The insurance industry in Malaysia remains dominated by foreign providers, as stated in the U.S. Department of Commerce 2008 Country Commercial Guide, and the government continues to promote Islamic insurance and reinsurance, better known as takaful and retakaful sectors, as part of its strategy to make Malaysia a global hub for Islamic financial services. Stronger solvency positions and enhanced asset-liability management contributed to the sustained performance of the insurance industry in 2007, according to the Central Bank of Malaysia's (BNM) 2007 Financial Stability and Payment Systems Report. The BNM, established under the Central Bank of Malaysia Act No. 519 of 1958, functions as the regulatory and supervisory authority for the insurance industry since 1988. The Insurance Act No. 553 of 1996 and 1996 Insurance Regulations, which were amended in 2005, provide for the licensing, regulation and supervision of the insurance industry. Malaysia completed a detailed self-assessment in April 2001 of its observance of the Insurance Core Principles (ICPs) developed by the International Association of Insurance Supervisors (IAIS) in 2000, according to the Asian Development Bank's 2001 report. Based on Malaysia's self-assessment, 11 principles were observed, 4 were largely observed and 2 were materially non-observed. However, the ICPs and methodology were revised in October 2003 by the IAIS, and there is insufficient information publicly available regarding Malaysia's compliance with the more stringent principles. The ten-year Financial Sector Master Plan (FSMP) was formulated by the BNM in 2001 to set a timeline for the liberalization of the insurance industry. As of 2005, according to the BNM's 2005 Insurance Annual Report, 16 of the 31 recommendations of the FSMP were implemented.

General Overview

The Central Bank of Malaysia (BNM) was established under the Central Bank of Malaysia Act No. 519 of 1958, which was last revised in 1994. The BNM functions as the regulatory and supervisory authority for the insurance industry since 1988. According to a 2007 study by Dilli Raj Khanal, regulation of the industry falls into four categories, namely policy development, administration and enforcement, an actuarial function, and consumer education and complaints handling. The Insurance Act No. 553 of 1996 provides for the licensing, regulation and supervision of insurance and reinsurance companies, insurance brokers, and financial advisory business. The Insurance Act further incorporates more stringent rules for financial requirements, higher levels of disclosure, and transparency in operations. Insurance Regulations adopted in 1996 supplement the Insurance Act by prescribing the details of mandatory requirements contained in certain provisions of the Act. According to the BNM's 2005 Insurance Annual Report, the Insurance (Amendment) Act was enacted in 2005 to establish the legislative licensing framework for financial advisers in Malaysia. Subsequently, in October 2005, the Insurance Regulations of 1996 were amended via the Insurance (Amendment) Regulations to prescribe the minimum capital requirements and licensing fees for financial advisers.

The ten-year Financial Sector Master Plan (FSMP) was formulated by the BNM in 2001 to set a timeline for the liberalization of the insurance industry. Phases of liberalization include increasing caps on foreign equity, fully opening the reinsurance industry to foreign competition, and lifting existing restrictions on employment of expatriate specialists, as stated in the Office of the United States Trade Representative's 2008 Trade Summary on Malaysia. As of 2005, according to the BNM's 2005 Insurance Annual Report, 16 of the 31 recommendations of the FSMP were implemented, and were predominantly directed towards strengthening resilience, building the capacity and capabilities of domestic insurers, raising professionalism and corporate governance standards in the industry, as well as strengthening consumer protection and supervisory framework. Further steps have been taken by the BNM to replace the rules-based approach with more principles-based regulation, while reinforcing its enforcement capabilities to ensure that insurance institutions deliver against a set of high-level principles of best practice.

According to the U.S. Department of Commerce (DoC) 2008 Country Commercial Guide, the insurance industry in Malaysia remains dominated by foreign providers. As part of the 1997 WTO Financial Services Agreement, Malaysia agreed in principle to allow existing foreign shareholders of locally incorporated insurance companies to increase their shareholding to 51 percent. The U.S. DoC report states that the government of Malaysia continues to promote "takaful" (i.e. Islamic insurance) as part of its strategy to make Malaysia a global hub for Islamic financial services. The BNM issued four new licenses in 2006, and announced that international takaful operators, both domestic and foreign, could apply for licenses to conduct business in international currencies, either as incorporated entities or as branches. Furthermore, on August 29, 2006, the BNM invited qualified domestic and foreign institutions to apply for licenses to provide "retakaful" (i.e. reinsurance under Islamic principles) services in Malaysia.

