaysia; reinsurance credits recognised only to the extent of deposits retained from reinsurers. - Life insurance practice: - Appointed Actuary (AA) must assess suitability and adequacy of reinsurance programme and report in the annual Financial Condition Report (FCR). - Retakaful: - Prudential requirements for retakaful arrangements are broader but less detailed; BNM indicates specific requirements will be enhanced with growth in retakaful utilisation. - Supervisory parity and disclosure: - Domestic reinsurers subject to same supervisory standards as direct insurers. - No formal supervisory recognition arrangements relating to reinsurers. - No additional public disclosure requirements on reinsurance transactions beyond IFRS 4. - Non-traditional risk transfer: - No explicit approval requirements, but BNM expects insurers to seek approval before entering non-traditional arrangements. - To date, no reinsurance transaction involving risk transfer to the capital markets in Malaysia. - Assessment and recommendation: - Assessment: Largely Observed. - BNM should update and expand reinsurance guidelines, particularly to ensure continued appropriateness and sufficient scope for life reinsurance. ### Valuation (ICP 14) — valuation basis and technical provisions - Financial reporting governed under FRA and CA; reporting entities must comply with MFRSs issued by MASB. Effective January 1 2012, MFRSs are in full compliance with IFRS as issued by IASB. - BNM may prescribe basis for determination of insurance fund assets, technical provisions and insurance fund liabilities (IA s.44; TA s.41). - For solvency purposes, BNM effectively uses IFRS as valuation basis with prescribed requirements in guidance and RBC, Guidelines on Valuation Basis for General Takaful Business, Guidelines on Valuation Basis for Family Takaful Business. - Life/family takaful technical provisions: - Measured using prospective actuarial valuation: present value of future guaranteed benefits plus appropriate non-guaranteed benefits for participating policies; account for expected future management and distribution expenses; less present value of future gross considerations; discounted at appropriate risk discount rate. - All options and guarantees must be explicitly identified and quantified. - RBC requires stochastic methods for valuation of options and guarantees unless portfolio is small and features simple/short-term, where deterministic methods may be allowed. - Explicit allowance for lapses and surrenders in cash flow projections; policyholder behaviour must be explicitly taken into account. - Surrender value floors not considered in technical provisions but are considered at capital level. - Margin over the Current Estimate (MOCE) required to provide an appropriate allowance for adverse deviation; overall technical provision to achieve a 75% confidence level. - MOCE methodologies reviewed as part of supervisory process; BNM plans more detailed assessments and benchmarking of MOCE methods. - Discounting and discount rates: - Prescribed risk discount rate for guaranteed benefits and specified funds is the Malaysian Government bond spot-rate curve. - During the global financial crisis, in 2009 BNM amended valuation rules to use a weighted curve over several past periods; temporary requirement removed beginning 2011. - Participating policy valuation takes the higher of guaranteed benefits discounted at risk free rate and total benefits liabilities discounted at fund based yield. - General insurance technical provisions: - Consist of claims liabilities (case-by-case and IBNR) and premium liabilities (higher of unearned premium reserve and unearned risk reserve together with MOCE). - MOCE for general insurers derived separately as percentages of best estimate claim liabilities and premium liabilities. - No explicit requirement for general insurers to discount liabilities; companies with long-tailed portfolios do apply discounting. - Governance and actuarial standards: - Valuation involves significant judgement; governance is supported by professional actuarial bodies’ practice standards and code of conduct. - All Appointed Actuaries and Signing Actuaries required to be Fellow members with sufficient post-qualification experience. - Assessment and recommendation: - Assessment: Observed. - BNM should review extent to which valuation approaches for solvency adequately meet regulatory objectives during ‘normal’ stress periods to limit need for temporary adjustments during anomalous conditions. ### Investment (ICP 15) — investment constraints and supervisory expectations - IA empowers BNM to prescribe investment manner (s.45) and safekeeping (s.48); documents