consumer protection and life insurance industry code of...

Malaysian Financial Planning Council (MFPC) 10-1

RFP Programme - Module 2 Chapter 10: Consumer Protection and Life Ins Industry Codes of Practice

Chapter 10

Consumer Protection and Life Insurance Industry Code of Practice

Chapter Objectives

Students must be able to:

Have a Good Understanding of Consumer Rights, the Role of Life Insurance Companies and their Agents towards their Policy-owners

Identify the Importance of the Role LIAM and PIAM play in the Industry

Understand the Regulatory Control, QCG (Quality Control Guidelines) for Agents to Enhance their Professionalism

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10-� Malaysian Financial Planning Council (MFPC)


Chapter 10

Consumer Protection and Life Insurance Industry Codes of Practice

Consumer Rights and The Life Insurance Industry

The issue of consumerism is becoming more and more important in the financial services industry as the days pass. Malaysian consumers, in consonance with consumers everywhere else, are increasingly getting more educated and knowledgeable in terms of their rights. The impact of this new awareness is that they become more inclined to pursue their rights where they perceive that any of those rights are violated. One only has to follow the news to be aware that litigation is fast becoming a trend in the Malaysian environment. Many people, including professionals, are being sued for a variety of reasons. This means that a financial services provider, such as an agent, has to be fully aware of his professional responsibilities when providing services to clients. The consequence of not fulfilling responsibilities to the expectation of what his peers would consider of professional standard could be costly.

One question that may emerge is the definition of rights in the context of a consumer. When would a person’s right be considered violated? A clear definition is obviously needed because it is the best way to draw a line between violation and non-violation of a person’s rights.

Since we are dealing with consumers’ rights, the definition of an authoritative body on consumerism is most appropriate. For our purpose, it would perhaps be fitting to refer to the definition given by the International Consumer Movement, an international body representing consumer rights worldwide. According to the International Consumer Movement, there are eight basic rights for the consumers of a product or service they procure. These basic rights are as follows:

Right to satisfaction – e.g. the customer should receive reasonable satisfaction from the services or goods they purchase.

Right to information – e.g. the customer has the right to demand for all the necessary information on the products or services needed for them to make an informed decision;

Right to choose – e.g. the customer must not be forced or tricked into making a wrong decision;

Right to basic goods and services – e.g. the customer has a right of access to purchase goods or services deemed necessary for survival and a reasonably comfortable lifestyle;

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Right to be heard – e.g. there should be a platform for them to voice any grievances over goods and services supplied to them that are not satisfactory;

Right to consumer education – e.g. the right to receive information that affects or that may affect their choice and decisions made on goods and services; and

Right to a safe and clean environment – e.g. the right to have the environment they live in to be protected against pollutions and hazardous materials that may harm their health.

While not all the consumer rights stated above are applicable to the financial services or more specifically the life insurance industry, those that are relevant have been adopted in some form in the new legislation and guidelines issued by the government. The Insurance Act introduced in 1996 is one such Act that has taken many of the above consumer rights into considerations. In fact, one of the main intentions of the Insurance Act 1996 is to further safeguard and protect the rights of consumers of insurance products. The changes made to the Insurance Act, 1963 include additional measures to ensure fairer terms for consumers/policy-owners of insurance products, thus protecting their rights and improving their satisfaction.

Those changes that increase protection and satisfaction for those insured are stated and described below:

The Act liberalizes and widens the terms governing the surrender of life policies. A provision in the Act allows a policy-owner to surrender a single premium policy at any time and any other life policy after it has been in force (provided the policy has a cash value – see also the Asset Share Guidelines in Appendix II of Chapter 4). Thus, the policy-owner is entitled to receive the surrender value of the policy in the manner prescribed. The provision also enables an insurer to provide a surrender value for a policy, which has been in force for less than three years, if he so chooses. This provision liberalizes the existing provision by permitting surrender values to be obtained on ordinary policies in force less than three years if the respective insurance company so decides. This widens the scope of the provision in the old Act in that it clarifies the position of the single premium policy.

The Act liberalizes the existing arrangement, which provides for a policy-owner to return a life policy shortly after issue if he has objections to it and he may not have necessarily submitted his written objections. However, to maintain a certain degree of fairness to the insurers, the policyholder will have to pay for the cost incurred for the medical examination (if applicable) when the premium is refunded on return of the policy [Ibid., section 148(1)].

The provision governing the duty of a proposer to disclose proper information to the insurance company has been simplified, as is also the provision on information that may cause a policy to be avoided. The Act also clearly stated that it is the duty of a proposer to disclose all matters to the insurerwhich will affect the decision of the insurer on whether to accept the risk or not as well as the rates and terms to be applied, among other things. [Ibid., section 150(1)].

However, the Act also provides that when a proposer fails to answer or gives an incomplete answer to a question in the proposal form or queries by the insurer, the insurer may be deemed to have waived the need for compliance with the disclosure requirement. And it must follow that



the ensuing policy will not be avoided. It will be recalled that presently, questionable information supplied by a proposer can only be overlooked as a ground for avoidance of a life policy after the lapse of two years. Even so, the questionable information must not be of a category which the insurer can show to have been given with fraudulent intent. Another main feature of the Act is that it covers both life and general policies.

