INSURANCE/TAKAFUL LIKELY LANDSCAPES BY YEAR 2020 - PART 2

Bobby, my ex-colleague, raised a concern to me via e-mail after having read my last article on the likely landscapes of insurance/takaful industry by 2020, which was posted by me on Feb. 3, 2012.He was referring to the recommendation  for  “Remove Caps On Operating Expenses”  as outlined by the Malaysia Financial Services Master Plan (for period 2001 – 2010), and my anticipation that this “left-over” recommendation may possibly spill to the decade covered by the sequel Financial Sector Blueprint (2011 – 2020) for materialization.

He says: “My concern is that taking off the cap on operating expenses for insurance industry will entail no control of spending by the industry and this will be dangerous to policyholders/investors whose claims/returns will be at stake. Also, will insurance companies go bankrupt eventually???” 

Before I proceed furthers, let me first thank bobby for raising the query, which is in fact an expected valid response with regard to this particular possible future landscape of the industry. Bobby – I believe many other readers may share the same perspective as you do.

Now, here is my elaboration as the answer to Bobby's query…………

The Financial Services Master Plan also tabled another recommendation, i.e. imposing Risk-Based Capital (RBC) Framework. This framework essentially serves as the safeguard to ensure obligations of conventional insurance companies and takaful operators would be honoured in respect of their risks of business portfolio promoted to the public. RBC came into force effective Jan. 1, 2009.

RBC, in simple layperson’s terms, requires every insurance company and takaful operator to maintain a minimum capital adequacy level that should commensurate with its business or product risk profiles.

The RBC principles spell out the following objectives:

·         *Allowing greater flexibility for an insurer to operate at different risk levels in line with its business strategies, so long as it holds commensurate capital and observes the prudential safeguards set by Bank Negara Malaysia.

·         *Promoting convergence with international practices so as to enhance comparability across jurisdictions and reduce opportunities for regulatory arbitrage with the financial sector.

Total capital – in simple layperson’s terms – in the formula deployed by RBC is, the fully paid-up shares capital + retained profits. Interpreting this definition literally, I would take it that any player which incurs exorbitant high operating expenses would have to deploy higher capital adequacy level to commensurate with its business profiles, for assurance of meeting obligations in line with the related risk levels.

In a simple nutshell, RBC is aimed at encouragement toward attaining a more viable or strategic portfolio mix so that premium growth and underwriting profitability of an insurance company or takaful operator can be better optimized.  

Hence, RBC is meant to serve as a self-regulating safeguard instituted by all players for the interests of customers and at the same time also supporting flexibility in order to promote effective strategizing for business growth.

Best Regards.