evidencing title to assets to be held in Malaysia in custody of insurer or banking institution or as approved by BNM. - RBC includes: - Expectation of overall investment strategy and risk management policy aligned with Board-approved risk appetite. - Differentiated credit risk capital charge by counterparty risk and allowance for collateral/guarantee enhancements. - Maximum limits (as percentage of total assets) for less secure asset classes: - maximum 5% exposure to non-investment grade debt securities, - 5% limit for shares not listed on the Main Market of Bursa, - absolute limit on foreign assets in jurisdictions with sovereign ratings at least equivalent to that of Malaysia (10 percent). - General insurance funds: minimum ratio of 10% liquid assets and maximum of 20% invested in immovable properties. - Asset concentration risk charge of 100% in excess of maximum limits for exposure to individual counterparties. - Lower interest capital charges for better matching of asset and liability durations; challenge due to insufficient long term fixed income instruments in Malaysian market. - Takaful investment requirements: - TA specifies at least 80% of total assets in Malaysian assets, with at least 15% invested in securities of the Federal or State Government (s.17); safekeeping requirements (s.20). - BNM developing a risk based capital framework for takaful operators. - Securities Borrowing and Lending (SBL): - Transactions must be collateralized; acceptable collaterals deposited with BNM or authorized depository institution. - Period of any SBL transaction must not be more than 1 month. - Derivatives: - Guidelines restrict use of derivatives to hedging only. - Derivatives exposure of insurers in relation to total assets is under 5%; prevalent transactions are “plain vanilla”, exchange traded and liquid. - Related party transactions and outsourcing: - Guidelines require fair and reasonable terms, reference to independent valuation or arm’s length terms. - Outsourcing guidelines require effective management of risks when investment activities are outsourced to related entities and fund managers. - Appointed Actuary role: - AA must review and judge whether investment policy is appropriate to liabilities and policy owner’s’ reasonable expectation (PRE) in FCR. - BNM will issue a concept paper on managing participating business detailing expectations on investment management and impact on PRE. - Gaps noted: - Expectations for insurers to conduct their own due diligence on counterparty risk rather than relying solely on credit ratings. - Applicability of requirements on a group-wide basis to cover investment aggregation risk. - Assessment and recommendation: - Assessment: Largely Observed. - BNM should review investment-related guidelines to include expectations on insurer use of external credit ratings and group-wide investment aggregation risks. ### Enterprise risk management and solvency (ICP 16, ICP 17) — governance and capital framework - Enterprise risk management (ICP 16): - Principle-based approach allowing flexibility to insurers relative to nature, scale and complexity. - Prudential Framework of Corporate Governance for Insurers expects effective risk management systems. - RBC requires insurers to maintain capital adequacy commensurate with risk profiles and to set an Internal Target Capital Level (ITCL) above supervisory minimum CAR, with a capital management plan to restore capital if it falls below ITCL. - Internal models not permitted for minimum regulatory capital determination under RBC. - Life insurer AA required annually to prepare Financial Condition Report (FCR); complemented by Dynamic Solvency Test report. - Guidelines on Stress Testing require rigorous, forward-looking tests considering second round effects and correlation changes. - Planned enhancements: - Risk Management Guidelines – Risk Governance to clarify Board and senior management roles, make explicit expectations for risk tolerance limits. - Implementation of Guidelines on Internal Capital Adequacy Assessment Process (ICAAP) expected in late 2012 to require insurers to set ITCL, prepare capital management plan and monitor capital levels; ICAAP requires factoring in risks beyond RBC. - Extension of FCR and Dynamic Solvency Testing requirements to general insurers and takaful operators; development of RBC for takaful operators. - Assessment: Partly Observed. - Comment: Planned near-term changes expected to address identified gaps. - Capital adequacy (ICP 17): - RBC implemented in 2009 replacing Margin of Solvency Framework; developed on total balance sheet approach. - RBC features: - Pre-defined criteria for capital available