This new provision [Ibid., section 186(3)] sets out the rights of a person insured under a group policy if the group policy owner has no insurable interest in the life of the person insured and if the person insured has paid the premium to the group policy owner regardless that the licensed insurer has not received the premium from the group policy owner.

This new provision of the Act requires an insurer to pay a minimum compound interest of 4% per annum or such other rate as may be prescribed on the amount of the policy moneys or sum assured which the insurer fails to pay on claims made under a life policy or a personal accident policy after 60 days of receipt of such claims following the death of the policyholders [Ibid., section 161(1)].

The Act introduces the provision which lays down the rights of the insurer concerning the entitlement of refunds [Ibid., section 121(2)] with regard to insurers who have been wound up. For a life insurance policy, a policyholder is entitled to the actuarial valuation reserve in respect of his policy. Another provision provides for the distribution of the assets in an insurance fund [Ibid., section 122]. It lays down the provision that liabilities to policyholders and claimants shall have priority over unsecured liabilities other than preferential debts.

Besides the above-mentioned provisions, many provisions were also introduced by the Act to help avoid exploitation of users of insurance products.

Further measures were brought in by the Act to prevent the sale of policies which are disadvantageous to the buyers. An insurer is required to submit to Bank Negara Malaysia (BNM) particulars of a new life product together with its certification by the appointed actuary, the prospectus or other sales literature, specimen policy, and other supporting information, at least thirty days before launching the product to the public [Ibid., section 142(2)].

The Act also provided protection to the consumer in instances when he was induced to purchase an insurance policy based on misleading, false, or deceptive statement, concealment of material facts, or the use of brochures or sales illustrations not authorized by an insurer by insurance agents [Ibid., section150 (4)]. The consumer would be entitled to a refund if he had handed over money to a person who was carrying on the insurance business illegally.

The Act also introduces requirements for greater transparency in the dealings between insurance intermediaries (agent or brokers) and purchasers of insurance policies.

The Act also requires insurers to facilitate public access to some basic information on their financial condition for instance, reports of its Board of Directors, its revenue account, profit and loss account, balance sheet and other documents as Bank Negara may require.

In addition to that, the Bill also goes into the area of effecting better control over the prices of insurance products.



Controlling the prices of an insurance product is to ensure that consumers are not forced to pay more than what is reasonable. With that, it empowers Bank Negara to call upon an insurer or an association of insurers to review and or justify the premium rates of an insurance policy and, if it considers necessary, to require it to increase or reduce these rates.

The other provision of the Bill gives Bank Negara some control over the prices of insurance products. This means the insurer must get Bank Negara’s approval before they can adopt a tariff of premium rates or tariff of policy terms and conditions.

The last area in the Act covers provisions to minimize problems and difficulties for users of insurance product. The following are the provisions which cover consumer rights in this area.

The provision provides for a policyholder to nominate a person to receive the policy moneys on his death by providing certain particulars to the insurer [Ibid., section 163]. Another provides for the revocation of a nomination [Ibid., section 164]. A third lays down the procedure for an insurer to pay out the policy moneys where there has been a nomination made by the insured [Ibid., section 165]. A fourth provides for the creation of a trust in favour of a nominee who is eligible for such. A fifth provision deals with assigned or pledged policy moneys [Ibid., section 168]

Another group of provisions is concerned with minimizing the problems and difficulties users of insurance products may encounter when the business of an insurer is being transferred to another entity. One provision, as noted earlier, is the requirement for the transferee in a transfer scheme to give a confirmation that the policyholders, claimants, and other creditors involved will not be adversely affected following the transfer.

From the above discussion, it can be summarized that the new Act increases protection for the consumer by ensuring fairer terms and better control over the prices of insurance products. It also ensures that the users are not exploited and any problems or difficulties, which may be faced by them, are minimized.

Minimum Standards for Agent and the Agency System

Insurance agents constitute the other important component of the insurance industry. Agents sell the products of the insurance companies to the public and provide services to policyholders or clients in connection with the products or policies they sell. The life insurance agent can enter the industry freely until the 1980s. An entry requirement was introduced in the form of a professional examination by the respective insurance associations in the 1980s to enable them to perform their functions better.

In 1981, the Life Insurance Association of Malaysia (LIAM) introduced the Basic Examination for Life Insurance Agent for the purpose of appointing new agents. These agents would have to pass this examination within two years of signing the agency contract. LIAM introduced Pre-Contract Examination (PCE) for Life Insurance Agent in 1987. Another important step was taken in 1988, which required all life insurance agents to be registered with LIAM.



There are certain basic requirements for an insurance agent. They are as follows:

The agent must be at least 18 years old

The agent must pass the Pre-contract Examination administered by MII and must be registered with LIAM

The agent must complete SPM/MCE.

