Bank Negara issues Exposure Draft on Claims Settlement Practices for General Insurance / Takaful Business
11 July 2023
- insurers licensed under the Financial Services Act 2013 to carry on general business;
- takaful operators licensed under the Islamic Financial Services Act 2013 to carry on general takaful business; and
- adjusters registered under the Financial Services Act 2013 to carry on adjusting business.
The Policy Document is to be read together with the nine policy documents and instruments enumerated in paragraph 6.1 and will supersede the seven guidelines, circular and letters set out in paragraph 7.1 of the Policy Document.
Objectives
The Policy Document sets out the minimum standards which licensed insurers and licensed takaful operators (severally a “ITO” and collectively “ITOs”) are required to meet in handling their general insurance and general takaful claims. It also seeks to ensure fair, transparent and timely outcomes in claims settlement practices and sets expectations for ITOs to observe high standards of sound and responsible business conduct, including their interaction with other stakeholders in the claims settlement process, such as consumers, related or third-party service providers and registered adjusters.
General Requirements
Part II of the Policy Document sets out the general requirements that ITOs are required to comply with. These requirements include:
- defining the roles and responsibilities of the board of directors and senior management of ITOs in their claims settlement practices;
- establishing a mandatory Motor Customer Service Charter (MCSC) and recommending the publication of a non-mandatory Customer Service Charter for non-motor claims;
- establishing specific and measurable key performance indicators for key persons involved in the claims settlement process;
- establishing an appropriate and comprehensive compliance, risk and audit programme to assess the effectiveness of its internal claims policies, procedure and controls and to conduct compliance, risk and audit reviews at least once every two years;
- establishing effective internal processes, mechanisms and controls to guide the ITO’s staff involved in the claims settlement process to adequately detect and deter incidents of fraud;
- establishing internal processes and policies to manage conflicts of interest;
- ensuring there are well-defined and comprehensive service level agreements with third-party service providers, such as the panel of registered adjusters and panel of repairers and monitoring compliance by the third-party service providers with the obligations and standards stipulated in the service level agreements; and
- establishing adequate whistleblowing policies, procedures and mechanisms for third-party service providers to raise issues or wrongdoings encountered during the claims settlement process.
Claims processing
Part III of the Policy Document sets out the requirements relating to claims processing that apply to motor claims and non-motor claims. The requirements include:
- setting out the time-frames within which specified key steps in the claims process are to be complied with, such as registration of claim, initiating the claims process, conducting assessment of loss, completing the adjusting or claims assessment work, notifying the claimant of the outcome of the claim, payment to the claimant, where applicable, and payment of fees to the registered adjuster (including specialists such as medical consultants and marine surveyors);
- with respect to motor claims, requiring the registered adjuster or in-house assessor to ensure that its assessments and recommendations are consistent with applicable standards or requirements imposed by the relevant authorities1;
- requiring letters of approval or offers issued by an ITO in respect of a claim to include itemised repair estimates (including replacement parts prices and labour charges based on the database from a credible database provider2) and details on how the scale of betterment, average clause and deduction of salvage have been applied, as well as options available to the claimant, where applicable;
- where there is no dispute as to liability and an ITO departs from the recommendation made in the registered adjuster’s final report or its in-house assessor’s final claims assessment, the ITO must document the reasoning and basis for the departure and be subject to periodic independent reviews as part of the ITO’s oversight of its claims settlement practices to meet the objectives of the Policy Document;
- where an ITO repudiates a claim, the ITO must state the reasons for the repudiation; and
- when conveying the final decision of a dispute raised or rejection of a claim, to display a statement informing a dissatisfied claimant that he/ she may refer the dispute to the Ombudsman for Financial Services (OFS) within six months from the date of the final decision.
Additional requirements on motor claims
Additional requirements on motor claims are set out in Part IV of the Policy Document. This Part is divided into six sub-sections, namely: (i) motor repair estimates; (ii) vehicle valuation; (iii) own damage motor claims; (iv) third-party motor claims; (v) total loss motor claims; and (vi) other matters. We shall highlight some key points in each of these sections of the Policy Document.
(i) Motor repair estimates
ITOs must:
- ensure that repairers are given access or provided with copies of the assessments and recommendations of registered adjusters or in-house assessors on motor claim estimates; and
- upon request, provide a copy of the claims assessments and recommendations of the registered adjuster or in-house assessor to the vehicle owner or the authorised named driver.
The assessments and recommendations to be provided to the repairers, vehicle owner or authorised named driver may be limited to repair estimates and areas relevant to deriving the repair estimate, and may exclude confidential information.
The ITOs must ensure that the database provider referred to for repairs estimations is credible and its database is: (i) secure and critical services remain available in adverse situations; (ii) easily interoperable; and (iii) comprehensive.
Registered adjusters and ITOs, in the event that in-house assessors are assigned, are required to submit motor claims repair estimates electronically via the claims estimating systems. ITOs are also required to approve motor claims through the claims estimating systems.
ITOs are required,
inter alia, to ensure that their in-house assessors are adequately qualified, competent, provided with relevant and continuous training and are adequately supervised.
