PIDM’s Dif­fer­en­tial Levy Sys­tem to En­cour­age Sound Risk Man­age­ment Among Malaysian In­sur­ers

The frame­work for the dif­fer­en­tial levy sys­tem has been much awaited by the in­sur­ance in­dus­try and will be im­ple­mented by Per­badanan In­surans De­posit Malaysia (PIDM) start­ing from 2013. The new frame­work, re­plac­ing the flat rate levy sys­tem, is seen as mo

Insurance - - CONTENTS - by Rafiz Azuan Ab­dul­lah Gen­eral Man­ager – In­sur­ance, Risk As­sess­ment and Mon­i­tor­ing Per­badanan In­surans De­posit Malaysia

Rafiz Azuan Ab­dul­lah writes about the much awaited frame­work for the dif­fer­en­tial levy sys­tem by the in­sur­ance in­dus­try that will be im­ple­mented by Per­badanan In­surans De­posit Malaysia (PIDM) start­ing from 2013. Find out what this new frame­work is all about.

PIDM is the Govern­ment agency es­tab­lished un­der Akta Per­badanan In­surans De­posit Malaysia to ad­min­is­ter the national De­posit In­sur­ance Sys­tem (DIS) and the Taka­ful and In­sur­ance Ben­e­fits Pro­tec­tion Sys­tem (TIPS). Our statu­tory man­date re­quires us to con­trib­ute to the sta­bil­ity of the Malaysian fi­nan­cial sys­tem by ad­min­is­ter­ing th­ese two fi­nan­cial con­sumer pro­tec­tion sys­tems, as well as pro­mot­ing sound risk man­age­ment among our mem­ber in­sti­tu­tions. The ad­min­is­tra­tion of th­ese pro­tec­tion sys­tems is funded by pre­mi­ums paid by PIDM mem­ber in­sti­tu­tions, which com­prise com­mer­cial and Is­lamic banks, taka­ful op­er­a­tors and in­sur­ance com­pa­nies. PIDM is also the res­o­lu­tion au­thor­ity that has wide pow­ers to in­ter­vene early and re­solve trou­bled mem­ber in­sti­tu­tions. Through the es­tab­lish­ment of dif­fer­en­tial pre­mium sys­tems for its mem­bers, PIDM strives to re­duce risks to the fi­nan­cial sys­tem by pro­vid­ing in­cen­tives for sound risk man­age­ment among our mem­ber in­sti­tu­tions. It also in­tro­duces the el­e­ment of fair­ness so that in­sti­tu­tions with lower risk pro­files need not bear the same pre­mi­ums or levies as those with higher risk pro­files. The im­ple­men­ta­tion of the Dif­fer­en­tial Pre­mium Sys­tem (DPS) for DIS in 2008 has seen no­table im­prove­ments in op­er­a­tional and risk man­age­ment ca­pa­bil­i­ties among mem­ber banks, and we ex­pect that over time, the in­tro­duc­tion of the Dif­fer­en­tial Levy Sys­tem (DLS) for TIPS will fur­ther en­hance the risk pro­files of our in­surer mem­bers. Sim­i­lar to the DPS, the DLS is de­signed to dif­fer­en­ti­ate in­surer mem­bers ac­cord­ing to their risk pro­files which will

re­sult in dif­fer­en­tial levy rates. Reg­u­la­tions for the DLS come into op­er­a­tion this year for con­ven­tional in­surer mem­bers, as pro­vided for un­der the PIDM Act 2011 (sec­tion 77) which gives PIDM the au­thor­ity to de­ter­mine pre­mi­ums by es­tab­lish­ing a sys­tem with the rel­e­vant cri­te­ria to clas­sify them into dif­fer­ent cat­e­gories. In­surer mem­bers will have to im­prove the over­all as­pects of their busi­nesses in or­der to achieve the best rated cat­e­gory and be sub­jected to the low­est levy rate. As a re­sult, in­surer mem­bers will have greater in­cen­tives to en­hance their risk man­age­ment prac­tices, which is in line with PIDM’s statu­tory man­date.

Malaysian In­sur­ance Land­scape and DLS De­vel­op­ment

The de­sign and de­vel­op­ment of the DLS pre­sented PIDM with a num­ber of chal­lenges. Un­like in­sur­ance guar­an­tee schemes in other ju­ris­dic­tions, TIPS not only pro­vides pro­tec­tion to con­ven­tional in­sur­ance pol­icy own­ers, but also taka­ful cer­tifi­cate own­ers. Fur­ther, our in­surer mem­bers may be li­censed to carry gen­eral, life, or a com­pos­ite busi­ness com­pris­ing both gen­eral and life in­sur­ance within a sin­gle en­tity. In ad­dress­ing the chal­lenges faced in the de­vel­op­ment of our DLS, PIDM en­gaged lo­cal in­sur­ance in­dus­try ex­perts who con­trib­uted both reg­u­la­tory and pri­vate sec­tor per­spec­tives to work with us. With their col­lab­o­ra­tion and valu­able feed­back, we de­vel­oped a method­ol­ogy that in­cor­po­rated work­able quan­ti­ta­tive and qual­i­ta­tive mea­sures that are not only fair for in­surer mem­bers but also meet the ob­jec­tives of the sys­tem.