The agent must complete 20 hours of training (by MII or in-house as approved by LIAM) within 6 months of appointment

The agent must not be a undischarged bankrupt. He should not have been involved in criminal acts and acts of dishonesty. He should confirm these facts before appointment. Any non-disclosure or inaccuracy on past conduct would be sufficient ground for termination

Regulatory Controls: Qualitative Control Guidelines *(QCG) for Agents

In the Bank Negara Malaysia (BNM)’s Guidelines on Operating Costs Control (OCC Guideline) of life insurance business, it is recommended that life insurance companies put their emphasis on professionalism, productivity and persistency in the area of maintenance of contracts and promotions of the agency force. The details of the QCG Guidelines for agents are shown as follows:



*GUIDELINES ON MINIMUM QUALITATIVE CRITERIA FOR THE LIFE AGENCY FORCE

1. Recruitment of Agent

• The agent must be at least 18 years old.

• The agent must pass the Pre-Contract Examination administered by the MII and must be registered with LlAM.

• The agent must complete SPM/MCE. The agent must complete 20 hours of training (by MII or in-house as approved by LIAM) within 6 months of appointment.

• The agent must not be an undischarged bankrupt. He should not have been involved in criminal acts and acts of dishonesty. He should confirm these facts before appointment. Any non-disclosure or inaccurate disclosure on past conduct would be sufficient ground for termination.

�. Appointment of Career Agent

There shall be no direct appointment of Career Agent. However, an insurer may appoint a Career Agent who was working in an equivalent position with another insurer subject to the following conditions: -

(a) He must have met the minimum performance criteria for maintenance of contract as Career Agent with the preceding insurer prior to appointment.

(b) The preceding insurer should give a clean discharge with respect to financial obligations of the person.

(c) There has been no direct or indirect monetary incentives given to encourage the movement.

�. Appointment of Agency Leaders

There shall be no direct appointment of Agency Leaders. However, an insurer may appoint an Agency Leader who was working in an equivalent position with another insurer subject to the following conditions:



(a) He must have met the minimum performance criteria for maintenance of contract as Agency Leader of equivalent rank with the preceding insurer prior to appointment.

(b) The preceding insurer should give a clean discharge with respect to financial obligations of the person.

(c) No direct or indirect monetary incentives shall be given to encourage the movement.

Staff of life insurance companies may be given direct appointment as Agency Leaders subject to the following conditions:

(i) Only clerical staff and above with three continuous years of service in the life insurance industry immediately prior to the appointment can be given direct appointment to Agency Supervisor.

(ii) Only executive staff and above with five years of continuous service in the life insurance industry immediately prior to the appointment can be given direct appointment as Agency Manager; and

(iii) Staff who are appointed as leaders would not receive any special financing or subsidy other than those given to ordinary agents/agency leaders.

�. Promotion Criteria -as Career Agents

• The agent must have a persistency of 80% on premium count over 2 consecutive years prior to promotion.

• The agent must have sold at least 24 policies per annum over 2 years prior to promotion.

• The agent must have achieved an aggregate personal production of RM80,000 FYP for 2 years prior to promotion, with a minimum of RM30,000 in the first year.

• The agent must have completed a minimum of 20 hours of advanced life insurance training (by MII or in-house as approved by LIAM) prior to the promotion.

�. Promotion Criteria as Supervisor

• The agent must have a persistency of 80% on premium count over 2 consecutive years prior to promotion.

• The agent must have sold at least 24 policies per annum over 2 years prior to promotion.



• The agent must have achieved an aggregate personal production of RM80,000 FYAP for 2 years prior to promotion, with a minimum of RM30,000 in the first year.

• The agent must introduce 3 potential agents to his Agency Leader prior to promotion. Upon promotion, the agents shall be transferred to the supervisor.

• The agent must have completed a minimum of 30 hours agency management course or equivalent (by MII or in-house as approved by LIAM) prior to promotion.

�. Promotion Criteria as Manager

• The Agency Leader must not hold a salaried job elsewhere.

• The Agency Leader must have completed a minimum of 30 hours agency management course or equivalent (by Mll or in-house as approved by LIAM) prior to promotion.

• The Agency Leader must have a minimum of 36 months of service as Supervisor with the same insurer.

• The agency leader must have achieved an aggregate group production of RM600,000 FYP for 3 years prior to promotion, with a minimum FYP as follows

(a) 1st year – RM I50,000

2nd year – RM 200,000

3rd year – RM 250,000

or

(b) Fast Track promotion within 2 years

• 1-year grace period may be allowed for make up before demotion.

• 50% waiver of maintenance of production requirement up to age 70

i) age 55 years or more and with over 15 years service; or

ii) with over 20 years service.

• Total waiver of the requirement in cases of critical illness/total permanent disability up to a maximum of 5 years.

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Maintenance of Contract – Supervisor

• The Supervisor must comply with LIAM’s Code of Ethics.

• The minimum qualitative criteria for maintenance of contract shall apply to the Supervisor only one year after the promotion.

• The Supervisor must attend minimum 20 hours of training by MII or in-house as approved by LIAM every 3 years.