According to the BNM's 2007 Financial Stability and Payment Systems Report, stronger solvency positions and enhanced asset-liability management contributed to the sustained performance of the insurance, takaful and retakaful sectors in 2007. As of 2007, per the same report, there were 41 insurance companies in Malaysia, including 8 life-insurers, 7 reinsurance companies, 8 takaful operators, and 2 retakaful operators. Operating in parallel with conventional finance, Islamic finance has experienced rapid growth in recent years, enhancing its significance in the Malaysian financial system. Total assets of the takaful sector grew by 18.9% on average annually since 2003 to account for 6.9% of total assets of the insurance and takaful industry in 2007. During the same period, as stated in the BNM's 2007 Financial Stability and Payment Systems Report, combined premiums and contributions of the insurance and takaful sectors amounted to USD9 billion, an 11.4% increase from the previous year.

Insurance companies also provide offshore insurance services in Labuan, an offshore financial center located in Malaysia, under the Offshore Insurance Act No. 444 of 1990. In Labuan, Malaysia, businesses receive preferential tax treatment for offshore banking activities, trust and fund management, offshore insurance and offshore insurance-related businesses, and offshore investment holding businesses. The Labuan Offshore Financial Services Authority, which works closely with the BNM under the authority of the Ministry of Finance, licenses offshore insurance companies, and performs stringent background checks before granting an offshore license.

Malaysia completed a detailed self-assessment in April 2001 of its observance of the Insurance Core Principles (ICPs) developed by the International Association of Insurance Supervisors (IAIS) in 2000, according to the Asian Development Bank's (ADB) 2001 report. Based on Malaysia's self-assessment, 11 principles were observed, 4 were largely observed and 2 were materially non-observed. However, the ICPs and methodology were revised in October 2003 by the IAIS, and there is insufficient information publicly available regarding Malaysia's compliance with the more stringent principles. A workshop on self assessment of selected IAIS Insurance Core Principles (ICPs) was conducted in April 2005 by the ASEAN Insurance Training and Research Institute (AITRI), as noted on the Financial Sector Reform and Strengthening (FIRST) Initiative website. The aim of the project was to strengthen the insurance supervisory system in Asia by helping insurance supervisors from Asia implement new action plans, and improve their supervisory standards in line with international best practices. The workshop, funded by FIRST, was considered a success by both the sponsors and participants. In December 2005, the ASEAN insurance regulators and Secretariat held the 8th ASEAN Insurance Regulators Meeting in Siem Reap, Cambodia, in which it was recommended that AITRI strengthen its role as the regional training arm for the insurance regulators. To date, as stated on the FIRST Initiative website, the AITRI has helped ASEAN insurance regulators to complete five ICPs, namely ICP 6 on licensing, ICP 12 on reporting to supervisors and off-site monitoring, ICP 20 on liabilities, ICP 23 on capital adequacy and solvency, and ICP 25 on consumer protection.

The Principles

ICP 1 Conditions for effective insurance supervision

II

The BNM was established under the Central Bank of Malaysia Act No. 519 of 1958, which was last revised in 1994. The Insurance Act No. 553 of 1996 provides for the licensing, regulation and supervision of insurance and reinsurance companies, insurance brokers, and financial advisory business. The Insurance Act further incorporates more stringent rules for financial requirements, higher levels of disclosure, and transparency in operations. Insurance Regulations adopted in 1996 supplement the Insurance Act by prescribing the details of mandatory requirements contained in certain provisions of the Act. According to the BNM's 2005 Insurance Annual Report, the Insurance (Amendment) Act was implemented in 2005 to establish the legislative licensing framework for financial advisers in Malaysia. Subsequently, in October 2005, the Insurance Regulations of 1996 were amended via the Insurance (Amendment) Regulations to prescribe the minimum capital requirements and licensing fees for financial advisers. Nevertheless, there is insufficient information publicly available clearly identifying Malaysia's compliance with this principle.

ICP 2 Supervisory objectives

II

There is insufficient information publicly available clearly identifying Malaysia's compliance with this principle.

