Balanced Scorecard for Life Insurance and Family Takaful Markets in Malaysia
THE RISE OF CONSUMER PROTECTION AND THE PRINCIPLES OF TREATING CUSTOMERS FAIRLY (TCF) IS A PARADIGM SHIFT FOR FINANCIAL SERVICES INDUSTRY, ESPECIALLY FOR INSURANCE COMPANIES. CUSTOMER CENTRICITY IN BUSINESS RELATIONSHIPS IS NOT JUST FOR COMPLIANCE PURPOSE
Across the border in Singapore, MAS has introduced the Financial Advisory Industry Review (FAIR) which proposes a number of changes with respect to market conduct including a detailed remuneration structure for intermediaries based on a Balanced Scorecard (BSC) approach. The Singapore industry has since completed a one-year pilot and the BSC is now effective. In Malaysia, TCF initiatives started several years ago in line with the “Launch-and-File” practice for life insurance products. With the new Life Insurance and Family Takaful (LIFE) Framework recently introduced by Bank Negara, fair treatment of consumers is further emphasised. BSC for life insurance and family Takaful intermediaries will be introduced as a tool to further the fair treatment for consumers.
The underlying rationale for applying BSC to intermediaries is twofold. Firstly, the interests of intermediaries and the consumers may not always be aligned in a salesbased remuneration models, hence providing non-sales based remuneration can be an effective tool to promote consumer’s interest. Secondly, compensation system can help to shape better sales behaviours thereby reducing the likelihood of mis-selling by the intermediaries.
Under the LIFE framework, a proportion of an intermediary’s remuneration will be dependent on whether the representative has acted professionally in performing needs analyses, recommending suitable products, and providing adequate disclosures for the consumers, amongst others. This will help to align the interests of intermediaries with their customers, and over the longer term, boost consumer confidence in the professionalism of the life insurance and the family Takaful sectors.
However, companies should not view BSC as simply a performance grading table for the intermediaries. In designing a BSC framework, companies should start with defining its Fair Dealing strategy and then use BSC as a means to achieve the Fair Dealing outcomes over the long run. A BSC is a holistic performance management tool. It comprises of three components: (1) the performance management infrastructure which sets out the governance, including the roles and responsibilities of different functions and department responsible for the administration of the BSC system; (2) the performance management process which sets out the design of the strategy mapping into carefully defined performance measures (“hard” controls) for the intermediaries; and (3) the performance management culture (“soft” controls) that is based on performance accountability. The BSC combines an internal control framework together with both hard controls (i.e., KPIs) and soft controls (i.e., culture) to deliver specified corporate objectives. It is a living tool, with revolving targets, milestones and action plans over time.
From a “top-down” perspective, the key success factors in implementing BSC include obtaining top management support and commitment,
A BSC is a holistic performance management tool.
engaging a broad base of leaders, managers and staff in the development process, choosing the right BSC champion, maintaining interactive and multi-way communications, and viewing the scorecard as a long-term journey rather than a short-term project.
In defining suitable performance measures, organisations can begin with a well-defined strategy and derive the linkages between the strategic objectives and its metrics. The measurements should balance between financial vs non-financial as well as short-term vs long-term aspects. The focus should be on leading measures (outcome focus) rather than lagging measures (output focus) to propel the organisation forward with competitive edge.
In conclusion, BSC framework is driven by both compliance as well as business agenda, addressing the needs of the regulator, distributors and consumers alike. It is important for companies to see BSC beyond merely compliance and view it also as business opportunities. A successful implementation of the BSC framework is critical to the long term success and sustainability of the life insurance and family Takaful companies under the emerging business landscape.