• The Supervisor must have a minimum of 80% persistency premium count for direct unit.

• The Supervisor must have a minimum of 3 qualifying agents in unit.

• The Supervisor must achieve RM75,000 FYAP per annum for his direct unit.

• The following production credit (for maintenance of contract) may be given to a supervisor on the promotion of his agent with a direct FYAP of RM1,000,000.

• A Supervisor who has been demoted for failure to meet the maintenance of contract requirements twice may only be re-appointed by the insurer and re-registered with LlAM after a waiting period of one year.

• 1-year grace period may be allowed for make up before demotion.

• 50% waiver of maintenance, of production requirement up to age 70.

i) age 55 years and 15 years service; or

ii) 20 years service; and

• Total waiver of the requirement in cases of critical illness/total permanent disability up to a

maximum of 5 years.

Maintenance of Contract – Agent

• The agent must comply with LIAM’s Code of Ethics.

• The agent must achieve a minimum First Year Annual Premium of RM6,000 per annum or 12 policies.

• The agent must have a minimum first year persistency of 80%.

• An agent’s contract will be terminated if he failed to meet the maintenance of contract requirements twice. He may only be re-appointed by the insurer and reregistered with LIAM after a waiting period of one year.

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• The agent must comply with LIAM’s Code of Ethics.

• The agent must achieve a minimum RM40,000 FYAP per annum, involving at least 24 policies.

• The agent must achieve a minimum persistency of 80%.

• A career agent who has been demoted for failure to meet maintenance of contract requirements twice may only be re-appointed by the insurer and reregistered with LIAM after a waiting period of one year. A career agent must achieve a minimum of:

i) 50% of FYAP of the newly appointed supervisor’s unit in his 1st year of promotion as supervisor; and

ii) 25% of FYAP of the newly appointed supervisor’s unit in his 2nd year of promotion as supervisor.

Maintenance of Contract – Manager

• The Manager must comply with LlAM’s Code of Ethics.

• The Agency Manager must have a minimum of 8 qualifying agents with FYAP of RM200,000 per annum in his group.

• The Agency Manager must have a minimum of 75% persistency on premium for group.

• The following production credit (for maintenance of contract) may be given to a Manager on the promotion of his supervisor:

i) 50% of FYAP of the newly appointed manager in his first year of promotion; and

ii) 25% of FYAP of the newly appointed manager in his second year of promotion.

• A manager who has been demoted for failure to meet the maintenance of. contract requirements twice shall have to be re-qualified after a waiting period of one year.

• 1-year grace period may be allowed for make-up before demotion.

• 50% waiver of maintenance of production requirement up to age 70.

i) age 55 years and 15 years service; or

ii) 20 years service; and

• Total waiver of the requirement in cases of critical illness/total permanent disability up to a maximum of 5 years.

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Transfer of Agents

• Insurers are not allowed to ‘buy over’ agents from another insurer by any form of inducement over the normal remuneration and fringe benefits package or any form of compensation offer.

• Insurers are not allowed to appoint any member of the agency force of another insurer by

offering him a position at a higher rank.

The Life Insurance Association of Malaysia (LIAM) and BNM’s Code Of Good Practice For Life Insurance

LIAM was formed in 1974 and it currently represents 18 life insurance companies in Malaysia. LIAM plays a very important role in developing the industry and enhancing the professionalism of its agents. In conjunction with the above, LIAM has come out with a list of objectives and activities, as follows:-

Objectives:

• To promote public understanding and appreciation for life insurance

• To improve the image of the life insurance industry through self regulation

• To give support to the regulatory authorities in developing a healthy industry

• To enhance the professionalism of its staff and agents through continuous training and education

• To work with local and foreign life insurance organizations towards achieving common objectives and benefits

Activities:

• To hold regular consultation with Bank Negara Malaysia on issues facing the life insurance industry

• To formulate rules and regulations to maintain discipline in the industry and issue from time to time rules, regulations and guidelines.

• To disseminate information through publication of research material, quarterly bulletins and annual reports

• To organize community service projects and public relations activities

• To organize seminars and conferences to promote the life insurance industry in Malaysia

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• To maintain a central computer database containing vital statistics and information of the industry

• To provide assistance in handling public complaints and enquiries through the LIAM Advisory Service Centre

Having gone through the objectives and activities of LIAM, let’s take a look BNM’s guidelines on Code of Good Practice. The purpose of the code is to provide a guideline in the self-regulatory aspects of the Life Insurance Industry in Malaysia. It focused on three areas in order to structure these guidelines; namely on the code of conduct, life insurance selling, statement of life insurance practice.

The details of the guidelines are as follows;

Part 1 – Preliminary

1. (i) This code of good practice, hereinafter referred to as the Code, is issued under Sections 142(5) and 149(5) of the Insurance Act, 1996

2. (i) This code shall apply to any new life insurance product or any review of an existing life product offered for sale on or after 1st July 1997

(ii) This code shall apply to a licensed life insurer or its agent in respect of any life insurance product offered for sale on or after 1st July 1997

(iii) A licensed life insurer shall modify any life insurance product currently being offered to proposers in such manner as to achieve compliance with this code not later than 30 June 1997

(iv) This code shall apply to product design and related proposal form, policy, brochure, sales illustration, announcement or advertisement.

