A friend recently asked me to write a commentary on the Financial Sector Blueprint (FSB) launched by the Malaysian government on December 21, 2011. I thought that would be a good idea since the insurance and takaful (combined) industry, which I have had served for many years, is one of the key segments outlined for vibrant development by the blueprint. Moreover, I believe what I am going to share now should be of interest to my many friends who are still attached to this industry.
FSB, which takes the drive through the decade till year 2020 – the dateline for Malaysia to attain developed and high income nation status, is the sequel to the Financial Master Plan (FMP) of the preceding decade (2001 – 2010). For an indicative future scenario of the insurance and takaful services in the country within the next nine years, we should therefore relate to both FMP and FSB together in totality.
While the overall recommendations or intended directions outlined by FMP for this segment have generally been implemented successfully - for example the further development of takaful business via securing more operators, and the introduction of independent financial advisers as an additional distribution channel - yet there are some salient “leftovers” which may be expected to spill into this decade for implementation. These are:
· *Open up pension industry to insurers.
· *Allow insurers to distribute other personal financial service products on behalf of licensed third parties.
· *Remove caps on operating expenses.
· *Deregulate pricing of general insurance products.
· *Raise the entry requirements for the agency force. Pre-contract examinations to qualify as agents will be updated. Additional compulsory examinations as part of the continuing education programmes for agents to remain operating as agents.
· *Allow new insurance licenses for innovative players.
· *Disclosure of commissions (given to agents) to promote transparency.
Now, let us view what are specifically in store for the segment as spelt out by FSB itself:
· *Develop a vibrant private pension industry to enhance Malaysians’ preparedness for retirement and old age.
· *Positioning insurance companies and banks, as significant intermediaries in the private pension industry. Products are such as annuities that mitigate longevity and inflation risks, “locked-in” savings that minimise pre-retirement.
· *Enhance the provision of wealth management products and services.
· *Provide higher value-added medical and health insurance; offer higher-end and more sophisticated products to complement protection under oncoming national health financing scheme; include long-term care benefits such as assisted living and hospice care.
· *Greater strategic alliances between domestic insurance companies and foreign financial institutions with specialised expertise in medical and health insurance and takaful.
· *New takaful licences. Support growth of Islamic fund and wealth management industry.
To me, FSB evidently complements FMP in order to complete the stretched journey to the intended destination by the designated dateline for insurance and takaful services. To me, these could be the likely landscapes ….within the next nine years from now till end of 2020.
LIBERALISATION IN OPERATIONS: I strongly sense that managements would be granted more leeway to operate their respective business in accordance to their prudence, capacity, capability and past proven experience. The much talked about removal of cap on expenses or operating cost control, planned under FMP, should be implemented without much further delay. The larger operators in fact are keenly waiting for it. Some predict it would happen in 2012, but coming along with the proposed compulsory disclosure of commissions (given to agents) for each product. So, allotting higher commission scales to incentivise agents for driving production would also mean informing consumers that the remuneration structure is a contributing factor to product pricing. I can anticipate the move for commission disclosure is based on the underlying logic as follows:a) a)For instilling transparency and to safeguard the interest of consumers as they can then make better informed decisions in sourcing and selecting products from the perspective of pricing and benefits.
b) b)Discouraging players, especially the larger ones, from going overboard in granting excessive commissions
c) c)Keeping a balance of some fair competition between players.
DEREGULATE PRICING OF GENERAL INSURANCE/TAKAFUL PRODUCTS: 
This is another much talked about subject of parties dealing with general insurance. For a long time since, providers of motor and fire/household insurance rigidly adhere to a set of standard tariff rates. The deregulation recommendation cited in FMP, if fully materialised, would mean that operators would have the liberty to quote their own premium rates. However, I do not foresee deregulation in this aspect happening for now……at least in the next four years. Apparently, parties involved are not ready for it as yet. Bank Negara just instituted a revision to the tariff for motor insurance, which lists out upward adjustments to premiums over the next four years. Obviously, full deregulation of the overall tariff for motor and fire/household insurance, if ever the event sets in, will spill over to around the 2nd half or later of the decade covered by FSB.
EMERGENCE OF RETIREMENT PRODUCTS:First tabled in FMP and then reiterated in FSB, I expect prominent and prior attention to be focused on the development of private retirement or pension products with intense involvement of players in this segment, along with other financial institutions. Without definite details being made available at this juncture, various questions have surfaced. Is it optional (especially to Employee Provident Fund contributors) or mandatory (regardless whether a wage earner is an EPF contributor or not)? Is it in the form of annuity only (which was introduced some years ago but rescinded after being rejected by a major trade union), or a new type of unit trust product, or special funds offered by fund houses, or a combination? Will there be a single standardised product or a variety for selection? Are the returns guaranteed or variable according to market/investment experiences? What about the tenure – long term only or a series of short term to long term according to participant’s preference? Are contributions or capital outlays fixed according to a set schedule or left to choice? On Dec. 5, 2011, the Securities Commission (SC) finalised the eligibility requirements for private retirement scheme providers (PRS), and SC has been empowered to approve the providers for promoting products under the said scheme. The local news media reported that selection will be based on financial standing, organisational capabilities, sufficient capital requirements, internal controls and risk management practices. The news triggered some fund houses to raise questions and comments in the media. I pose a pertinent question: Apart from SC, what about the role of the supervisory bodies for insurance and takaful since very affirmatively both FMP and FSB have had declared the new private pension industry to be open to these operators? Should not these bodies be involved in the selection process if their players are in the game too? Notwithstanding what product genre will be on the final platter, the expectation that it would assume a prominent financial vehicle possessed by Malaysians by the end of the decade is not far-fetched.