ICP 3 Supervisory authority

II

The BNM functions as the regulatory and supervisory authority for the insurance industry since 1988. According to a 2007 study by Dilli Raj Khanal, regulation of the industry falls into four categories, namely policy development, administration and enforcement, an actuarial function, and consumer education and complaints handling. Nevertheless, there is insufficient information publicly available clearly identifying Malaysia's compliance with this principle.

ICP 4 Supervisory process

II

In order to improve transparency, according to the ADB's 2001 report, the BNM was expected to develop an insurance website to disseminate laws, regulations and guidelines applicable to the insurance sector. The website was also intended to facilitate the release of key market indicators at regular intervals. Nevertheless, there is insufficient information publicly available clearly identifying Malaysia's compliance with this principle.

ICP 5 Supervisory cooperation and information sharing

II

According to the ADB's 2001 report, ICPs on cross-border business operations, and coordination and cooperation were assessed as materially non-observed due to legal constraints on the ability to share information with foreign supervisors. Despite these constraints, Malaysia continued to establish networking relationships with its counterparts to facilitate the exchange of information on an informal basis. However, the ICPs and methodology were revised in October 2003 by the IAIS, and there is insufficient information publicly available regarding Malaysia's compliance with the more stringent principles. The BNM, as stated in its 2005 Insurance Annual Report, engages actively with regional and international institutions to foster closer insurance cooperation among the regulators. In addition, the Malaysian Insurance Institute, which provides professional insurance education in Malaysia, collaborates closely with the insurance industry and internationally-recognized insurance institutes.

ICP 6 Licensing

II

The BNM manages the insurance sector, both through the regulation and supervision of insurance licensees, as noted in the 2007 study by Khanal. Per the same report, licenses have been renewed biannually since 1999 for proper management of financially strong brokers and adjusters. Nevertheless, there is insufficient information publicly available clearly identifying Malaysia's compliance with this principle.

ICP 7 Suitability of persons

II

In February 2004, as stated in the BNM's 2003 Insurance Annual Report, fit and proper requirements were further strengthened to ensure that persons exercising a controlling influence over insurance licensees were fit and proper. Nevertheless, there is insufficient information publicly available clearly identifying Malaysia's compliance with this principle.

ICP 8 Changes in control and portfolio transfers

II

There is insufficient information publicly available clearly identifying Malaysia's compliance with this principle.

ICP 9 Corporate governance

II

As stated in its 2005 Insurance Annual Report, the BNM assesses and evaluates the corporate governance practices of the supervised entities to ensure good standards of practices in all aspects of their operations. It further enters into regular contact with the boards of directors and management of supervised entities. As stated in its 2003 Insurance Annual Report, the BNM issued guidelines in December 1990 regarding the duties and responsibilities of directors and CEOs of insurance companies. In February 1995, per the same report, guidelines on audit committees and internal audit departments for insurance companies were published to define the requirements relating to the formation of the audit committee of an insurer. These guidelines were further revised in December 2004. In May 2000, the BNM issued a prudential framework of corporate governance for insurers, covering board responsibility and oversight, management accountability, corporate independence, internal controls and operation risk management, public accountability, and financial reporting.

The Malaysian Code on Corporate Governance was also adopted as part of the prudential framework. In May 2003, additional corporate governance standards were issued regarding the creation by insurers of nomination, remuneration, and risk management committees, as well as criteria to be met by independent directors. Finally, in December 2003, according to the BNM's 2003 Insurance Annual Report, insurers were required to provide specific disclosures on the aggregate remuneration of directors and CEOs in their annual financial statements with effect from July 1, 2003. As of 2005, according to the BNM's 2005 Insurance Annual Report, 16 of the 31 recommendations of the FSMP were implemented, and were directed, inter alia, towards raising professionalism and corporate governance standards in the insurance industry. However, the available sources do not directly address Malaysia's compliance with this principle.

ICP 10 Internal control

II

The BNM, as noted in its 2005 Insurance Annual Report, gives particular emphasis to sound corporate governance practices, strong risk management and internal controls, accountability of auditors and actuaries, and robust reporting and valuation processes. Nevertheless, there is insufficient information publicly available clearly identifying Malaysia's compliance with this principle.