3. (i) This Code is intended to achieve the following objectives in the design and sale of life insurance products:

(a) Design of life insurance products to ethical standards

(b) Fair pricing of products

(c) Truth in selling with full disclosure; and

(d) Proper advice to proposers and policyholders

4. (i) The chief executive officer and the appointed actuary shall be individually responsible for compliance with this Code.



(ii) Any intentional disregard of this Code or lack of diligence to comply with it shall render the person not fit and proper to hold his position in the licensed life insurer.

Part II – Product Design

5. (i) The name of a life insurance product shall not be misleading. A product must not be described as “vanishing premium”.

6. (i) A level annual premium term assurance policy or an extension to a life policy extending beyond the age of 70 years should not be designed as term assurance product.

(ii) A pure endowment assurance plan must provide for the refund of premiums paid in the event of death before the maturity date.

(iii) An extension to a life policy must not be made compulsory whether for one year or during the duration of the policy nor should it be sold on a package basis.

(iv) The sum insured by an extension to a life policy should not exceed five times the sum insured by the policy.

(v) A life insurance product must not be designed or must not be marketed on the basis of premiums under the policy being financed by a loan on the policy.

(vi) A life insurance product must not be designed to provide for the amount payable upon death being more than five times the guaranteed amount payable under the policy upon survival.

(vii) A life insurance product must not be designed or must not be marketed on the basis of payment of bonus contravening the following conditions:

(a) The period of deferment for participation in profits must not be more than three years from inception of the policy

(b) The bonus which can be declared for any year after the fifth policy year shall not exceed one hundred and twenty five percent of the bonus declared for the immediate preceding policy year;

(c) A participating policy must be eligible for distribution of bonus every year subject to sub-paragraph (a) above.

(d) Any bonus payable upon termination of a policy (terminal bonus) shall be payable whether the termination is by death or by maturity; and

(e) The terminal bonus payable on a life policy shall not exceed the lower of eighty percent of the vested bonus or twenty five per thousand sum assured per policy year for which the policy has remained in force.



Part III – Proposal Form

7. A proposal form to be completed for purchase of a life insurance product shall be written in clear and simple language and the question shall be specific and not such that it requires the proposer to guess as to what information should be provided in reply.

8. A proposal form shall incorporate the following notices:

(a) Notice required under Section 149(4) of the Act;

(b) A notice that proof of age will be required; and

(c) A notice that the proposer should ask for and study the brochure and sales illustration in respect of the policy product paying particular attention to benefits which are guaranteed, benefits which are not guaranteed.

9. A proposal form containing questions regarding purchase of any extension to all life insurance products should explicitly state that purchase of such extension is not compulsory and is entirely at the discretion of the proposer.

Part IV – Life Policy

10. (ii) Where a life insurer provides provisional insurance protection from the date of receipt of a payment towards the premium, the receipt for the premium shall specifically state the terms and conditions and limitations attaching to such insurance protection during the period up to the date of issue of the life policy.

(ii) The receipt shall be examined and accepted by the insured. It should specifically state that provision of insurance protection is only effective from the date of the policy.

11. A life insurance policy or an extension of a policy shall not contain any exclusion of protection other than prescribed without the prior written approval of Bank Negara.

12. (i) A life insurance policy shall incorporate within its body, the following minimum particulars:

(a) Name of the product

(b) Whether it is participating in profits immediately or whether it is participating in profits with a deferment period to be specified or whether it does not participate in profits

(c) Name and address of the policy owner

(d) Name of life assured if different from the policy owner, and his relationship to policy owner



(e) Amount of benefits payable, contingencies upon occurrence of which they are payable, and date of maturity or expiry of the policy

(f) Limitation on benefits and the duration for which it is applicable, if any

(g) Date of commencement of the policy

(h) Premium amount, frequency of payment and date of last payment

(i) The consequences of failure to pay premium

(j) Age of the life assured and whether the age has been disclosed; and

(k) Name and relationship of the nominee, if any.

(ii) A life insurer shall provide a copy of the proposal form relating to the policy owner together with the policy.

13. (i) A life insurer shall provide a form in which a policy owner may record his nomination under Section 163 of the Act

(ii) A nomination form shall explicitly state that:

(a) a nomination to which Section 166 of the Act applies shall create a trust in favour of the nominee;

(b) a policy owner should appoint a trustee for the policy moneys and in the event of failure to do so, the nominee shall be trustee.

(c) If the policy owner intends the nominee to receive the policy moneys as beneficiary and the nominee is not his spouse, child or parent under Section 166 of the Act, then he should assign the policy benefits to the nominee.

Part V – Brochures

14. This part applies to all announcements or advertisements in respect of a life insurance product, sales brochures, general sales illustrations or any other material provided at the point of sale hereinafter referred to as brochure.