and list of capital available. - Statutory capital aligned to credit, market, insurance and operational risk exposures. - Capital adequacy ratio (CAR) measuring sufficiency of capital resources. - Calibration and risk charges developed referencing Malaysian market conditions via volatility studies and quantitative surveys, with adjustments for benchmarking. - Operational risk charge proxied by total assets. - Liquidity risk primarily addressed for general insurance funds; not a major concern for life insurers. - RBC does not explicitly address interdependencies between/within risk categories; capital requirements consider entity-specific risks only (no group-wide capital adequacy expectations). - Solvency control levels under RBC: - Supervisory Target Capital Level (STCL): - Insurers required to maintain CAR at 130% (STCL) over a period of 1 year. - Breaches of STCL subject to most severe supervisory actions. - Individual Target Capital Level (ITCL): - Set above STCL to reflect specific risk profiles and risks not addressed by RBC and to capture qualitative factors. - Insurers required to account for plausible adverse scenarios over a one-year time horizon so ITCL does not fall below STCL under such scenarios. - Breaches of ITCL may trigger supervisory actions (e.g., restrictions on dividend payments, interest or redemption of capital instruments). - Model use and capital instruments: - Internal or partial internal models not permitted currently for STCL determination. - Determination of ITCL under ICAAP should not be based on internal model outputs unless expressed as plausible adverse scenarios consistent with stress test expectations. - All planned issuance of capital instruments by insurers under RBC requires prior BNM approval. - Capital available governed by tiering: core Tier 1 and supplementary Tier 2; Tier 1 required to exceed Tier 2; certain instruments deducted if not realisable on going or gone concern basis. - Additional allowances for valuation surplus and 50% of discretionary future bonuses payable for participating business. - Adjustments recognise non-fungibility of valuation surplus between participating life business and shareholders’ fund. - Group issues and future enhancements: - RBC does not apply to insurance groups; partial addressing of intra-group exposures via deduction from investments in subsidiaries. - BNM indicated possible future enhancements: - Internal models and partial internal models as tailored approaches when market capacity allows. - Adjustments to regulatory capital for diversification effects to address interdependencies between/within risk categories. - During the global financial crisis, BNM introduced temporary counter-cyclical measures to reduce pro-cyclicality of capital requirements. - Takaful solvency regime currently requires surplus of assets over liabilities of not less than RM5 million for each family and general takaful business and minimum paid-up capital of RM100 million. - BNM issued a concept paper on RBCT in April 2011 and is implementing RBCT for takaful. - BNM is developing a regulatory capital framework for financial guarantee insurance following the establishment of Danajamin Nasional Berhad in 2009. - Assessment and recommendations: - Assessment: Largely Observed. - BNM should consider explicitly addressing interdependencies between and within risk categories within RBC. - BNM should consider more explicitly defining RBC in terms of level of risk protection it should afford, subject to insurer competencies and market depth/liquidity. - BNM should establish definitive project plans for near-term development and implementation of a regulatory capital framework for financial guarantee insurance. ### Intermediaries (ICP 18) — distribution and oversight - Market distribution: - Agency force dominates; insurance and takaful agents accounted for more than 60% of total premiums transacted in 2010. - Insurance brokers accounted for about 11% and financial advisers less than 1% of total premiums transacted in 2010. - Bancassurance distribution is significant. - Regulation of agents: - Insurance and takaful agents not directly regulated by BNM; subject to self-regulatory requirements of industry associations. - Insurers required to oversee conduct of their agents; BNM’s expectations for agents indirectly administered through supervision of insurers. - Inter-company agreements require insurers/takaful operators to only deal with agents registered with mandatory associations: - Life Insurance Association of Malaysia (LIAM) for life insurance agents; - Persatuan Insurans Am Malaysia (PIAM) for general insurance agents; - Malaysian Takaful Association (MTA) for takaful agents. - Members are prohibited under inter-company agreements from dealing with unregistered agents; actions including fines may be imposed for breach. *Source: _cr1357 - section 99(1) of PIDM Act.