PARTICIPATION IN THE NATIONAL HEALTH FINANCING SCHEME: NEW PRODUCTS PROVIDED BY THE INSURANCE/TAKAFUL SEGMENT:
Remember the natiional hospitalisation insurance sheme called Sihat Malaysia, which the government launched about 10 years ago with a consortium of insurers? It took off quite well but subsequently fizzled out. Remember the hype about developing a natonal critical illness programme called EPF-CI plan (arrangement for premium to be deducted from participant’s EPF account) around five years ago which was scrapped because of unfavourable feedback from a major trade union? Resurgence of yet one more concept of a medical and health scheme seems to be in the pipeline, as recommended by FSB. It is anyone’s guess for now what the recommendation entails. I pay special attention to the descriptive terms used in FSB, viz. “higher value-added”, “higher-end and more sophisticated”, “long-term care”, “assisted living”, “hospice care” – sounds like a major medical/hospitalisation plus critical illness programme? (I may be wrong…….what do you think?). Already, some individuals have raised quesstions whether the proposed scheme would be compulsory for all who are gainfully employed, i.e. monthly contributions to be automatically deducted from earnings? Or is it meant to cater for higher income earners as voluntary contributors?
Allow me to sidetrack a bit by sharing with you some information on the national health scheme of Malaysia’s immediate neighbour – Singapore. I sourced the following extracts from Wikepedia.
· *Singapore system uses a combination of compulsory savings from payroll deductions (funded by both employers and employees) to provide subsidies within a nationalized health insurance plan called Medisave.
· *Such funds can be pooled within and across an entire extended family.
· *The vast majority of Singapore citizens have substantial savings in this scheme.
· *Approximately 70-80% of Singaporeans obtain their medical care within the public health system.
· *Singapore has “one of the most successful healthcare systems in the world, in terms of both efficiency in financing and the results achieved in conmmunity health outcomes,” according to an analysis by global consulting firm Watson Wyatt.
Surely, the government and the relevant supervisory bodies will look at some successful models already implemented by other nations. Will Singapore’s scheme be one of them? I rest this question with you to ponder on.
Tan Tock Seng Hospital, S’pore 
QUALIFIED AGENTS PROVIDING FINANCIAL PLANNING & WEALTH MANAGEMENT SERVICES:
Transformation is taking place and will continue the flow to keep up with changing trends. FMP recommended for insurers to be alllowed to distribute other personal financial products (besides insurance products) on behalf of licensed third parties. FSB directs the segment to enhance the provision of wealth management products and services. Both documents have had endorsed opening up pension industry to the segment. Invariably, appropriate training on these subjects must be formulated for agents. If Bank Negara is really serious about enforcing the recommendation for raising entry requirements for new agents and additional compulsory examinations for existing agents, then I can foresee higher calibre agents in the not-so-far future who are knowlegeable enough to function as full financial planners and wealth managers, and not just plain insurance agents. I know a few individual agents who are already offering asset allocation services to supplement and complement their life insurance sales.
PROMINENT INCREASE OF TAKAFUL BUSINESS MARKET SHARE IN THE INSURANCE SEGMENT:
The government harbours the fervent aim of pushing up, to significant level, the overall islamic finance versus total domestic financing market by year 2020. In 2010, islamic finance constituted 29% market share against 71% secured by the conventional counterpart. The target for 2020 is 40% to come from islamic finance and 60% from conventional. Even if the growth in market share of overall takaful is not targetted to commensurate at the 40% level by 2020, we can still be sure that it will be a quantum jump from the current standing of around 10%. Note that more new takaful licences will be issued under the tenure of FSB. Malaysia aims to be the internationally recognised Islamic financial centrre of excellence. Certainly, intense concerted action plans will be rolled out to ensure takaful business grows much more rapidly by year 2020.
MORE JOINT VENTURES BETWEEN LOCAL AND FOREIGN COMPANIES & MORE PLAYERS:
It is obvious that to reach greater heights, the segment must rope in corporations, including foreign ones, which have demonstrated innovative and outstanding experiences. Such move will be in line wiith two of the nine key areas for improvement identified by FSB, viz. Strengthening regional and international financial integration; Talent development for the financial sector. It will also be in line with the liberalisation process being instituted gradually, for example allowing higher foreign equity share for joint ventures with domestic corporations, and allowing more qualified expatriates to be engaged.
I wish to sum up by re-producing some excerpts from the written script of Bank Negara Governor’s speech during the launch of FSB (overall) on Dec. 21, 2011:
· *The recommendations in the Blueprint has taken into account the expected changes in the international and domestic environment and its consequent demands on the financial system in this next decade. It also takes into account Malaysia’s aspirations to become a high value-added, high income economy.
· *More than half of total financing in 2020 will be raised through financial markets, while Islamic finance will continue to increase in prominence, grossing at a faster pace to account 40% of total financing.
· *A strong focus in the Blueprint is on developing the financial ecosystem to enhance funding for innovation which reprresents a key transformative agenda in our new economic model.
· *Over the next ten years, steps will be taken to achieve a wider range of funding sources for new ideas, including new conduits for financing and investments in innovative industries.
· *Key recommendations in the Blueprint include more flexible limits on foreign participation in financial institutions with specialised expertise that are able to contribute to Malaysia’s economic aspirations and financial sector development.
· *A range of measures will be introduced to accelerate the pace of migration towards e-payments, including driving the adoption of the mobile phone banking and payment transactions, increasing the number of point-of-sale terminals, and introducing a pricing structure that incentivises the use of e-payments.
My best regards to all friends for the rest of 2012.
DISCLAIMER: The commentary is based on my personal analysis and opinions. Therefore, readers should not take my views as guarantee of future events. I leave to your good judgement as to whether the contents in the commentary hold water or otherwise. You are free to concur or disagree.
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