15. A life insurer shall immediately withdraw any brochure which becomes misleading following any change of circumstances

16. A life insurer or its agent shall not issue or use a brochure providing information on non-guaranteed benefits unless release of such information has been authorized by its appointed actuary.



17. A brochure shall be written in simple, unambiguous and easily comprehensible language. The same type style, size and general layout that are applied to any statement being qualified must be used for stating the qualification. Technical or industry terms must not be used without a clear explanation of their meaning, which can be readily understood by the general public. All graphs and other diagrams must be drawn to scale. There should be no statement or description of any non-guaranteed benefit, which is so worded as to cause a misunderstanding about the nature, quantum or the non-guaranteed character of such “bonus once declared is guaranteed”. A brochure shall not describe any product as “vanishing premium”.

18. A brochure used as the point of sale material shall contain the following minimum information:

(a) Name and address of the insurer. Where financial information about the insurer is included, it must be accurate and up to date.

(b) A key future statement containing :

(i) a simple statement describing the product and its main objectives and purposes;

(ii) details of the events, circumstances or contingencies upon which benefits are payable and the form of the benefit payments;

(iii) circumstances in which exclusions or restrictions of benefits apply;

(iv) details of the obligation to pay premiums including the amount, frequency of payment and the term over which it is payable;

(v) the availability of a table of premium rates for each type of insured benefit;

(vi) in respect of participating life policies, a brief description of the nature of bonus (whether cash, reversionary, periodic or terminal), deferment period, if any, together with the events upon which they are payable and a statement that the full value of the reversionary bonus is not payable on early termination or conversion of the policy; and

(vii) implications of ceasing payment of premium;

(c) A sales illustration of payments and benefits complying with this Code either as a part of the main brochure or as a separate document.

(d) Important notices to the proposer in appropriate wording such as;

(i) The policy will not have a cash value on termination until after you have paid premiums for three years;

(ii) If you terminate your policy in the early years, you may get back less than the amount you have paid in; and



(iii) You should satisfy yourself that this plan will best serve your needs and that the premium payable under the policy is an amount you can afford.

(e) The position of the premium payable for the policy in terms of deduction for income tax.

Part VI – Sales Illustrations

19. A Life insurer or its agent shall provide an illustration of the premiums and benefits applicable to the specific proposal called a sales illustration to the proposer at the point of sale.

20. The appointed actuary shall review the appropriateness of all the assumptions at least once every two years.

21. A life insurer shall not illustrate the cost and benefits of an extension of a life policy or a rider on the policy together with the life policy.

22. Any information or date provided in a sales illustration shall be current, accurate and be presented in a manner that will not be misleading.

23. Any reference to the past performance of the insurer whether in the brochure or in the sales illustration shall be appropriate to the product being illustrated and shall include a statement that past performance may not be a guide to future performance which may be different.

24. The sales illustration must contain a clear statement of any risks borne by the policy owner with respect to the benefits under the plan.

25. The sales illustration shall clearly state the benefits, which are not guaranteed and emphasise that the benefits are not guaranteed and that quantum declared in future may be less or more than the values illustrated. Non-guaranteed benefits should be shown separately from the guaranteed benefits.

26. (i) A life insurer shall not represent that premium is not required for each year of the premium payment term of the policy. A life insurer shall not illustrate premium being financed through automatic policy loans. Where a life insurer illustrates future premium as being financed from future non-guaranteed benefits, the insurer shall emphasize that depending on actual results, the policy owner may need to continue or resume premium payments. Where a life policy carries an extension to it or a rider, the entire premium including the premium for the rider should be covered by this feature.

(ii) Where a life insurer illustrates future premium payments as being financed from non-guaranteed benefits, the illustration must show the impact of such payments on future benefits and values by comparison of the benefits without using this facility with the benefits using this facility. The rate of interest used to accumulate cash dividends shall not exceed the rate actually used by the insurer now and shall carry the statement that the rate may change. The rate of interest used for loan against the surrender value of bonus



where it is the method used to pay premiums, shall not be less than the rate of interest used in the profit test for that product.

27. (1) A sales illustration shall conform to the appropriate format as prescribed. Where none of the given formats are appropriate to the specific product, the insurer may use a different format without reducing the extent of disclosure subject to prior written approval of Bank Negara Malaysia.

(2) A sales illustration shall show the values as at the end of each policy year for policy years 1 to 20 and every 5 years thereafter until maturity or the age of 70years (but age 100 years where paragraph 26(2) applies) for a life assured entering at the age or the proposer in respect of:

(a) the premium paid;

(b) the guaranteed survival benefits;

(c) the guaranteed death benefits;

(d) the guaranteed surrender value; and

(e) the non-guaranteed benefits.

(3) Where paragraph 6(7)(b) or (c) applies, values for each of the preceding five policy years shall also be illustrated.

