Bank Negara issues Policy Document on Digital Insurers and Takaful Operators
30 July 2024
- an applicant applying for a licence under section 10 of the Financial Services Act 2013 (‘FSA’) or section 10 of the Islamic Financial Services Act 2013 (‘IFSA’) to carry on digital insurance business1 or digital takaful business2, as the case may be;
- a person licensed under section 10 of the FSA to carry on digital insurance business (‘licensed digital insurer’) or licensed under section 10 of the IFSA to carry on digital takaful business (‘licensed digital takaful operator’) (a ‘licensed DITO’ refers to a licensed digital insurer and/or a licensed digital takaful operator);
- the shareholders of a proposed licensed DITO who require an approval under section 90 of the FSA or section 102 of the IFSA to hold interest in shares of a proposed licensed DITO; and
- the prospective shareholders of a licensed DITO who require an approval under section 90 of the FSA or section 102 of the IFSA for the acquisition of interest in shares of a licensed DITO.
The Policy Document aims to facilitate the entry of licensed DITOs with strong value propositions to serve the unserved and underserved market, provide competitive offerings and enhance consumer experience via the adoption of advanced digital technology and innovative business models.
Some of the main requirements set out in the Policy Document are discussed below.
Eligibility criteria
In line with the best interest of Malaysia criteria as set out under Schedule 5 of the FSA or IFSA, applicants are required to demonstrate to BNM’s satisfaction meaningful value propositions that will contribute towards long-term social and economic benefits for Malaysia. Specifically, applicants shall be committed to drive all of the following outcomes in a sustainable manner as to their commitment to realise all of the following outcomes (‘core value propositions’) in a sustainable manner:
- Inclusion – Enhanced financial resilience of consumers whose protection needs are currently either not served or not adequately served;
- Competition – Innovative insurance/ takaful products to cater to the diverse protection needs of consumers; and
- Efficiency – Convenient and seamless consumer experience with greater cost savings.
The core value propositions are further discussed in paragraphs 7.1 to 7.11 of the Policy Document.
Applicants are encouraged to consider the issues outlined in Appendix I of the Policy Document, 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 that are consistent with the core value propositions. The identification of such protection gaps to demonstrate the applicant’s value propositions shall be compelling and supported by credible data and relevant market research.
Eligible business models
The proposed framework recognises that licensed DITOs may adopt a range of business models that align with their respective capabilities and expertise to meet diverse consumer demands across the insurance and takaful sector and their value chain. In this regard, licensed DITOs are expected to adopt the following models to achieve the core value propositions:
- fully assume insurance/ takaful risks, with reasonable ceding out of risks to reinsurers/ retakaful operators, where relevant, to manage their respective underwriting capacities; or
- adopt risk-sharing protection models, subject to meeting BNM’s minimum criteria to mitigate risks to consumers.
Some of the considerations with regard to the above-referred business models are set out in paragraphs 8.4 to 8.9 of the Policy Document.
The Policy Document does not apply to intermediaries, such as financial advisers, insurance or takaful agents, and insurance brokers which are currently not assuming any insurance/ takaful risks and are not planning to do so in the future.
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’), including the requirement in paragraph 10.2 of the Licensing Procedures Policy Document for the applicant to meet and discuss with BNM before it submits its application.
Formal applications are to be submitted to BNM from 2 January 2025 to 31 December 2026.
Existing licensed insurance and takaful operators (‘
licensed ITOs’) are not required to obtain a separate licence under the Policy Document to digitalise their current licensed insurance/ takaful business operations. However licensed ITOs that wish to carry out 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 is required to apply for separate 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.
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After a licence is granted, a licensed DITO is required to undergo an operational readiness review
4 before it commences operations.
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 matters that it considers relevant, including 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 and any other information, including those from publicly available sources. 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 either be a licensed person or a financial holding company.
Business and exit plans
An applicant must submit to BNM a clear and comprehensive seven-year business plan approved by its board to enable BNM to assess the viability of the applicant’s business strategies, ability to deliver the intended value propositions, and determine whether the applicant has adequate financial, managerial and organisational resources to support its operations.
5
An applicant must also submit to BNM together with its application, an exit plan
6 for the first seven 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 seven 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 to BNM by 31 January of each calendar year, the following information as at 31 December of the preceding calendar year:
- implementation progress of its business plan, including achievement of key performance indicators and the core value propositions; and
- a report on the status of compliance with any licensing and/or shareholding conditions imposed on the licensed DITO by the Minister of Finance (‘Minister’) or BNM, as the case may be.
During the foundational phase, a licensed DITO is required to at all times maintain a minimum paid-up capital of RM30 million. However, a licensed DITO must continue to comply with other prevailing capital requirements under BNM’s Policy Document on Risk-Based Capital Framework for Insurers and Policy Document on Risk-Based Capital Framework for Takaful Operators policy documents both issued by BNM on 17 December 2018
7 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, upon completion of three years from the commencement of its operations, submit an application in writing to BNM to exit the foundational phase.
By the end of the foundational phrase, a licensed DITO must demonstrate to the satisfaction of BNM that it has:
- complied with all regulatory requirements applicable to existing licensed ITOs and specific regulatory requirements applicable to licensed DITOs as specified by BNM;
- sufficiently built its underwriting capacity, capability and retention level of their insurance/takaful risks;
- put in place all critical systems, processes and resources to support its business operations and effective risk management;
- reached and is maintaining a minimum paid-up capital of RM100 million for each licensed entity;
- met the reasonable thresholds for longer-term viability8; and
- achieved satisfactory progress in delivering the committed value propositions as described in its business plan.
A licensed DITO that fails to fulfil the requirements mentioned in the preceding paragraph by the end of the foundational phase will be required to implement its exit plan.
