‘TIPS’ for Sound Management of Insurers
PERBADANAN INSURANS DEPOSIT MALAYSIA (PIDM) IS AN INTEGRAL PART OF THE NATION’S FINANCIAL SAFETY NET SYSTEM. IT WAS ESTABLISHED IN 2005 TO ADMINISTER THE DEPOSIT INSURANCE SYSTEM (DIS).
In 2010, its mandate was expanded to administer the Takaful and Insurance Benefits Protection System (TIPS). Globally, insurance guarantee systems (IGS) like TIPS play an important role in ensuring prompt payment of insurance benefits or ensuring continuity of insurance coverage to financial consumers in the event an insurance company fails. Through these protection systems, PIDM protects depositors and takaful and policy owners from losing their bank deposits or takaful and insurance benefits in the event of a member institution failure.
All licensed commercial banks and Islamic banks (member banks) as well as all licensed general and life insurance companies (insurer members) are members of PIDM.
Public awareness about PIDM's protection systems is an important component in promoting public confidence in the stability of the financial system.
PIDM is also mandated to provide incentives for sound risk management in the financial system, as well as to promote and contribute to the stability of the financial system to preserve public confidence. PIDM reports to Parliament through the Finance Minister and is funded by annual levies collected from its members.
TIPS FEATURES PROMOTING SOUND RISK MANAGEMENT IN INSURERS
Scope and limits of protection The protection provided by TIPS covers a majority of the policy owners and third party claimants and is subject to explicit limits to mitigate moral hazard. The scope and limits of the protection are summarised below:
Risk mitigation key to financial system stability
PIDM carries out independent risk assessment and monitoring of its members and works closely with Bank Negara Malaysia, the primary regulator and supervisor of the banks and insurance companies in Malaysia, to ensure early detection of issues faced by member institutions so prompt action can be taken if needed. The Strategic Alliance Agreement between PIDM and Bank Negara facilitates collaboration in all significant areas, with a view to having clear arrangements between PIDM and Bank Negara for coordinating their regulatory activities including risk assessment and monitoring and for the exchange of information. PIDM has broad powers under its legislation to intervene or resolve a troubled member institution. These include powers to assume control over the member, require a transfer of shares in a member, to wind up a member or take such other actions as appropriate, at least cost to the financial system.
Incentivising sound risk management practices
PIDM also complements and reinforces the supervisory role of Bank Negara by providing incentives for insurer members to enhance their risk management practices and minimise risk taking through the implementation of a differentiated levy system. Under the Differential Levy System (DLS), introduced in 2012, insurer members with sound risk management practices contribute a lower rate of levy to the fund, while those with higher risk profile pay levies at a higher rate. The levy rates are designed using a “double-up approach” within the four categories, ranging from 0.025% to 0.2% for Family Takaful Business and 0.1% to 0.8% for General Takaful business. Insurer members in the lower categories are thus incentivised to improve risk management practices so that they can move up into another category with a lower levy rate. In designing the DLS, PIDM drew on lessons from the Differential Premium Systems (DPS) for member banks, extensive jurisdictional research, taking into consideration the unique features of the insurance industry in Malaysia, and consulted extensively with the industry.
Promoting a robust insurance industry
PIDM also promotes sound risk management practices through the terms and conditions of membership that set standards of behaviour to promote safety and soundness. They require the insurer members to have in place sound risk management practices, maintain adequate level of capital funds, ensure compliance with legislation and to notify PIDM of significant events that may affect their safety and soundness. Protection systems administered by PIDM and other IGS around the world work to minimise the impact caused by troubled insurers to the financial system and without burdening taxpayers’ money. The involvement of IGS in countries such as South Korea and Canada have also made it possible for policyholders of troubled insurers to continue maintaining their benefits. Public awareness about PIDM's protection systems is an important component in promoting public confidence in the stability of the financial system. With the knowledge about the benefits and limitations of the protection systems, the public will be better informed to make financial decisions and safeguard their financial interests. In the event of failure of an insurer member, PIDM will act promptly to protect the policy owners.