Malaysia to Set Up New Compensation Scheme for Policyholders Protection

Malaysia's government is planning to introduce a new Insurance Compensation Scheme to enhance protection for policyholders of life, nonlife and takaful (Islam-based) insurance.

Perdadanan Insurans Deposit Malaysia, the administrator for the proposed scheme, issued a consultation paper and is inviting industry and public feedback. The compensation scheme is entirely new for insurance policyholders in Malaysia, a spokesperson at PIDM told BestWire.

The proposed scheme aims to protect policyholders from loss of claims or insured benefits in the event of a failed insurance or takaful company, said PIDM in a statement. The scheme would provide protection and mitigate financial losses for consumers.

Currently, there is an Insurance Guarantee Scheme, which was established by Bank Negara Malaysia, the country's central bank and financial regulator. The IGS is funded by the insurance industry and is intended to resolve claims of failed insurers, minimizing the need for public funding. The funds are separate for the life and nonlife sectors.

Levies are collected from nonlife insurers annually at a rate of 0.25% of gross direct premiums for the nonlife fund. However, PIDM said levies have yet to be imposed for the life sector as no life insurer has failed in Malaysia. The IGS for takaful companies has yet to be established.

Compared with the IGS, the proposed ICS would have a broader function to complement Bank Negara's role in promoting risk management. More importantly, PIDM would have "a risk minimizer function" to resolve and intervene in a troubled insurance and takaful company before it becomes insolvent, said PIDM in the consultation paper.

The government's intention is to ensure policyholders of insurance and takaful products that they will have a similar level of consumer protection provided by PIDM for depositors in commercial and Islamic banks, said the Ministry of Finance in a statement. The new scheme would also level the playing field between the banking and insurance industries.

"The proposed ICS will contribute to enhancing financial consumer confidence, which would in turn promote consumer demand for insurance and takaful products," said the ministry.

The insurance and takaful industry is an integral part of Malaysia's financial system, with total industry assets accounting for 5.4% of the financial system in 2009, according to PIDM.

Malaysia had 14.4 million life and takaful policies in 2009, up from 13.7 million a year earlier. Nonlife insurance premiums increased to 12.6 billion ringgit (US$3.87 billion) in 2009, from 11.2 billion ringgit a year earlier.

Overall, the proposed ICS enables PIDM to act as a proxy for policyholders in monitoring the health and soundness of insurance and takaful companies, said PIDM in its paper.

(By Iris Lai, Hong Kong bureau manager: [email protected])