ICP 11 Market analysis

II

There is insufficient information publicly available clearly identifying Malaysia's compliance with this principle.

ICP 12 Reporting to supervisors and off-site monitoring

II

The BNM, as noted in its 2005 Insurance Annual Report, gives particular emphasis, among other issues, to accountability of auditors and actuaries, and robust reporting and valuation processes. According to a regulatory and standard-setting framework assessment published by the Malaysian Institute of Certified Public Accountants (MICPA) in February 2005, the BNM serves as an advisor on the Malaysian Accounting Standards Board (MASB). The MICPA notes that insurance companies are required to submit to the BNM the audited financial statements containing detailed analysis of the accounts. The BNM also places reliance on the auditors in ensuring compliance with approved accounting standards issued by the MASB and guidelines issued by the BNM on accounting and financial reporting. Per the October 2006 update available from the Deloitte & Touche IAS Plus website, the MASB announced that Malaysia's newly revised Financial Reporting Standards were generally consistent with the International Financial Reporting Standards issued by the International Accounting Standards Board, and would take effect as of January 1, 2007. Nevertheless, there is insufficient information publicly available clearly identifying Malaysia's compliance with this principle.

ICP 13 On-site inspection

II

In August 2004, the new risk-based supervisory framework was launched with the aim of focusing supervisory attention on, and allocating resources in line with, the risk profile of financial institutions. The BNM, as stated in its 2005 Insurance Annual Report, conducts on-site examinations and offsite surveillance based on the newly enhanced risk-based supervisory framework. Nevertheless, there is insufficient information publicly available clearly identifying Malaysia's compliance with this principle.

ICP 14 Preventive and corrective measures

II

There is insufficient information publicly available clearly identifying Malaysia's compliance with this principle.

ICP 15 Enforcement or sanctions

II

According to the BNM's 2005 Insurance Annual Report, further steps have been taken by the BNM to replace the rules-based approach with more principles-based regulation, while reinforcing its enforcement capabilities to ensure that insurance institutions deliver against a set of high-level principles of best practice. Nevertheless, there is insufficient information publicly available clearly identifying Malaysia's compliance with this principle.

ICP 16 Winding-up & exit from the market

II

There is insufficient information publicly available clearly identifying Malaysia's compliance with this principle.

ICP 17 Group-wide supervision

II

According to the ADB's 2001 report, Malaysia's trend towards consolidation and financial convergence has created new challenges for the BNM. The report recommended continuously adapting the supervisory approach and prudential standards set by the BNM to take into account risks associated with financial groups. It was further advised to pay close attention to the potential impact on policyholders' interests following mergers and consolidations. Nevertheless, there is insufficient information publicly available clearly identifying Malaysia's compliance with this principle.

ICP 18 Risk assessment and management

II

The BNM, as noted in its 2005 Insurance Annual Report, gives particular emphasis to sound corporate governance practices, strong risk management and internal controls, accountability of auditors and actuaries, and robust reporting and valuation processes. In August 2004, the new risk-based supervisory framework was launched with the aim of focusing supervisory attention on, and allocating resources in line with, the risk profile of financial institutions. The BNM, as stated in its 2005 Insurance Annual Report, conducts on-site examinations and offsite surveillance based on the newly enhanced risk-based supervisory framework. The BNM further issued a second concept paper on the new risk-based capital framework, which addresses the future determination of solvency, as well as the supporting institutional risk management and governance framework that insurers will need to have in place. The paper was expected to be implemented by 2008. However, the available sources do not directly address Malaysia's compliance with this principle.

ICP 19 Insurance activity

II

According to the BNM's 2007 Financial Stability and Payment Systems Report, stronger solvency positions and enhanced asset-liability management contributed to the sustained performance of the insurance, takaful and retakaful sectors in 2007. Nevertheless, there is insufficient information publicly available clearly identifying Malaysia's compliance with this principle.

ICP 20 Liabilities

II

In September 2005, the BNM issued guidelines, which set out the minimum standards that must be observed by insurers with effect from December 1, 2005, including requirements on product design and pricing, fees and charges, management of funds, investment limits, and valuation of assets and liabilities. According to the BNM's 2007 Financial Stability and Payment Systems Report, stronger solvency positions and enhanced asset-liability management contributed to the sustained performance of the insurance, takaful and retakaful sectors in 2007. Nevertheless, there is insufficient information publicly available clearly identifying Malaysia's compliance with this principle.