28. (i) A life insurer shall not illustrate non-guaranteed benefits which cannot be supported by profits as demonstrated by a profit test based on assumptions no more favourable than the following assumptions:

(a) Premium – based on the average sum insured per policy for the product or a similar product of the insurer;

(b) Guaranteed benefits – based on the features of the product and the premium used for the illustration;

(c) Guaranteed surrender value – based on the features of the product;

(d) Non-guaranteed benefits – based on the assessment of the appointed actuary of the levels of benefits most likely to be declared if the assumptions herein contained are realized;

(e) Mortality – Malaysian Mortality Table (83-88) Male Ordinary Life. Age set back of 3 years for female life;

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(f) Interest rate - The lower of average actual investment return during the preceding 5 years and 8.5% per annum;

(g) Income tax - 8% on investment income;

(h) Commission - The cost built in by the appointed actuary for commission, overriding commission, production bonus, persistency bonus (but not agency related expenses) in determination of premium rates for the product;

(i) Expenses of Management - the aggregate of 12% of the premium and RM160 for the first policy year and the aggregate of 3% of the premium and RM40 for each of the second and subsequent policy years. However, where an insurer can demonstrate that its actual expenses including agency related expenses are lower than these figures it may use such lower expenses quantum;

(j) Withdrawal rates - 10% in the first policy year, 10% in the second policy year and 3% in each of the subsequent policy years up to the thirtieth policy year and zero percent thereafter; and

(k) Valuation reserve - on the statutory valuation basis.

(ii) After defining the variables as mentioned in sub-paragraph (I), the cash flows and profit estimates should be shown as in Schedule VII.

(iii) The assumptions listed in sub-paragraph (I) may be revised by Bank Negara Malaysia in the light of emerging market experience and expectations for the future.

Part VII – Policy Information Statement

29. A life insurer shall issue together with a life policy, a policy information statement containing at least the information required to be provided in compliance with this Part.

30. A policy information statement shall include information, which will help the policy owner to observe his obligations under the policy including;

(a) the requirement for proof of age to be provided where age is not already admitted.

(b) the facility available for payment of premium;

(c) the facility for nomination for a person to receive policy moneys;

(d) the facility to secure a loan on security of the policy;

(e) the availability of a surrender value with the caution that the policy owner will lose if he surrenders his policy;

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(f) the person or office to be contacted for any enquiry or service relating to the policy; and

(g) the importance of advising the insurer of any change of address of the policy owner or the nominee.

31. A policy information statement shall inform the policy owner about the provisions of Section 148 of the Act.

32. A policy information statement shall inform the policy owner about the availability of the Insurance Mediation bureau, its address and its role in resolution of any dispute arising from the policy.

PIAM Code of Good Practice for General Insurance

The purpose of having inter company agreement amongst the members of PIAM are as follows:

To promote and protect the interests of the members

To regulate the conduct and activities of all insurance companies engaged in the general insurance business

To monitor the tariffs, commissions and remuneration applicable to general insurance business

In order to regulate and to achieve the above mentioned objectives, the management committee of PIAM has appointed the board to ensure that the conduct and activities of all registered agents are in compliance with the regulation which will be highlighted later.

The Board that was mentioned earlier has the following power:

To receive and consider the applications for registration as registered agents

To issue, renew or extend certificates of registration

To monitor and control the conduct and activities of registered agents

To recommend to the management committee the appointment of a registrar for the administration of the functions of the Board

To consider and to approve appeals for exemptions from the terms of the regulations

PIAM Code of Ethics

This Code applies to general business as defined in the Insurance Act 1963 including any modification and re-enactment thereof but does not apply to reinsurance business. Members of the association undertake to enforce this Code and to use their best endeavours to ensure that all those involved in selling their policies observe the provisions.

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It shall be an overriding obligation of an intermediary at all times to conduct business with utmost good faith and integrity.

In the case of complaints from policyholders (either direct or indirect, for example through the Complaints Action Bureau, Consumer Associations or Agency Board), the insurance company concerned shall require an intermediary to co-operate so that the facts can be established. An intermediary shall inform the policyholder complaining that he can take his problem direct to the insurance company concerned.

A. GENERAL SALES PRINCIPLES

1. The intermediary shall:

i) where appropriate, make appointment prior to call or visit. Unsolicited or un-arranged calls shall be made at an hour likely to be suitable to the prospective policyholder;

ii) when he makes contact with the prospective policyholder, identifies himself and explains as soon as possible that the arrangements he wishes to discuss could include insurance. He shall make it known that he is an agent of one or two company/ies, for whose conduct the company/ies accepts/ accept responsibility;

iii) ensure as far as possible that the policy proposed is suitable to the needs and resources of the prospective policyholder;

iv) give advice only on those insurance matters in which he is knowledgeable and seek or recommend other specialist advice when necessary; and

v) treat all information supplied by the prospective policyholder as completely confidential to himself and to the company or companies to which the business is being offered.