* ### Section 22 of IA and section 4 of TA imposes a mandatory requirement for licensees to become a member of ### _cr1357 - Section 22 of IA and section 4 of TA imposes a mandatory requirement for licensees to become a member of ### Associations, agents and bancassurance - Section 22 of IA and section 4 of TA require licensees to become members of: - an association of life insurers (life insurance business), - general insurers (general insurance business), - takaful operators (takaful business), - insurance brokers (insurance broking business). - BNM approves the constituent documents of these associations. - Associations issue rules for registration and regulation of insurance agents to ensure professionalism and good business conduct; BNM works closely with associations to issue conduct rules. - Corporate agents of life insurers: individual staff engaged by corporate agents to sell life insurance must register with LIAM. - Bancassurance: - Staff of banking institutions marketing life insurance products must register with LIAM and comply with life insurance agent rules. - MTA imposes similar registration requirements for banking staff marketing takaful products. - Staff of banking institutions marketing general insurance products are exempt from registration with PIAM, but PIAM requires bancassurance partners to submit an undertaking that the bank and its staff will comply with general insurance agent rules; PIAM can impose penalties (corrective actions, prohibition from selling, fines) on the banking institution and its staff. ### Training, conduct, and de-registration of agents - Associations issue guidelines on training and testing requirements; agents must pass these before marketing products. - Insurance agents selling investment-linked products must pass additional training courses. - Compulsory continuing professional development requirements apply to agents. - LIAM, PIAM and MTA maintain a repository of information on agents deregistered for disciplinary reasons (breach of code of ethics, misconduct, criminal breach of trust, violating association rules). - Efforts underway to introduce a common platform for sharing information between LIAM, PIAM and MTA on errant agents to prevent migration of deregistered agents across industries. ### Licensing, criteria and supervisory approach for brokers and financial advisers - IA s.9(1) and TA s.37(1) require licensing and regulation by BNM for insurance/takaful brokers and financial advisers. - Individual representatives of financial advisers must be approved by BNM. - Licensing criteria include minimum paid-up capital, shareholders’ fund requirements, and minimum professional indemnity insurance cover; compliance assessed prior to issuing new licenses and during licence renewal every one to two years. - BNM conducts periodic on-site examinations of intermediaries, informed by intermediary-submitted information, prior findings, complaints or tip-offs. - License renewal assessments include compliance with licensing criteria and conditions, number of qualified staff, and suitability17 of Directors and CEOs. - BNM may issue a shorter licence period for less serious breaches. ### Codes, undertakings and market conduct requirements for brokers - Insurance and takaful brokers must comply with MITBA Code of Ethics and Conduct; MITBA is the mandatory association for brokers and is enhancing compulsory training requirements. - BNM strengthening surveillance of brokers and financial advisers, reviewing renewal criteria and conducting thematic reviews of broking and advisory practices. - BNM Guidelines on Product Transparency and Disclosure require intermediaries to disclose commissions on investment-linked, general, and medical and health insurance policies at point of sale; no equivalent legislated requirements for disclosure of cancellation rights, complaint notification, client money arrangements, confidentiality. - BNM requires brokers to execute letters of undertaking with insurers/takaful operators to remit premiums collected within 15 days of receipt, or upon expiry of the 60-day premium warranty period, whichever is earlier. - MITBA’s Code requires brokers to maintain separate bank accounts for premiums collected pending remittance and for claim monies received on behalf of clients. - No legislated requirement currently exists for brokers, takaful brokers and financial advisers to maintain separate fiduciary accounts for client monies. ### Enforcement