3
ITOs must ensure that betterment charges are only applied when new franchised parts are used for vehicles above five years old and such charges must adhere to the scale and rates specified in the Policy Document.
(ii) Vehicle valuation
At the point of sale or renewal of motor insurance/ takaful cover, an ITO must among others advice customers of the exact current market value (without rounding to the nearest RM1,000) of the motor vehicle as provided in the vehicle valuation database
4 (“
VVD”) used by the ITO as well as the effect of over-insurance/ coverage and under-insurance/ coverage when a claim is made. An ITO is also required to indicate the source from which it derived the market value at the point of purchase or renewal and in the event of a claim, to refer to the same VVD when determining the claim settlement amount for total loss or theft claims.
The Policy Document also requires ITOs to take specific measures to put in place internal policies, procedures and controls to ensure the accuracy of the market value stipulated in the VVD used.
Guidance is also provided in the Policy document on measures to be adopted where the market value of a motor vehicle is unavailable in the VVD.
Where an agreed value policy/ takaful certificate is offered, an ITO must ensure that the renewal notice and quotation slip, as applicable, clearly states that it is an agreed value policy/ takaful certificate, and clearly explains to the consumer the implications of having an agreed value policy/ takaful certificate.
Where an ITO does not offer agreed value/ coverage to match the higher outstanding loan/ financing balances borne by the consumer, the ITO is required to advise the consumer on the availability of gap cover add-ons to account for the difference between the actual market value of their motor vehicles and their outstanding loan/ financing balances in the event of a total loss or a theft claim and inform the consumer on the availability of gap cover add-ons in the market in the event that such gap cover is not offered by the ITO.
Where agents are advising consumers on behalf of ITO with respect to a vehicle’s market value or agreed value, ITOs shall ensure that their agents comply with the vehicle valuation requirements in the Policy Document.
(iii) Own damage motor claims
An ITO must, among others, comply with the following requirements in relation to own damage motor claims:
- ensure that repairs comply with applicable standards and requirements imposed by the relevant authorities;5
- where repairs are entitled to a warranty period, communicate clearly to the policy owner/ takaful participant that they may report unsatisfactory repairs to ITOs within the repair warranty period;
- in the event of a complaint of unsatisfactory repair, to ensure that the vehicle is re-inspected by a vehicle inspection provider6 (“VIP”) within a prescribed time frame and is restored to its pre-accident condition; and
- reimburse the policy owner/ takaful participant with the market value of the vehicle if the vehicle is certified by the VIP as not roadworthy after repairs have been carried out with the ITO’s approval.
In relation to theft claims, the Policy Documents requires an ITO to comply with specified time frames to commence and complete investigations and to make a reasonable offer for settlement or repudiate the claim.
(iv) Third-party motor-claims
Some of the key points in the Policy Document on third-party motor claims are as follows:
- an ITO shall not apply excess in the settlement of third-party motor claim;
- an ITO shall not repudiate liability on third-party property damage solely on grounds of non-reporting of the accident to the Party at Fault Insurer/ Takaful Operator (“PFITO”) by its policy owner/ takaful participant who is the party-at-fault; and
- the basis for Compensation for Assessed Repair Time (“CART”), including the minimum amount claimable for CART, are set out in the Policy Document.
Third-party property damage claims
The requirements applicable to the handling of third-party property damage (“TPPD”) claims are set out in paragraphs 14.10 to 14.19 of the Policy Document. These include the steps that a PFITO and a third-party claimant’s insurer/ takaful operator (“CITO”) are required to take in respect of a TPPD claim and touches on the requirements under the Knock-for-Knock Agreement and the Knock-for-Knock Supplemental Agreement.
Where applicable, the CITO is required to inform the policy owner/ takaful participant of the option to submit an own damage Knock-for-Knock claim to expedite claims processing and that his/ her No-Claim Discount will not be affected by doing so.
Third-party bodily injury
Two interesting points of guidance on the provisions dealing with third-party bodily injury claims are as follows:
- in the case of a judgment sum awarded by the court, an ITO should instruct its solicitors to request from the court for the court judgment award intended for long-term needs of an injured person7, such as nursing care, to be managed through a public trustee for the benefit of the injured person so as to avoid unwarranted dissipation of the payments that are intended to cover costs of recovery, rehabilitation and care of the accident victim over the long term; and
- the administrative costs charged by the public trustee for managing the above-referred sums should be absorbed by the ITOs as part of their corporate social responsibilities.
(v) Total loss motor claims
For a total loss claim, an ITO is given the discretion to declare a vehicle as Actual Total Loss (“ATL”) or Beyond Economic Repair (“BER”), subject to the registered adjuster’s recommendation. In making this decision, an ITO shall ensure that:
- the relevant approvals8 are obtained, where applicable;
- the decision is premised on the safety and roadworthiness of the claimant’s vehicle; and
- the best interests of the claimant as registered legal owner of the vehicle are protected.
ITOs are required to provide a clear explanation on the basis for all total loss settlements i.e. ATL and BER, to the claimant and to ensure that any deduction from total loss settlements due to depreciation are measurable, reasonable and specific.
