3 October, 2015
Since the introduction of the Financial Services Act 2013 (FSA) and Islamic Financial Services Act 2013 (IFSA), the Central Bank of Malaysia (BNM) has taken steps to move toward a disclosure-based regime (as opposed to an approval-based regime), simultaneously seeking to ensure that insurers observe conduct that is fair, responsible and professional when dealing with policyholders. There is, however, a further unifying theme in the two new policy documents (the Policy Document on Introduction of New Products by Insurers and the Policy Document on Management of Participating Business): senior management and the board of directors of the insurers shoulder the responsibility of ensuring that the product risks and, as the case may be, the participating life business are well managed, and that actions taken and decisions made safeguard policyholders’ interests.
Policy Document on Introduction of New Products by Insurers and Takaful Operators
The policy document, which came into force on 1 July 2015, enables insurers and takaful operators to offer a product after it has attended to the product documentation submission with BNM (unless it is a product that is new in Malaysia). The "launch-and-file" system will enable a shorter time from inception to market for new products.
However, with this change, BNM has placed a higher onus on the senior management and board of directors of the licensed person. Each institution must now ensure that product risk management is effectively managed. This would entail the board of directors setting the overall governance framework and risk management system for products, which would cascade down to a newly established product approval committee. It will also require the licensed person to put a product management program in place. Provided that the product approval committee signs off on the new product, the Chief Executive Officer provides a declaration to BNM, and the formalities filed with BNM, a new product can be offered.
Although the burden has shifted to the board of directors and senior management of a licensed person, the policy document sets out the procedures that should be adopted by these stakeholders to identify, assess and mitigate risks associated with products that are being offered. This includes the necessary considerations for identifying and assessing risks arising from product designs, risks arising from any implicit or explicit assumptions made in the pricing of products, risks arising from a pricing range used in group products, and legal, regulatory and reputational risks associated with products.
It also elaborates on the other aspect of the procedures including the development of the corresponding risk mitigation measures for the risks specific to new products. For example, the procedures must include measures reducing the probability of occurrence and/or mitigate the financial impact, should the risk factors identified occur and include specification of any explicit risk limits for a new product.
Policy Document on Management of Participating Life Business
The policy document on management of participating life business is a consolidated framework of the management of participating business aiming to promote the sustainability of businesses and the protection of policy owner's interests. The policy document will come into force on 1 July 2016, save that the requirement to provide an illustration of premiums and benefits for a specific proposal at the point of sale would only apply from 1 January 2017.
The policy document sets out the principles and practices for management of participating life business policy (MPB policy) covering determination of benefit payouts, allocation of expenses, management of estate and acquisition of and closure to new business. It also provides specific requirements on bonus revisions and requirements for transparency and disclosure. Toward this end, the policy document places the responsibility of formulating the MPB policy on the board of directors, a policy that would then be implemented by the senior management. Broad guidance is provided in the policy document in respect of the role of the board of directors, senior management and the appointed actuary. However, the ultimate guiding principle for these key stakeholders is to ensure that policyholders are treated fairly.
Further, and toward ensuring fair, responsible and professional business conduct in the sale of participating life business products, the policy document prescribes the information and illustration that must be included in the materials at the point of sale. Given the significant change to the sales illustration, which will entail providing details of the policy, the different types of bonuses that are payable, the manner of determining bonuses, and the guaranteed and non-guaranteed benefits, the licensed persons are given more than a year to prepare for this.
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