powers, remedial actions and supervisory resources - IA and TA empower BNM to sanction brokers, takaful brokers and financial advisers (and representatives) for contraventions; sanctions include fines, imprisonment, revocation or non-renewal of licence, removal of directors and senior management, and action against unlicensed intermediaries. - IA s.150(4) and TA s.28 empower fines against agents who make misleading statements, fraudulently conceal material facts, or use unauthorised sales materials. - In practice, BNM requires insurers/takaful operators to take remedial actions for misrepresentation/mis-selling: withdraw misleading materials, provide restitution, claw back commissions, suspend/terminate/retrain intermediaries. - BNM lacks a supervisory process specific to intermediaries; a modified version of SuRF is being developed and piloted for intermediary reviews. BNM has a small number of staff dedicated to intermediary reviews and uses a thematic approach, focusing on brokers and financial advisers; agents are primarily self-regulated by associations. - Proposed legislation aims to: - strengthen BNM’s enforcement powers against improper intermediary conduct, - include specific provisions on proper handling of clients’ moneys, - prescribe functions and duties of Boards of Directors, - require disclosure of terms of business to customers, - implement a significantly strengthened market conduct supervisory framework. ### Assessment and recommended legislative/supervisory enhancements (Intermediaries) - Assessment: Partly Observed. - Comments and recommendations: - Codify requirements for maintenance of separate fiduciary accounts for monies collected from clients. - Strengthen enforcement powers. - Further develop a supervisory approach specific to intermediaries to ensure supervisory effectiveness. ### Conduct of Business and consumer protection (ICP 19) - BNM legislation and guidelines set expectations for insurers and intermediaries to act with due skill, care and diligence; guidelines cover product introduction, product transparency and disclosure, proper advice practices, complaints management, claims settlement. - Guidelines on Introduction of New Products require Board approval of policies/procedures for fair treatment of consumers; product submissions follow a ‘launch-and-file’ system except for specified product categories. - Products requiring a 30 days wait before offering to market after complete submission to BNM: - Insurance and takaful products being introduced in Malaysian market for first time; - Annuity certain and life/family annuity products; - General and family takaful products involving new Shariah contract(s), changes in Shariah contract for existing products or creation of new sub-funds; - Investment-linked products invested in financial derivatives for purposes other than hedging. - IA s.161(1): life insurer must pay a minimum compound of 4% per annum on unpaid death claim amounts if not paid within 60 days of receipt of intimation. - Guidelines on Complaints Handling require insurers to establish dedicated public complaints units and specified complaint resolution procedures. - New broad-based personal data protection legislation is now in place. - LIAM established an industry framework setting minimum standards for treating customers fairly across product lifecycle. - BNM reviews insurers’ policies, staff training materials and issues directives where necessary. - BNM’s enforcement tools under current legislation are limited and do not include the ability to impose civil as well as administrative penalties; proposed legislation will provide additional enforcement tools. - BNM has a small market conduct review staff; market conduct supervisory processes are less well defined than prudential supervision; enhancements planned to strengthen market conduct supervision with emphasis on transparency, governance, culture and internal controls. - BNM promotes consumer education via insuranceinfo CEP and maintains a customer service centre, LINK. - Assessment: Largely Observed. - Recommendation: legislative amendments to strengthen enforcement powers and enhancements to BNM’s market conduct supervisory function and practices. ### Public disclosure (ICP 20) - Financial reporting governed under FRA and CA; reporting entities must comply with MFRSs issued by MASB. Effective 1 January 2012, MFRSs are in full compliance with IFRS. - IA requires insurers to: - apply the reporting basis used in statutory reporting to general purpose financial statements (IA s.87(2))19; - ensure disclosures in financial statements comply with BNM guidelines (IA s.90), including BNM’s Guidelines