Following on the issue of a Discussion Paper on Licensing Framework for Digital Insurers and Takaful Operators on 4 January 2022, Bank Negara Malaysia (‘BNM’) issued its Exposure Draft of the proposed Licensing and Regulatory Framework for Digital Insurers and Takaful Operators (‘the exposure draft’) on 25 November 2022 seeking feedback from stakeholders, interested applicants and the public on the proposed requirements.
 
In an accompanying media release, BNM indicated that it would issue up to five digital insurance business and digital takaful business licences to qualified applicants.
 
The policy document when issued will apply to: 

Some of the main requirements set out in the exposure draft are discussed below.
 
Background
 
The exposure draft sets out the proposed licensing and regulatory framework for the entry and regulation of digital insurers and digital takaful operators with innovative business models to offer insurance/ takaful products and services to address critical protection gaps in Malaysia by serving the unserved and underserved market and enhancing consumer experience, wholly or almost wholly through digital or electronic means.
 
Eligibility criteria
 
Applicants must satisfy BNM as to their commitment to realise all of the following outcomes (‘core value propositions’) in a sustainable manner: 

Applicants must also satisfy the factors set out in Schedule 5 of the FSA or IFSA (as applicable), and demonstrate, to BNM’s satisfaction, meaningful value propositions that will contribute towards long-term social and economic benefits for Malaysia.
 
Applicants are encouraged to consider the issues outlined in Appendix I of the exposure draft, which set out examples of critical protection gaps and issues experienced by consumers as well as to identify other key protection gaps to meet the needs of the Malaysian insurance/ takaful market.
 
Eligible business models
 
The proposed framework permits licensed DITOs to adopt the following models⁴: 

Application procedures
 
An applicant is required to submit a formal application for a digital insurance business or digital takaful business licence in accordance with the procedures set out in Part C of the policy document on Application Procedures for New Licences under the Financial Services Act 2013 and Islamic Financial Services Act 2013 issued by BNM on 27 December 2019 (‘Licensing Procedures Policy Document’). Before doing so, the applicant must meet and discuss with BNM as required under paragraph 10.2 of the Licensing Procedures Policy Document.
 
It is proposed in the exposure draft that formal applications are to be submitted within six months from the date of BNM’s announcement on the commencement of the application period for digital insurance business or digital takaful business licences.
 
Existing licensed insurance and takaful operators (‘licensed ITOs’) are not required to obtain a separate licence under the proposed framework to digitalise their current licensed insurance/ takaful business operations. However licensed ITOs that wish to carry out their digital insurance or digital takaful business separately from their current insurance/ takaful business, may apply to carry on digital insurance or digital takaful business through a separate corporate body, such as a subsidiary.
 
An applicant that wishes to carry on both general and life/ family business are required to apply for two licences, one licence for a body corporate to carry on general insurance or general takaful business, and another for a body corporate to carry on life insurance or family takaful business.⁶
 
A licensed DITO is required to undergo an operational readiness review⁷ before it commences business.
 
Assessment of shareholders
 
The shareholders or prospective shareholders of an applicant are required to submit an application to BNM pursuant to section 90 or 112 of the FSA or section 102 or 124 of the IFSA. Such application must be submitted together with the applicant’s application for a licence to carry on digital insurance or digital takaful business, as the case may be.
 
In assessing the suitability of the shareholders or prospective shareholders of an applicant, BNM may, among others, take into consideration any of the factors set out in Schedule 6 of the FSA or IFSA and the requirements in the Shareholder Suitability Policy Document issued by BNM on 18 August 2016. BNM will give consideration to strategic synergies demonstrated by the shareholders or prospective shareholders that can positively contribute to the growth and business viability of a licensed DITO.
 
BNM may suggest that a shareholder who holds an aggregate interest in shares of 50% or more in an applicant to organise all its financial and financial-related subsidiaries under a financial group, headed by a single apex entity, which may be a licensed person or a financial holding company.
 
Business and exit plans
 
An applicant must submit to BNM a clear and comprehensive five-year business plan approved by its board to enable BNM to assess the viability of the applicant’s business strategies, ability to deliver the committed value propositions, and determine whether the applicant has adequate financial, managerial and organisational resources to support its operations.⁸
 
An applicant must also submit to BNM together with its application, an exit plan⁹ for the first five years of its operations to ensure an orderly exit in the event that it is unable to achieve its licensing commitments and demonstrate viable business operations.
 