ITOs must establish robust internal policies, procedures and controls in compliance with applicable standards and requirements imposed by relevant authorities
9 to ensure proper deregistration and disposal of ATL vehicles as well as appropriate handling of BER vehicles, which shall include:
- sending ATL vehicles to a licensed Automotive Treatment Facility (AATF) for disposal, where applicable;
- obtaining services from a credible auctioneer, vendor or repairer for towing, storage and undertaking the tender process for the sale of BER vehicles; and
- ensuring all repaired BER vehicles are sent to a VIP for the appropriate inspection and certification of roadworthiness.
Upon declaring a motor vehicle as ATL, an ITO must, among others, immediately notify Jabatan Pengangkutan Jalanraya (Road Transport Department) (“
JPJ”) on the ATL status of the vehicle and ensure that the vehicle is successfully deregistered and the motor vehicle registration card of such vehicle is returned to JPJ for cancellation within the timeline indicated by JPJ. In addition, an ITO shall disclose information on ATL vehicles to VIPs upon request.
If the wreck value
10 of a vehicle declared as BER is more than the claim settlement sum offered, the ITO shall give the claimant the choice of either withdrawing their total loss claim or accepting the ITO’s offer.
(vi) Motor claims – other matters
The ITOs are prohibited from allowing contract repairs for damaged vehicles unless: (i) there is a written agreement of the policy owner/ takaful participant; (ii) the damaged vehicle is more than five years old; and (iii) the estimated cost of repair exceeds 65% of the sum insured/ covered. The ITOs must ensure that all contract repaired vehicles are sent to VIPs for the appropriate inspection and certification of roadworthiness.
The practice of joining two halves of damaged vehicles (cut-and-joint) as a method of repair is prohibited, except for the repair of ‘stretched’ versions of vehicles constructed using the joining technique or process, and subject to prior approval being obtained from JPJ before the commencement of repairs.
The Policy Document provides that in a chain collision, the ITO insuring/ covering the vehicle immediately behind a vehicle shall be responsible for the damage and uninsured/ uncovered losses (i.e. excess and CART only) for the vehicle in front of it. This rule does not apply to collisions involving parked vehicles or foreign-registered vehicles, or where the front vehicle is making a ‘U’ turn or where the vehicles are not travelling in the same direction. An ITO shall not forfeit the No-Claims Discount for any third-party claimant involved in the chain collision.
Other matters
Additional information on procedures for handling non-reported TPPD claims, scale of compensation for CART and scale of betterment as well as helpful flowcharts are provided in Part V of the Policy Document.
Proposed effective date
BNM has indicated that it is considering to set a date in the second half of 2023 for the Policy Document to come into effect.
Deadline for feedback
Feedback on the Exposure Draft is to be submitted to BNM by
17 August 2023.
Comments
The consolidation of claims processing matters from seven instruments into a single document that is publicly available on BNM’s website is welcomed.
In view of the possibility that the Policy Document may come into effect in the second half of 2023, it is imperative that ITOs undertake an immediate review of their claims settlement practices for general insurance/ takaful business to ensure that such practices conform to the requirements set out in the Exposure Draft.
Article by Kok Chee Kheong (Partner) and Angela Hii (Associate) of the Corporate Practice of Skrine.
1 The Policy Document cites the Guidelines on Application for Vehicle Panel Structure Repair or Conversion (Accident Cases) issued by JPJ in April 2019 and any subsequent amendments to it as an example of standards or requirements imposed by a relevant authority.
2 The Policy Document cites the Motordata Consortium Sdn Bhd (MRC) database as an example of such database.
3 The Policy Document provides that in relation to the qualification and training requirements, ITOs should be guided by the Policy Document on Registration Procedures and Requirements on Professionalism of Adjusters issued by BNM on 1 June 2023.
4 The Policy Documents explains that this refers to the ISM Automobile Business Intelligence System (ISM-ABI system) or any other credible vehicle valuation database.
5 The Policy Document cites the Guidelines on Application for Vehicle Panel Structure Repair or Conversion (Accident Cases) issued by JPJ in April 2019 as an example of standards or requirements imposed by a relevant authority.
6 A “VIP” refers to a vehicle service provider recognised by JPJ or the Ministry of Transport Malaysia. PUSPAKOM is cited in the Policy Document as an example of a VIP.
7 The Policy Document clarifies that this amount does not refer to the entire court judgement sum but excludes items such as medical cost incurred, loss of future income, pain and suffering and special damages.
8 For example, approval from JPJ in relation to damaged vehicle structural panels shall be obtained before the repair process commences.
9 The Policy Document cites the Guidelines on Application for Vehicle Panel Structure Repair or Conversion (Accident Cases) issued by JPJ in April 2019 as an example of standards or requirements imposed by a relevant authority and refers to voluntary standards and guidelines specified by relevant industry associations and relevant agencies such as Jabatan Standard Malaysia’s Motor Vehicle Aftermarket: Smash Repair Requirements.
10 According to the Policy Document, the “wreck value” refers to price of a damaged accident vehicle which may be repaired or restored.
This alert contains general information only. It does not constitute legal advice nor an expression of legal opinion and should not be relied upon as such. For further information, kindly contact skrine@skrine.com.