�. The intermediary shall not:

i) inform the prospective policyholder that his name has been given by another person; unless he is prepared to disclose that person’s name if requested to do so by the prospective policyholder and has that person’s consent to make that disclosure;

ii) make inaccurate or unfair criticisms of any insurer; or

iii) make comparisons with other types of policy unless he makes clear the differing characteristics of each policy;

iv) prevent the prospective policyholder from stating material facts to the insurance company or induce the person not to state them; or

v) induce the prospective policyholder to make a misrepresentation to the insurance company with regard to material facts.

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B. EXPLANATION OF THE CONTRACT

The intermediary shall:

i) identify the insurance company;

ii) explain all the essential provisions of the cover afforded by the policy, or policies, which he is recommending, so as to ensure as far as possible that the prospective policyholder understands what he is buying;

iii) draw attention to any restrictions and exclusions applying to the policy;

iv) if necessary, obtain from the insurance company specialist advice in relation to items (ii) a (iii) above; and

v) not impose any charges in addition to the premium required by the insurance company without disclosing the amount and purpose of such charges

C. DISCLOSURE OF UNDERWRITING INFORMATION

The intermediary shall, in obtaining the completion of the proposal form or any other material:

i) take all reasonable steps to ensure that the necessary proposal forms are completed fully and accurately by each prospective policyholder;

ii) avoid influencing the prospective policyholder and making clear that he is the ultimate person who will be responsible for the answers given;

iii) ensure that the consequences of non-disclosure and inaccuracies are fully understood by the prospective policyholder by drawing his attention to the relevant statement in the proposal form and explaining the consequences to him; and

iv) make all reasonable enquiries to gauge the existence of risk and to highlight any circumstances, which may adversely affect the risk to be underwritten, to his Principal.



Self Assessment

1. The Zoom Life insurance company has printed several thousand copies of sales brochures which have become misleading because of a change of circumstances. If you are asked to advise the company on what to do, what would be your answer that is considered in line with the Code of Good Practice for Life Insurance Products?

A. It is all right to continue the distribution since so much money has been spent

B. It is all right to continue the distribution since there are no violation of the Code

C. It must withdraw the brochures immediately or breach the Code

D. It can continue distributing the brochure with a letter to rectify the misleading statement

2. Part VI of the Code of Good Practice for Life Insurance Products covers Sales Illustration. Which of the following statement is FALSE with regard to sales illustration?

A. An appointed Actuary shall review the appropriateness of the assumptions at least once in every two years

B. Any information provided is current, accurate and not misleading

C. The illustration must contain a clear statement of any risks borne by the policy owner with respect to the benefits under the plan

D. The sales illustration must state the maximum payments or profits that the policy owner will get although such payments or profits are non-guaranteed items.

3. Part VI of the Code of Good Practice for Life Insurance Products covers Policy Information Statement. A policy information statement shall include information which will help the policy owner to observe his obligations under the policy. All the following are true EXCEPT:

A. The facility available for payment of premium

B. The facility available to provide legal advice such as will writing

C. The person to contact for any enquiry or service on the policy

D. The importance of advising the insurer of any change of address of the policy owner or nominee



4. Which of the following is NOT one of the basic rights as espoused by the International Consumer Movement?

A. The right to satisfaction

B. The right to surrender the policy for cash after one year

C. The right to basic goods and services

D. The right to be heard

5. Under the Insurance Act 1996, an insurer is allowed to provide cash value for policies in the following circumstances.

I. Single premium life policies at any time

II. Life policies in force after three years

III. Life policies in force before three years

A. i only

B. i & ii only

C. i & iii only

D. All the above

6. Maggie wishes to return the life policy bought a few days ago. Under the Insurance Act 1996,

A. she must return the policy within 2 months of receipt of the policy

B. she must pay for the medical cost on the policy incurred by the insurer

C. she cannot return the policy to the insurer

D. she must give a valid reason in writing to the insurer



7. There are certain basic requirements for a person to qualify himself as a life insurance agent. Which of the following is/are requirement(s) of being a life insurance agent?

I. 18 years of age

II. Passed agents pre-contract examination

III. Registration with NAMLIA

IV. Registration with LIAM

A. i & ii only

B. i, ii & iii

C. i, ii & iv

D. All the above

8. The Code of Good Practice for life insurance products was introduced to promote the following, EXCEPT:

A. To get the insurers to merge to meet the needs of globalization

B. To regulate the manner of sales illustrations for life policies

C. To provide guidelines on proposal forms

D. To set guidelines on product design

9. Which of the following statements is TRUE with regard to the Code of Good Practice for agents and life insurers?

A. It applies only to life products after 1st July 1997

B. It applies to life products on or after 1st July 1997

C. The Code shall apply to regulate the actual sales talk by life agents

D. The Code shall apply to regulate the mortality table to be selected



10. The Code of Good practice for life insurance products is intended to meet certain objectives. Which of the following are the objectives?

I. Design of life insurance products to ethical standards

II. Fair pricing of products

III. Truth in selling with full disclosures

IV. Proper advice to proposers and policyholders

A. i only

B. i & ii only

C. i, ii & iii only

D. All the above

Answers: 1-C, 2-D, 3-B, 4-B, 5-D, 6-B, 7-C, 8-A, 9-B, 10-D

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