ACTIVITIES OF PIAM

Developments In The General Insurance Industry

Joint Insurance-Takaful Council (JITC)
PIAM, the Life Insurance Association of Malaysia (LIAM) and Malaysian Takaful Association (MTA) have agreed, in principle, on the formation of a crosssectoral Joint Insurance-Takaful Council (JITC).

The terms of reference of the Council are:-

1. To promote consistency in rules, regulations and guidelines in the 3 sectors and, where inconsistencies arise, to resolve these issues through consultations;
   

2. To study the respective guidelines and make recommendations to the sectors concerned with a view to harmonizing the industry practices, rules, regulations or guidelines where there may be inconsistency in market practices identified by any sector;
   

3. To make recommendations to the insurance and takaful authorities on issues in respect of improvements and amendments to any rules, regulations and guidelines, as and when necessary.
   

4. To preside over and conduct inquiries into any inter-sector disputes or complaints that are referred to the JITC by the Associations and to resolve inter-sector disputes or complaints amicably. The decisions of the JITC on inter-sector disputes or complaints shall be binding on the parties concerned.
   

5. To impose sanctions (including monetary fines) on members found in breach of any of the agreed industry rules, regulations and guidelines of the 3 sectors.

The JITC will be represented by 9 nominees with three representatives nominated by each Association. The formation of the Council and its activation will be initiated in close consultation with Bank Negara Malaysia (BNM).

Proposed Third Party Bodily Injury and Death (TPBID) Scheme
Responding to the announcement by the Prime Minister in the Budget 2010 speech, BNM is currently looking into the formulation of a motor insurance Third Party Bodily Injury and Death (TPBID) Scheme. Once the framework is developed, BNM will be conducting consultation sessions with all relevant stakeholders, including consumer associations, transport-related trade associations, the legal fraternity as well as the insurance industry, before the scheme is presented to the Government for consideration.

The rationale for reviewing the current motor insurance framework is to address issues raised by the public as well as the insurance industry in providing motor insurance under a Motor Tariff system that has not been adjusted for over 30 years. This has resulted in a pricing misalignment as the tariff has not been adjusted to take into account the actual rise in costs such as hospitalization, medical and general living costs and claims over the same period, particularly for TPBID, which is mandatory under the Road Transport Act 1987.

The proposed new TPBID scheme is intended to balance the concerns and interests of all affected stakeholders to ensure that all motorists are able to obtain a basic motor insurance coverage for TPBID at a reasonable premium that is commensurate with the level of protection provided. The proposed new TPBID scheme will also look into measures to ensure that potential claimants are able to make their claims more expeditiously.

Malaysian Insurance Institute (MII) Capacity Building Project
The Asian Institute of Finance (AIF), which is an initiative led by BNM and the Securities Commission Malaysia, was established in November 2008 to augment human capital development in the financial services sector.

The AIF's objective is to develop human capital and to develop an institution of global excellence in collaboration with the four training institutes in the financial services sector namely Institut Bank-Bank Malaysia (IBBM), Islamic Banking and Finance Institute Malaysia (IBFIM), Malaysian Insurance Institute (MII) and Securities Industry Development Corporation (SIDC).

AIF will work closely with these training institutions to coordinate and enhance program design, content, instruction and delivery. This includes the implementation of a quality assurance framework to ensure high standards in training, the development and coordination of programs in areas that cut across the different financial industries, as well as in the conduct of research.

In this regard, the AIF will oversee the MII Capacity Building Project which is financed jointly by BNM and the insurance industry. The capacity building project includes the enhancement of MII's curricula and programs, knowledge and resource up-scaling, faculty enhancements and expansion, customer service and branding. The first project to be undertaken under the capacity building project is the development of a competency framework for the insurance industry. Once this framework has been created it will be possible to link the identified competencies for each job to a structured set of training programs. The expected benefits of this framework are improved human resources performance, productivity and superior retention and engagement practices.

The MII has appointed external consultants i.e. a combined LOMA, LIMRA, and ANZIIF effort to work with MII on this particular initiative. This project will entail extensive research and inputs from member companies in developing a customized framework for the insurance industry.

FRS Awareness Workshops
In 2009, the Malaysian Accounting Standards Board and Financial Reporting Foundation had announced plans to bring Malaysia to full compliance with the International Financial Reporting Standards (IFRS) by 2012. To facilitate a phased changeover to IFRS, the effective date for FRS 139 - Financial Instruments: Recognition and Measurement, FRS 4 - Insurance Contracts and FRS 7 - Financial Instruments: Disclosure would be 1st January 2010. Insurers would need to dedicate adequate resources for the changeover.

To ensure that PIAM's members were fully aware of and understood the standards, the Association organized a series of FRS Awareness Workshops which were conducted by an established accounting firm. These workshops were highly interactive and certainly promoted a better comprehension of the standards as they were enhanced with case studies.

Tax Treatments of General Insurers Arising from the Introduction of the Risk Based Capital (RBC) Framework and Financial Reporting Standard 139
The Risk Based Capital Framework (RBC) requires insurers to analyze and monitor risks inherent in insurance activities. The RBC not only enhances the underwriting procedures of insurance companies, it also enhances, amongst others, their technical expertise in valuation of assets and liabilities, stress testing and risks assessment and management.

There are various implications of adopting the RBC Framework vis-à-vis FRS 139; some of which are the methodology of valuation of assets and general insurance liabilities, the tax treatment of general insurance companies, changes in accounting valuation and recognition of financial assets and liabilities.

The Association had appointed Consultants to explore and identify the tax issues arising from the adoption of RBC and FRS 139 that will impact general insurers and identify options available to address the concerns and impact of these issues. Thereafter, they were required to evaluate the current tax treatments and provide proposals on the tax treatment arising from the adoption of the RBC and FRS 139. They were also required to propose transitional provisions as well as to consider other tax issues involving insurers' operations which require special treatment.

As part of this exercise and following consultation with member companies, a Memorandum was submitted by the Association to the Tax Analysis Division, Ministry of Finance with the following proposals:-

1. Notwithstanding the introduction of the RBC Framework and FRS 139, the current tax treatment as enacted in Section 60 of the Income Tax Act for general insurers should remain unchanged, namely:-
   
   
   1. Any gains or losses arising from the disposal of investments would be taxable or deductible only upon realization;
      
      
   2. The general insurer would be taxed/allowed deduction on the movement of the URR/UPR during the year as such URR/UPR calculations are based on prescribed valuation methods; and
      
      
   3. The changes (i.e. increase/decrease) due to re-measurement of the claims liabilities upon the initial adoption of the RBC Framework (adjusted through retained earnings) should be deductible/taxable in the first year of adoption of the RBC framework;
      
      
2. General insurance companies to be given the option to elect for the RBC basis/FRS 139 tax treatment, if they so choose
   
   
3. Interest expense incurred by insurance companies on borrowed funds and utilized in the production of gross income of the insurers to be tax deductible; and
   
   
4. Tax deductions to be accorded for specific provisions for doubtful debts and/or bad debts written off incurred by insurance companies where requirements under Section 34(2) and Section 34(3) of the Income Tax Act are met.
   
   

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