on Financial Reporting for Insurers20; - publish annual financial statements within 14 days after tabling at AGM in at least two local daily newspapers and exhibit at each branch/office in Malaysia (IA s.95) (excluding reinsurers). - Takaful operators expected to follow BNM’s Guidelines on Financial Reporting for Takaful Operators. - BNM publishes statistical and financial reports for individual insurers and consolidated industries on its website; insurers must publish interim unaudited half-yearly financial reports on their websites within 8 weeks of interim reporting period. - BNM places reliance on external auditors (Malaysian Approved Standards on Auditing compliant with International Standards of Auditing as of 2010). - BNM requires insurers to disclose total capital available, in components similar to regulatory capital; no specific requirement to disclose capital adequacy measure and key risks influencing capital calculation. - Additional public disclosure requirements are being considered, some to be required upon insurer implementation of BNM’s Guidelines on Internal Capital Adequacy Assessment Process (ICAAP) for Insurers later in 2012. - Assessment: Largely Observed. - Recommendation: enhance public disclosure regime with disaggregated information on insurer source of earnings and capital adequacy measures and risks/risk management processes. ### Countering Fraud in Insurance (ICP 21) - Fraud punishable under Malaysian Penal Code s.418 with imprisonment up to seven years, or fine, or both. - IA requires external auditors to immediately report to BNM any offence involving fraud or dishonesty discovered in course of duties and any contravention of IA or serious irregularities (s.82). - BNM issued Guidelines to Combat Motor Insurance Fraud and Guidelines on Claims Settlement Practices to prevent/detect/control insurance fraud. - Industry anti-fraud measures include standardized motor spare parts system (MRC), industry code of ethics, and sharing mechanisms on fraud cases. - BNM’s Operational risk Specialist Unit (ORSU) conducts macro surveillance on fraud, produces regular fraud analysis reports, and provides advisory assistance. - Legislation empowers BNM to require insurers to submit information on fraud cases (IA s.193(1), TA s.57(1)). BNM’s eFIDS online reporting system captures detailed fraud case data. - Insurers required to report suspected fraud to police; BNM supervisors assess remedial actions and evaluate controls via SuRF. - SuRF not specifically designed for anti-fraud assessments; BNM should review SuRF’s effectiveness and rigour for these assessments. - BNM SIU maintains close working relationship with Polis Diraja Malaysia (PDRM); BNM will soon formalize an MoU with PDRM to collaborate on combating financial crimes, sharing information on insurance fraud, enforcement, capacity building, and public awareness. - Assessment: Largely Observed. - Recommendation: review effectiveness and rigour of SuRF in capturing and assessing insurer anti-fraud practices. ### Anti-Money Laundering and Combating Financing of Terrorism (ICP 22) - Since APG Mutual Evaluation Report (2007), Malaysia implemented AML/CFT regime consistent with FATF standards; BNM established FIU to administer/enforce AMLATFA with broad enforcement and sanction powers. - Persons carrying on insurance, insurance broking, adjusting, financial advisory and takaful businesses are reporting institutions under AMLATFA. - BNM issued AML GP1 and AML GP1(2) (November 2006, amended February 2009) and an AML Manual (2010) providing a risk-based AML/CFT Supervisory Framework and supervisory checklist. - Supervisors receive basic AML/CFT training and may attend advanced training; AML Manual assists insurance supervisors in AML/CFT assessments. - BNM assesses insurance sector as low ML/TF risk. In 2010 BNM analysed AML/CFT considerations for all insurers; additional follow-up in 2011. No sanctions, prosecutions, convictions or civil forfeitures relating to insurance sector. - 2010–2011 feedback sessions improved quality of suspicious transaction reports (STRs). - FIU undertaking National Risk Assessment (NRA) with a multi-agency task force; National Coordination Committee (NCC) established in 2000 coordinates 15 Ministries and agencies23. - BNM has signed 34 memoranda of understanding (MoUs) with foreign authorities to facilitate intelligence sharing. - Assessment: Observed. - Recommendation: utilize FIU specialists on AML/CFT supervisory reviews of insurers with significant sales of products having higher ML risk susceptibility. ### Group-wide supervision (ICP 23) - Out of 60 insurers operating in Malaysia, only four belong to groups