Foundational phase
 
A licensed DITO is required to operate for a minimum of three years but no more than five years in a foundational phase (‘foundational phase’). The foundational phase serves as a period for the licensed DITO to demonstrate its viability and operational soundness, and for BNM to observe associated risks.
 
During the foundational phase, a licensed DITO is required to submit the following to BNM on an annual basis for the 31 December position no later than 31 January of the following calendar year: 

During the foundational phase, a licensed DITO is required to at all times maintain a minimum paid-up capital of RM40 million. However, a licensed DITO must continue to comply with other prevailing capital requirements under the Risk-Based Capital Framework for Insurers and Risk-Based Capital Framework for Takaful Operators policy documents both issued by BNM on 17 December 2018 to ensure sufficient capital is held with prudent management of risk exposures, proportionate to the size and risk profile of its business.
 
A licensed DITO may, after three years from the commencement of its operations, submit an application in writing to BNM to exit the foundational phase.
 
At the end of the foundational phrase, a licensed DITO must demonstrate to the satisfaction of BNM that it has: 

• approved financial advisers, approved Islamic financial advisers, approved insurance/ takaful brokers, and insurance/ takaful aggregators approved under the Financial Technology Regulatory Sandbox Framework issued by BNM on 18 October 2016; and
• third-party digital platforms. 

BNM may apply targeted adjustments to a licensed DITO that adopts a risk-sharing protection model¹¹.
 
Where the Minister has granted a digital insurance business and a digital takaful business licence to each of two bodies corporate within a financial group, each of the licensed DITOs within that financial group is required to maintain a minimum paid-up capital of RM30 million at all times during the foundational phase. However each of these licensed DITOs must have a minimum paid-up capital of RM100 million at the end of their foundational phase.
 
An applicant which is one of two applicants for a digital insurance business and a digital takaful business licence within a financial group may submit an application to BNM for targeted and temporary regulatory flexibilities to be applied during the foundational phase, together with its application for a licence.
 
Physical access points
 
A licensed DITO is required to ensure its end-to-end operations, including all critical functions such as onboarding, underwriting, product distribution, policy/ takaful certificate servicing, claims processing and payments, are carried on wholly or almost wholly through digital or electronic means. Notwithstanding the foregoing, a licensed DITO may utilise limited physical access points to reach out to the unserved and underserved segments, especially in cases where the necessary digital infrastructures are unavailable. This may include limited physical access points to facilitate the submission of certified documents for claims, post-sales customer services and handling of face-to-face customer complaints.
 
A licensed DITO is required to establish a registered office in Malaysia but the establishment of any physical office will require approval of BNM.¹²
 
Distribution channels
 
A licensed DITO is required to mainly utilise direct digital distribution channels such as web-based or mobile-based applications to distribute its insurance/ takaful products. Subject to applicable regulatory requirements, a licensed DITO is allowed to make its product offerings available to consumers through the following channels: 

In line with the key differentiation of licensed DITOs which are intended to operate wholly or almost wholly through digital or electronic means, a licensed DITO will not be permitted to engage, appoint or use the agency and bancassurance/ bancatakaful channels, that rely on face-to-face or in-person interactions with consumers for product distribution.
 
Other matters
 
The policy document to be issued pursuant to the exposure draft will be effective upon the issuance of the final policy document. The application period for digital insurance business and digital takaful business licences will commence upon announcement by BNM.
 
The deadline for submission of comments on the exposure draft is 28 April 2023.
 
Comments

The issuance of the exposure draft for the entry and regulation of digital insurers and digital takaful operators is welcomed following BNM’s recent announcement of five digital bank licensees.
 
The proposed framework which leverages on digitalisation of services will allow industry players to become more competitive by introducing innovative insurance and takaful solutions and will encourage a more inclusive and efficient insurance/ takaful sector in Malaysia in line with the evolving needs of consumers. The implementation of the core value propositions will extend the depth of the domestic insurance and takaful market by making more affordable products available to the segments of Malaysian society that are presently unserved or underserved.
 
 
Article by To’ Puan Janet Looi (Partner) and Lee Ai Hsian (Partner) of the Corporate Practice of Skrine.
 

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