DLS Frame­work

The DLS as­sess­ment method­ol­ogy uses a com­bi­na­tion of quan­ti­ta­tive and qual­i­ta­tive cri­te­ria, sim­i­lar to the ap­proach adopted in the DPS for the DIS. This method­ol­ogy is more ef­fec­tive and com­pre­hen­sive than an ap­proach that em­pha­sises ei­ther quan­ti­ta­tive or qual­i­ta­tive cri­te­ria. Our com­bined ap­proach aims to en­sure a DLS frame­work that is not only ob­jec­tive and trans­par­ent but also for­ward­look­ing. As such, a larger weigh­tage of 60% is as­signed to the quan­ti­ta­tive cri­te­ria while the re­main­ing weigh­tage of 40% is ap­plied for the qual­i­ta­tive cri­te­ria. The DLS frame­work in­tro­duces a unique twodi­men­sional ap­proach in the as­sess­ment of quan­ti­ta­tive cri­te­ria, termed as the “ma­trix

PIDM’s statu­tory man­date re­quires us to

con­trib­ute to the sta­bil­ity of the Malaysian fi­nan­cial sys­tem … as well as pro­mot­ing sound risk man­age­ment among

our mem­ber in­sti­tu­tions. ap­proach.” One of the di­men­sions is the mea­sure of cap­i­tal strength and the other com­prises op­er­a­tional per­for­mance and busi­ness sus­tain­abil­ity of in­surer mem­bers. The as­sess­ment of the op­er­a­tional per­for­mance and busi­ness sus­tain­abil­ity in­clude mea­sures of busi­ness growth, busi­ness sta­bil­ity, op­er­a­tional ef­fi­ciency and prof­itabil­ity. The ma­trix de­notes two lev­els of im­por­tance guided by the level of the cap­i­tal mea­sure, where those scor­ing be­low a de­ter­mined point would need to strengthen cap­i­tal buf­fers; while scor­ing above this point would re­quire bet­ter man­age­ment of op­er­a­tional per­for­mance and busi­ness sus­tain­abil­ity. On the other hand, the qual­i­ta­tive cri­te­ria com­prise the su­per­vi­sory rat­ing of in­surer mem­bers and any other ma­te­rial in­for­ma­tion that would have im­pli­ca­tions on the well-be­ing of the in­surer mem­bers. The ad­van­tage of a qual­i­ta­tive ap­proach is that it can pro­vide im­por­tant in­for­ma­tion on the cur­rent and fu­ture risk pro­files of in­surer mem­bers, which may not be cap­tured by quan­ti­ta­tive fac­tors alone. The com­bi­na­tion of the quan­ti­ta­tive ma­trix and the qual­i­ta­tive score re­sults in the ul­ti­mate score of an in­surer mem­ber, de­noted as the ‘DLS Score’. In the case of a com­pos­ite in­surer mem­ber, the to­tal quan­ti­ta­tive scores for its gen­eral and life in­sur­ance busi­nesses will be ap­por­tioned us­ing the net pre­mi­ums of the re­spec­tive busi­nesses to de­rive its quan­ti­ta­tive score. The DLS score will then trans­late into a levy cat­e­gory for the in­surer mem­ber, which de­ter­mines the levy rate for the com­pu­ta­tion of the amount payable to PIDM for the cor­re­spond­ing as­sess­ment year. In­surer mem­bers will be clas­si­fied into four cat­e­gories based on their DLS Score with cat­e­gory 1 rep­re­sent­ing the best cat­e­gory and cat­e­gory 4 be­ing the worst. A DLS rate is pre­scribed in re­la­tion to each cat­e­gory ac­cord­ing to dif­fer­ent types of in­sur­ance busi­nesses, ei­ther life or gen­eral in­sur­ance busi­ness.

Im­pact on In­surer Mem­bers

In­sur­ance com­pa­nies and taka­ful op­er­a­tors have been in favour of a DLS con­cept since the im­ple­men­ta­tion of TIPS in 2011 as it pro­vides greater fair­ness than a flat rate levy sys­tem. The in­tro­duc­tion of the dif­fer­en­tial sys­tem is also timely given the sta­bil­ity of the in­dus­try’s op­er­at­ing and su­per­vi­sory en­vi­ron­ment. The key ben­e­fits of the DLS frame­work lie in its ob­jec­tiv­ity and trans­parency and in­surer mem­bers will know which ar­eas they must fo­cus on to achieve a higher score and im­prove their over­all risk. We are con­fi­dent that the DLS will re­sult in greater lev­els of im­prove­ment in risk man­age­ment prac­tices, ul­ti­mately con­tribut­ing to en­hanc­ing the sta­bil­ity of the fi­nan­cial sys­tem.

Go­ing For­ward

The DLS frame­work for TIPS is cur­rently ap­pli­ca­ble only to con­ven­tional in­surer mem­bers, whilst a frame­work for taka­ful op­er­a­tors is be­ing de­signed to cater to new de­vel­op­ments in the taka­ful op­er­a­tional land­scape, es­pe­cially with the im­ple­men­ta­tion of the Risk-Based Cap­i­tal for Taka­ful Op­er­a­tors by Bank Ne­gara Malaysia.

DLS Frame­work Method­ol­ogy and Cri­te­ria

Levy Rates

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