Bank Negara issues Policy Document on Operating Cost Controls for General Insurance and Takaful Business
14 July 2023
- insurers licensed under the Financial Services Act 2013 to carry on general insurance business; and
- takaful operators licensed under the Islamic Financial Services Act 2013 to carry on general takaful business,
(severally a “licensed person” and collectively “licensed persons”).
The Policy Document will come into effect on 1 January 2024 and supersede the Guidelines to Control Operating Costs of General Insurance Business (BNM/RH/GL 003-7) issued by the BNM on 3 July 2007.
The Policy Document seeks to:
- strengthen financial discipline and accountability by licensed persons on the management of their intermediaries1, so as to encourage continuous improvements in the quality of service of intermediaries and preserve good value of products and services offered to customers;
- accord licensed persons with greater flexibility to manage operating costs that are commensurate with their business strategies to pave the way for greater innovation and improved access to insurance and takaful products and services, including for the unserved and underserved customer segments; and
- ensure the cost control requirements are applied consistently to preserve appropriate incentives for delivering high standards of service quality to customers.
Among others, the Policy Document:
- requires a licensed person to develop, establish and monitor the implementation of a comprehensive and clear written policy which outlines the details of the remuneration that can be paid to its intermediaries and the principles used to qualify for such remuneration;
- prescribes the maximum gross commission2 that can be given for certain types of business, e.g. motor, marine and medical and health, and prohibits the payment of commission to intermediaries that operate digital/ electronic channels/ platforms that serve only to redirect customers to the licensed person’s website to complete the purchase of insurance or takaful products and do not provide after-sales services;
- limits the aggregate amount of intermediary-related expenses3 that a licensed person may incur to 3% of gross direct premium or contribution4, which limit is to be applied separately for motor and non-motor business;
- permits the provision of profit commission5 to agents6, based on the profitability of the business sourced by the agent subject to the limit and condition set out in paragraph 12.14 of the Policy Document;
- allows payment of additional compensation to intermediaries only with the prior written approval of BNM;
- requires, at a minimum, a licensed person to make available its motor insurance or takaful products to customers through online direct distribution channels, accompanied by a customer service channel that provides the services set out in paragraph 14.2 of the Policy Document;
- requires a licensed person to provide a full rebate of the applicable gross commission to policy owners or takaful participants who purchase or renew their insurance policies or takaful certificates through any direct distribution channels;
- requires a licensed persons to ensure that agreements entered into with intermediaries: (i) are fair and not prejudicial to the interests of the licensed person and its policy owners or takaful participants; (ii) do not adversely affect the financial condition of the licensed person; (iii) are on an arm’s length basis; and (iv) allow for modification in the event of any change in regulatory requirements issued by BNM, or where BNM considers the terms and conditions of the agreement to be inconsistent with the requirements in the Policy Document;
- requires a licensed person to ensure that adequate controls are in place to monitor, audit and review the expenses to be appropriate and reasonable with the services provided;
- requires a licensed person to have information technology systems that monitor and track the payments of gross commission, intermediary-related expenses, profit commission and additional compensation to ensure such payments are made in compliance with limits set by BNM; and
- requires a licensed person to submit prescribed information to BNM on a quarterly and annual basis within the applicable time frames stipulated in paragraphs 16.2 and 16.3 of the Policy Document using the templates in Appendix 3 of the Policy Document, and in addition, to submit information using the aforementioned templates as and when requested by BNM.
A non-exhaustive list of expenses and how they are to be classified by a licensed person is provided in Appendix 1 of the Policy Document.
Article by Kok Chee Kheong (Partner) of the Corporate Practice of Skrine
1 The Policy Document defines an “intermediary” as (a) any person who, for remuneration, pursues the activity of insurance or takaful distribution, through any means including digital or electronic means and excludes marketing staff under the employment of the licensed person; and (b) any related party of such person in item (a) who for remuneration, pursues any activity ancillary, incidental, closely related to or that facilitates the provision of insurance coverage or takaful protection for the benefit of licensed persons, and/or policy owners or takaful participants, including marketing and advertising activities, towing or road side services assistance, software interfacing and providing support services such as providing a platform.
2 The Policy Document defines “gross commission” as commission or brokerage (other than profit commission) paid on gross direct premium or contribution (net of return premium or contribution) written within Malaysia.
3 The Policy Document defines “intermediary-related expenses” as any payments other than gross commissions, or benefits in kind, including subsidies in any form provided to any intermediaries. Payments under commercial distribution arrangements with licensed financial institutions or e-commerce platforms that are not linked to production in any way, are excluded.
4 The Policy Document defines “gross direct premium or contribution” as the gross premium or contribution receivable on an insurance policy or takaful certificate written by a licensed person within Malaysia adjusted for additional or return premium or contribution, but before deducting commission, brokerage or other expenses.
5 The Policy Document defines “profit commission” as the performance bonus payable to an insurance or takaful agent in addition to normal commission, based on the underwriting profit or distributable surplus in the agent’s portfolio, which profit or surplus is to be determined in accordance with paragraph 12.3 and Appendix 2 of the Policy Document.
6 The Policy Document provides that agents in Schedule 2 of the Persatuan Insurans Am Malaysia’s (PIAM) Inter-Company Agreement on General Insurance Business, including any future amendments made to the exclusion list specified in such Schedule or other relevant documents issued by PIAM, Malaysian Takaful Association (MTA) or BNM, are not allowed to receive profit commission.
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.