ACTIVITIES OF PIAM

Developments In The General Insurance Industry

Risk Based Capital Framework
The Risk Based Capital (RBC) Framework which was issued in April 2007 for exposure and parallel testruns finally came into effect on 1^st January 2009. The RBC framework is the capital adequacy framework for all insurers including reinsurers licensed under the Insurance Act 1996. The Framework requires each insurer to maintain a capital adequacy level that commensurates with its risk profiles. The framework was developed based on the following principles:

1. Allow greater flexibility for insurers to operate at different risk levels in line with their respective business strategies, so long as commensurate capital are held and the insurers observe the prudential safeguards set by Bank Negara Malaysia (BNM);
   

2. Explicit quantification of the prudential buffers which are currently embedded in the existing valuation and solvency framework, with the objective of improving transparency;
   

3. Convergence with international practices is promoted to enhance comparability with other jurisdictions and reduce opportunities for regulatory arbitrage within the financial sector;
   

4. Providing an early warning system on any significant deterioration in capital adequacy levels in order to allow prompt and pre-emptive supervisory actions to be taken, where necessary; and
   

5. Insurers are incentivized to put in place appropriate risk management infrastructure and adopt more prudent practices. For example, under the Framework, the level of capital required of an insurer shall also depend on the qualitative factors that influence the choice of risk-profile such as the quality of its board of directors and management, the adequacy of internal risk control measures and monitoring processes.

Under the Framework, each insurer is required to determine the adequacy of the capital available in its insurance and shareholders' funds to support the 'Total Capital Required' (TCR) which will serve as a key indicator of the insurer's financial resilience. The Framework is implemented on the basis that insurers implement effectively sound risk management practices and market conduct governance. These include periodic reviews of the strategies and internal policies, and decision-making processes by the board of directors and senior management of the insurers with respect to the risks that the insurers assume. Insurers are also expected to manage the adequacy of capital actively by taking into account the potential impact of the business strategies on risk profiles and financial resiliency. The responsibility for the implementation of sound risk management practices and market conduct governance rests primarily with the board of directors and senior management of the insurer. It is also the responsibility of the board of directors and management of the insurer to ensure that risks which are not adequately addressed within the Framework are properly identified, monitored and controlled.

Impact of Price Increases on the General Insurance Industry
The global price increase of fuel in 2008 triggered abnormal price hikes for major consumer products. The general insurance industry was not spared the effect of increasing prices during this dramatic period which led to the industry responding quickly and adopting more prudent underwriting measures.

This reaction by insurers was especially appropriate in relation to addressing the impact on the motor insurance portfolio. Motor insurance comprised 44.3 percent of the overall general insurance business in Malaysia and in 2007, general insurers paid out RM3.49 billion or an average RM9.6 million a day for motor claims, out of the total gross premiums of RM4.68 billion collected that year. The combined claims ratio amounted to 114 percent in 2007 and it deteriorated to 121 percent in the first half of 2008. Malaysian general insurance companies had been suffering from high claims ratio which exceeded 100 percent in the last five years. These results were largely due to increase in the frequency of vehicle thefts and road accidents as well as increasing severity of claims cost per accident, especially for third-party bodily injury claims.

Express buses and goods vehicles were found to be major contributors to the underwriting losses in the motor insurance class and have the highest claims ratio. In 2007, the combined claims ratio for express buses was 335 percent, followed by goods vehicles at 155 percent. The rising motor claims made by young drivers was also another major concern. Industry statistics showed that the claims ratio attributed to drivers of 25 years of age and below was about 40 percent higher than other insured age groups. The rising motor claims ratio had resulted in insurers adopting more stringent underwriting measures for motor insurance, including the application of premium loadings.

Self-Regulatory Measures - Formation of Ethics Committee
The Management Committee of PIAM has proposed the formation of an Ethics Committee to address any complaints of unethical practices by member companies and to deal with complaints from members on a "pre-emptive" basis i.e. to deal with complaints expeditiously with a view to arrest any malpractices before they can become disruptive to the industry.

Some salient features of the Ethics Committee are:-

1. The Ethics Committee will have jurisdiction over breaches of documented rules, regulations and codes of practice of the Association.
   
   

2. The Ethics Committee is envisaged to comprise five (5) members i.e. an independent Chairman from outside the industry, a Deputy Chairman from amongst the members of the Management Committee and 3 members appointed by the Management Committee by invitation from members, restricted to CEOs of member companies.
   
   

3. The functions and powers of the Ethics Committee are:-

   1. To receive and investigate whether there is a basis for any complaint.

   2. To make specific recommendations to the Management Committee in relation to such complaints as well as general recommendations arising from its investigations and review of the complaint to ensure that fair and ethical practices shall prevail in the insurance industry.
      

In terms of preparation by PIAM on the formation of the Ethics Committee, the relevant amendments to the PIAM Constitution which will enable the Management Committee to form this Ethics Committee and the resolution to adopt these amendments at a Special General meeting have been drafted. The Association is exploring a BNM suggestion that the role of the Ethics Committee be expanded to be an "umbrella" Ethics Committee for general, life and takaful business. In this regard, the PIAM Management Committee is discussing with LIAM and MTA on the feasibility and best approach for the formation of such an "umbrella" Ethics Committee.

Quarterly Meetings between BNM and PIAM Management Committee
BNM in an effort to foster greater collaboration between the regulator and the insurance industry holds regular quarterly meetings with the Management Committee members of PIAM. These quarterly meetings provide a platform for PIAM to raise issues and concerns with the regulator on industry matters, provide updates on market developments and projects and discuss matters of common interest amongst member companies through the Management Committee. Member companies and the Management Committee have found these discussions to be very useful and several industry issues have been resolved through these effective discussions.

Liaison Meetings with General Insurance Associations of Brunei (GIAB), Indonesia (AAUI) and Singapore (GIAS)
The Management Committee of PIAM maintains close rapport with its counterparts in the region by holding annual liaison meetings with the Management Committee members of the regional associations which are hosted alternately between PIAM and these associations.

In 2008, the Management Committee of PIAM had meetings with the General Insurance Associations of Brunei Darussalam, Indonesia and Singapore. The Management Committee of PIAM hosted the liaison meeting with Brunei and Singapore which was held in East Malaysia and the General Insurance Association of Indonesia (Assosiasi Asuransi Umum Indonesia (AAUI)) hosted this year s liaison meeting which was held in Bandung, Indonesia. These meetings provide a suitable platform for exchange of information on developments in the respective markets and also foster mutual understanding and encourage co-operation to address issues that affect our respective markets.

PIAM/AAUI Liaison Meeting in Bandung, Indonesia


PIAM/GIAS/GIAB Liaison Meeting in Kota Kinabalu, Sabah

24th East Asian Insurance Congress (EAIC)
24 - 27 November 2008, Hong Kong
The 24^th East Asian Insurance Congress (EAIC) which is a biennial congress hosted by members of the EAIC was held in Hong Kong from 24^th to 27^th November 2008. The congress was hosted by the Hong Kong Federation of Insurers and was attended by more than 1,100 participants from 11 member cities and 33 countries. The theme for the conference was "Staying Ahead - East Asian Insurers in the Era of Global Challenges" and embraced three pressing challenges that we are facing in the current era - terrorism, global warming and an ageing population - all of which present both challenges and opportunities for insurance in both the life and non-life sectors.

This congress provided an excellent forum for insurers from the region and around the world to appreciate the perspectives of experts on issues that are of current interest to all, and their views on what they think should and can be done to address those challenges. The next EAIC will be held in Bali, Indonesia in 2010 and Kuala Lumpur will be hosting this congress in 2012.

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