ICP 21 Investments

II

In September 2005, the BNM issued guidelines which cover a wide spectrum of the operations and administration of investment-linked business. Guidelines set out the minimum standards that must be observed by insurers with effect from December 1, 2005, including requirements on product design and pricing, fees and charges, management of funds, investment limits, and valuation of assets and liabilities. Nevertheless, there is insufficient information publicly available clearly identifying Malaysia's compliance with this principle.

ICP 22 Derivatives and similar commitments

II

There is insufficient information publicly available clearly identifying Malaysia's compliance with this principle.

ICP 23 Capital adequacy and solvency

II

Both the capital and solvency margin requirements have been fully implemented since the beginning of 2001, as stated in the 2007 study by Khanal. The Insurance Act allows the BNM to specify the manner in which assets backing the solvency margin of an insurer are invested. According to the BNM's 2007 Financial Stability and Payment Systems Report, capital and solvency positions of the insurance industry remained strong during 2007. Furthermore, the solvency position of the insurance industry strengthened further, with an aggregate solvency surplus of USD5.6 billion at the end of 2007. However, the available sources do not directly address Malaysia's compliance with this principle.

ICP 24 Intermediaries

II

Although insurance agents are not directly supervised by the BNM, as stated in its 2005 Insurance Annual Report, they are required to be registered under the Insurance Act. At the end of 2005, per the same report, there were 126,898 registered insurance agents, a 3.3 percent decrease from the previous year. The number of life insurance intermediaries also decreased by 4.5% to 78,810. Initiatives in the area of market conduct, per the same report, were focused along enhancing the financial capabilities of consumers, improving product disclosures, and strengthening enforcement. Nevertheless, there is insufficient information publicly available clearly identifying Malaysia's compliance with this principle.

ICP 25 Consumer protection

II

In order to enhance consumer protection in the insurance industry, the 1996 Insurance Act and 1996 Insurance Regulations were amended in 2005 to establish the regulatory framework for the licensing of financial advisers. As of 2005, according to the BNM's 2005 Insurance Annual Report, 16 of the 31 recommendations of the FSMP were implemented, and were directed, inter alia, towards strengthening consumer protection and supervisory framework. Nevertheless, there is insufficient information publicly available clearly identifying Malaysia's compliance with this principle.

ICP 26 Information, disclosure & transparency towards the market

II

There is insufficient information publicly available clearly identifying Malaysia's compliance with this principle.

ICP 27 Fraud

II

With respect to insurance fraud, the BNM, as stated in its 2005 Insurance Annual Report, collaborates with the insurance industry and relevant law enforcement agencies through various initiatives under the anti-fraud joint committees. A fraud surveillance system has also been implemented to monitor incidences of fraud. Nevertheless, there is insufficient information publicly available clearly identifying Malaysia's compliance with this principle.

ICP 28 Anti-money laundering/ Combating the Financing of Terrorism

II

The BNM has been appointed by the Minister of Finance as the competent authority for administering the 2001 Law on anti-money laundering (AML) and combating the financing of terrorism (CFT). Greater emphasis was given by the BNM to the assessment of AML/CFT measures taken by the supervised entities, as noted in the BNM's 2005 Insurance Annual Report. The BNM namely undertook a review of the adequacy of AML/CFT measures in the areas of quality of board and senior management oversight, comprehensiveness of policies and procedures, effectiveness of internal controls, and adequacy and accuracy of the management. While Malaysia's offshore financial center on the island of Labuan has different regulations for the establishment and operation of offshore businesses, offshore insurance companies are required to file suspicious transaction reports under the country's AML/CFT Law. The Labuan Offshore Financial Services Authority, which works closely with the BNM under the authority of the Ministry of Finance, licenses offshore insurance companies, and performs stringent background checks before granting an offshore license. An on-site visit by the Asia/Pacific Group on Money Laundering for the Mutual Evaluation of Malaysia took place from January 29-February 9, 2007. However, the available sources do not directly address Malaysia's compliance with this principle.