Flexibilities
To facilitate proper operationalisation of a risk-sharing protection model
9 while continuing to ensure that the applicable regulatory requirements remain proportionate and risk-based, BNM may, at its discretion, allow targeted regulatory adjustments to a licensed DITO which administers such a model.
Where the Minister has granted one or more licences to bodies corporate within a financial group financial group to carry out digital insurance/ digital takaful business, the licensed DITO shall comply with:
- all existing regulatory requirements (including prudential and business conduct standards) applicable to licensed ITOs, as specified by BNM; and
- any specific requirement applicable to a licensed DITO, as specified by BNM.
In addition, each licensed DITO within that financial group is required to maintain a minimum paid-up capital of RM30 million at all times during the foundational phase and must demonstrate to the satisfaction of BNM, that it has reached and is maintaining a minimum paid-up capital of RM100 million by the end of the foundational phase.
Where there is more than one DITO licence within a financial group, an applicant may submit an application to BNM for targeted and temporary regulatory flexibilities (as described in Appendix IV of the Policy Document) to be applied during the foundational phase, together with its application for a licence.
Physical access points and distribution channels
The provisions of paragraphs 15.1 to 15.12 of the Policy Document relating to physical access points and distribution channels seek to encourage innovative distribution capabilities in promoting inclusive protection, fostering healthy competition and improving operational efficiencies, taking into account the operating landscape of the Malaysian market. Safeguards are integrated within these requirements to support informed decision-making by consumers of digital insurance/ digital takaful products, recognising that not all consumers would be financially and digitally savvy.
A licensed DITO is required to establish a registered office in Malaysia but the establishment of any physical office will require approval of BNM.
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The registered office may only be used for the following purposes:
- to facilitate BNM’s communication with the licensed DITO during the supervisory process, including examinations and engagements with the board and senior management of the licensed DITO;
- for administrative purposes; and
- to facilitate investigations by BNM or any other authority pursuant to applicable laws in the event of allegations pertaining to a commission of any offence.
In line with the key differentiation between licensed ITOs and licensed DITOs, 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. Further, 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.
Notwithstanding the requirements set out in the preceding paragraph, a licensed DITO may:
- utilise limited physical access points especially in cases where the necessary digital infrastructures are unavailable to facilitate the submission of certified documents for claims, post-sales customer services and handling of face-to-face customer complaints; and
- subject to applicable regulatory requirements, make its product offerings available to consumers via approved financial advisers, approved Islamic financial advisers and approved insurance/takaful brokers.
A licensed DITO may utilise third-party platforms as a distribution channel, including platforms operated by a licensed digital bank or a licensed Islamic digital bank. However, it is not permitted to engage, appoint or use insurance and takaful agents and bancassurance/ bancatakaful channels that rely on face-to-face or in-person interactions with consumers for product distribution.
Comments
The Policy Document was preceded by an Exposure Draft of a Policy Document by the same name that was issued on 25 November 2022. The main changes from the Exposure Draft are as follows:
- the foundational phase has been increased from five to seven years; and
- minimum paid-up share capital to be maintained by a licensed DITO at the point of entry and throughout the foundational phase has been reduced from RM40 million to RM30 million.
In a
press statement dated 9 July 2024 announcing the issue of the Policy Document, BNM stated that all interested applicants must consult BNM prior to submitting their formal applications, and may start the consultation process from 1 October 2024 via
DITF@bnm.gov.my.
In the above-referred press statement, BNM indicated that it will issue licences to applicants who can successfully demonstrate their capacity and capability to achieve the intended policy outcomes while still preserving a strong focus on risk management and consumer protection. It also stated in a footnote to the press statement that it will no longer limit the number of licences to five only as communicated in the earlier press statement in November 2022.
A set of Frequently Asked Questions on the Policy Document issued by BNM on 9 July 2024 can be accessed
here.
Article by Kok Chee Kheong (Partner) and Lee Ai Hsian (Partner) of the Corporate Practice of Skrine.
1The expression ‘
digital insurance business’ refers to ‘insurance business as described in section 5(4) of the FSA which is carried on wholly or almost wholly through digital or electronic means’ (paragraph 5.2 of the Policy Document).
2 The expression ‘
digital takaful business’ refers to ‘takaful business as defined and described in sections 2(1) and 5(4) of the IFSA which is carried on wholly or almost wholly through digital or electronic means’ (paragraph 5.2 of the Policy Document).
3 Section 16 of the FSA prohibits a licensed insurer (other than a licensed professional insurer) from carrying both life business and general insurance. Similarly, section 16 of the IFSA prohibits a licensed takaful operator (other than a licensed professional retakaful operator) from carrying both family takaful business and general takaful business.
4 Refer to paragraphs 10.17 and 10.18 of the Licensing Procedures Policy Document for further details of the operational readiness review.
5 The business plan must contain the information required under paragraph 12 of the Licensing Procedures Policy Document and the additional information outlined in Appendix II of the Policy Document.
6 The exit plan is to be developed by competent persons and must cover all matters specified in Appendix III and paragraphs 12.4 and 12.5 of the Policy Document.
7 According to the Policy Document, the Capital Adequacy Policy Documents are being reviewed by BNM and upon finalisation, will be made applicable to licensed DITOs.
8 Refer to paragraph 13.11 of the Policy Document for indicators on long term viability.
9 A ‘risk-sharing protection model’ includes an insurance or takaful arrangement managed or administered by a licensed DITO, where policy owners/ takaful participants agree to pool premiums or takaful contributions to provide financial benefits upon the occurrence of one or more specified events.
10 Unless otherwise specified by BNM, the establishment of physical offices requires the prior approval of BNM under section 25(1) of the FSA and section 22(1) of the IFSA.
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.