with branches/subsidiaries/sister companies in one or two other foreign jurisdictions; foreign operations are not significant for the group. - Three quarters of insurers operate within local banking groups or foreign financial groups. - For insurers part of Malaysian financial conglomerates with a banking holding, BNM can obtain supervisory information from bank or related corporations. - BNM has informal arrangements with host supervisors; established HHSF to facilitate cross-border supervisory engagement and information sharing. - SuRF is not specifically designed for group-wide supervision; monitoring of non-regulated group entities is used as background assessment for the regulated entity. - BNM may employ indirect approaches (ring-fencing, dividend restrictions, related party transaction restrictions) where legal authority to directly supervise non-regulated group entities is lacking. - Proposed legislation will explicitly empower BNM to regulate and supervise holding companies and related entities. - Assessment: Partially Observed. - Recommendation: legislative amendments to provide explicit powers to regulate and supervise holding companies and related entities. ### Macroprudential surveillance and industry monitoring (ICP 24) - BNM conducts internal stress testing on insurers simulating shocks on credit, market and insurance risks under adverse and extreme macroeconomic scenarios; results compared with insurers’ regular stress tests. - BNM has not required insurers to conduct periodic comprehensive industry-wide standardized scenario testing. - BNM collects considerable quantitative and qualitative data from insurers and publishes annual detailed balance sheet information and industry financial data. - BNM tracks financial soundness indicators and reports trends in the Financial Stability and Payment Systems Report (FSPSR) and Quarterly Bulletin. - No clear structured internal process for identifying, assessing, monitoring and reporting on emerging risks in the insurance industry. - No comprehensive structured assessment of systemic importance of insurers; BNM assesses systemic importance as low using size and interconnectedness measures and other factors. - Market concentration measures: - life and family takaful business HHI = 0.1092, - general sector HHI = 0.0005. - Life and general insurers (including takaful operators) accounted for 6% of the financial system assets as at end-2011. - Domestic insurers’ international operations accounted for 0.5% of insurance industry’s assets. - BNM indicated work is underway to enhance assessments of insurer importance using more robust indicators. - Assessment: Observed. - Recommendations: - Require insurers to conduct periodic comprehensive industry-wide standardized scenario testing exercises. - Establish structured internal processes for identifying, assessing, monitoring and reporting on emerging risks. - Develop more robust indicators for assessing systemic risk of insurers. ### Supervisory cooperation, coordination and crisis arrangements (ICP 25 & 26) - Few insurance groups have cross-border operations; determination of group-wide supervisor straightforward; no supervisory college meetings to date. - BNM does not have explicit power to regulate/supervise authorised holding companies; proposed legislation expected to address this. - BNM has legal power to share supervisory information with foreign supervisors (CBA s.40(1)) and has HHSF guiding engagement where formal MOUs are absent. - BNM has entered MOUs with some domestic regulators; few formal arrangements with foreign supervisors and not a signatory to IAIS MMOU. - Cross-border crisis management: - Only four insurers have limited foreign operations (foreign operations comprised less than 8% of total gross premiums underwritten in Malaysia during 2011). - BNM currently has no internationally-coordinated crisis management plans. - BNM assisted in cross-border resolution during the 2008 financial crisis. - No requirements for insurers to maintain comprehensive contingency plans on a going- or gone-concern basis; new guidance under development to address gaps. - BNM has not extensively tested insurers’ ability to generate timely ad hoc information (e.g., catastrophe exposure accumulations), so readiness in crisis is uncertain. - Assessment: Partially Observed. - Recommendations: - Increase expectations for insurers to maintain comprehensive contingency plans and robust information systems capable of timely ad hoc reporting on risk accumulations to bolster cross-border crisis management capacity. *Source: _cr1357 (section text provided)* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr1357.pdf_