CHAPTER 7

Government
Supervision

INS200
RISK AND INSURANCE
Prepared by:
Sylviannie Jimius
Chapter Contents:
7.0 Government Supervision
7.1 Supervision of the insurance industry in Malaysia
7.2 The roles of the Director General of Insurance (DGI)
7.3 Statutory regulation
7.4 Self-regulation
7.5 Why BNM must regulate/control insurance industry?
7.6 Consumer complaints
7.7 Main causes of consumer problems
7.8 Consumer education programmed
7.1 Supervision of the insurance
industry in Malaysia
• The principal legislation governing the insurance business in
Malaysia is the Insurance Act 1996.

• This revised Act (replacing the previous Insurance Act 1963) came
into force on 1 January 1997.

• The insurance industry is under the supervision of the Bank

Negara Malaysia (Central Bank of Malaysia), a division of the
Ministry of Finance.

• The licensing authority for insurers and professional reinsurers is

the Minister of Finance.
7.2 The roles of the Director
General of Insurance (DGI)
• The Insurance Act 1996 empowers the DGI to supervise the
insurance companies and if he is satisfied that the insurer is not
conducting his business in accordance with the provisions of the
Act, he can take, among other things, the following actions:
• Cancel the registration of an insurer which has failed to comply
with certain requirements.
• Inspect books and other documents of the insurer.
• Has control over the proposals, policies and brochures issued
by insurers.
• Investigate into the business of the insurer.
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ROLES OF DGI

• Issue directions regarding the conduct of the insurer’s business.

• Remove certain employees or directors of the insurance

company and appoint suitable persons as replacement.

• Assume control over the property, business and affairs of the

insurer.

• Apply to the court to appoint a receiver or manager to manage

the business affairs and property of the insurer.

• Present a petition to the court to wind up the insurer’s business, if

necessary.
7.3 Statutory regulation

• Statutory regulation made to protect the policyholder’s interest and

the general public.
• It exists to protect the public against the risk of poor practice.
• In Malaysia, the regulation of general insurance business is
achieved through the administration and enforcement of the
Insurance Act 1996 (Insurance Act, 1963 revised by the Director
General of Insurance, DGI).
• Insurance business is subject to greater government regulation
because of certain inherent characteristics of insurance business.
• In order to protect the policyholder’s interest, the Act focuses on
three main areas:
1. Financial solvency of insurers
2. Fair trade practices
3. Competence of brokers and loss adjusters
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• Why insurance placed under strict government regulation;
INTANGIBLE COMPLEX PRODUCT AFFECTED WITH A
PRODUCT PUBLIC INTEREST
- Buy and sell - Policyholders hard to - Insurer provide
promises interpret & financial protection to
- Promises depend on understand individuals, families
insurer ability to pay - Policies contain legal and business
claims terms & phrases enterprise
- Ability to pay claims (difficult to - Inability to pay
depend on integrity & understand) claims will give
financial stability - Unfair trade negative effect to
practices may economy & welfare
happen: due to the of public
inability of
policyholders to
interpret and
understand the
policy
7.4 Self-regulation

• Means insurers voluntarily refrain from some action or, conversely

voluntarily take some action.

• Self-regulation may be an individual or an industry wide decision.

• Self-regulation has been introduced by the insurance industry with

two fold objective namely:
- To instill discipline and promote healthy competition in the
industry.
- To provide some element of protection to insurance consumers.
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SELF REGULATION

§ For General Insurance business, the main association are as follows:

• Persatuan Insurans Am Malaysia (PIAM)
• Malaysian Insurance and Takaful Brokers Association (MITBA)
• Association of Malaysian Loss Adjusters (AMLA)

§ For Life Insurance business, the main association is :-

• Life Insurance Association of Malaysia (LIAM)

§ To facilitate self-regulatory measures taken by these association, the

Director General of Insurance (DGI) has made membership of these
association mandatory.
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SELF REGULATION

• These association are vested powers to enforce the rules and regulations
formulated to ensure among others, professional of their respective
business.

• Others than rules and regulation, the association have initiated self-
regulatory measures such as Inter-Company Agreements and Guidelines
which the objective of these agreements and guidelines is to regulate the
proper conduct of the business, ensure ethical and professional being of
the insurers and agents.
7.5 Why BNM must regulate/
control insurance industry?
1. To maintain solvency
2. To maintain equity
3. To maintain competence
4. To maintain insurable interest
5. To maintain provision of certain forms of
insurance
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REASONS BNM REGULATE INSURANCE INDUSTRY

1. TO MAINTAIN SOLVENCY
• Solvency – insurers’ capability to make payment
• BNM had introduces solvency limits that insurer need to fulfil to
start insurance business
• For instance, Oppo Insurance Company need sufficient funds to
meet the requirement of BNM.
• Accordingly, this ensures that only companies with sound
financial are allowed to underwrite insurance business.
• This will protect policyholders from being unpaid when they
incur loss.
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REASONS BNM REGULATE INSURANCE INDUSTRY

2. TO MAINTAIN EQUITY
• Equity – the fair and unbiased quality of the insurance business
transactions
• BNM ensure that an element of fairness must exist between
companies and policyholder – Insurance contract is complex.
• For example, an insurance agent fraudulently ask a
policyholder to pay higher insurance premium because he know
that his client is uneducated.
• Hence it is essential that controls exist for the protection of
policyholders.
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REASONS BNM REGULATE INSURANCE INDUSTRY

3. TO MAINTAIN COMPETENCE (Kecekapan)

• Competence – insurers’ quality or extent of being competent
• The buying and selling of insurance – ‘a promise to provide
indemnity’ is being bought and sold
• Therefore, it is important to make sure insurer are competent
when they are doing their job.
• For instance, Adon Insurance Company provide prompt/fast
services to its clients such as paying out claim payment.
• Consequently, regulations are necessary as guidelines in the
management of insurance company.
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REASONS BNM REGULATE INSURANCE INDUSTRY

4. TO MAINTAIN INSURABLE INTEREST

• Insurable interest – legally recognized financial interest on
subject matter
• BNM wants to eradicate any element of gambling, which refers
to insurance transactions which involve an absence of the
insurable interest aspect
• For example, a thief try to buy insurance for a stolen car to take
advantage over claim payment.
• Thus regulations are important so as to make sure no one tries
to make profit out of insurance.
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REASONS BNM REGULATE INSURANCE INDUSTRY

5. TO MAINTAIN PROVISION OF CERTAIN FORMS OF

INSURANCE
• There is an element of intervention by the government towards
the insurance industry
• BNM ensures some type of insurance is made compulsory
towards some people so as to protect them.
• For example, people who want to buy car must also buy
insurance as it has been made compulsory by the government
in view that car accidents are frequently/always happen.
• Therefore, regulations are important to ensure that such type of
insurance continues to be compulsory so as to protect people
from such risk.
7.6 Consumer complaints

• Insurance has its share of problems and complaints.

• Among other things the industry has been criticized

1. Unreasonable delay in settlement of claims
2. Unfair claims settlement
3. Operating in high cost
4. Collusion and price fixing
5. Poor services
6. Providing incomplete and false information
7. Resorting to pressure selling
8. Lack of professionalism
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CONSUMER COMPLAINTS

• In this modern era, consumers are now educated and

knowledgeable which they more aware of their rights and less
hesitant to peruse their rights whenever matters arise.

• Eight (8) basic rights of customer (According to International

Customer Movement)
1. Rights to satisfactions
2. Rights to information
3. Rights to be heard
4. Rights to redress
5. Rights to choose
6. Rights to basic goods and services
7. Rights to consumer education
8. Rights to safe and clean environment
7.7 Main causes of consumer
problems
• Basically there are three main causes of consumer complaint which are as
follows:-
1. UNCERTAINTY OF FINANCIAL SECURITY OF THE INSURERS
• Problem arise when insurer mismanage the funds. When this happen
claim settlement may take time and settles unfairly. In extreme cases,
claim may not be paid because the insurer facing liquidation

2. DIFFICULTIES IN UNDERSTANDING OF THE DOCUMENTS

• This situation arise by the fact that many policy have exclusion and
conditions which are printed in small print.
• Thus, they are seldom in the positions to tell whether or not their
requirement are met by the policies they purchased
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MAIN CAUSE OF CONSUMER COMPLAINTS

3. INSUFFICIENT OF INFORMATION PROVIDED BEFORE

PURCHASES
• Problem arise when one both of the parties could not fulfill their
respective duties
• Insured – have duty to provide information before insurance
contract is complete
• Insurer – has moral duty to disclose information related to the
proposed policy and legal duty not to lead/mislead the insured
into a contract to his disadvantages.
7.8 Consumer education
programmed
• Bank Negara Malaysia had launched a consumer education programmed
in 2003 known as Insurance Info.

• The objectives of Insurance Info are:

üProviding and disseminating information on insurance and takaful
products and services, important terms and conditions of insurance
policies and the rights and responsibilities of consumers, in clear and
simple manner;
üFamiliarizing public with underwriting and claims issues;
üCreating awareness of ethical market practices such as consumers
can be more assertive and discerning in making decisions; and
üAdvising customers on how to seek redress/unfair if not satisfied.