Welcome to the quarterly edition of the Baker & McKenzie Asia Pacific Insurance Newsletter (for earlier editions, please click here.) In this issue, we present major insurance regulatory developments in the region. 

  • China issues a consultation draft of the amendments to the Insurance Law and a circular regarding the formation of private equity funds by insurers.
  • Hong Kong introduces bill to establish resolution regime for financial institutions and publishes a commencement notice for the first batch of provisions of the Amendment Ordinance.
  • Indonesia issues regulation on self-retention and domestic reinsurance support and introduces policy on statutory managers for financial services institutions.
  • Japan publishes drafts of amendments to the General Guidelines for Supervision of Insurance Companies and puts them on the public comments procedure.
  • Malaysia introduces new Life Insurance and Family Takaful Framework for a  more competitive insurance market.
  • Singapore issues a series of amendments to various MAS Notices on Prevention of Money Laundering and Countering the Financing of Terrorism and the corresponding guidelines.
  • Taiwan issues a ruling permitting insurance companies to invest in financial technology enterprises.
  • Thailand's Draft New Insurance Acts addresses issues on transfer of insurance policies, consent of creditors, and transfer of pending litigation cases.
  • Vietnam imposes new requirements for compulsory insurance products in construction and investment activities and releases specific regulations provided by the New Penal Code, which will take effect on 1 July 2016.

China

Consultation Draft of Amendments to PRC Insurance Law

By Martin Tam and Jacques Yue

The Legislative Affairs Office of the State Council issued aconsultation draft of the amendments to the Insurance Law of the People’s Republic of China《关于修改〈中华人民共和国保险法〉的决定(征求意见稿)》on 14 October 2015. The consultation concluded on 14 November 2015. The PRC Insurance Law was last overhauled in October 2009, and this consultation draft is the first major overhaul of the PRC Insurance Law since 2009.

The amendments involve the introduction of 24 new articles and amendment of 55 articles. A number of these amendments are embodied in the circulars and notices issued by the CIRC in the past years, and the consultation draft seeks to codify them into the legislation. The key amendments are set out below:

a) Measures to strengthen consumer protection

i) For personal insurance contracts of more than one year, a cooling-off period of not less than 20 days will be required to be provided to the policyholders. Full refund of the premium to a policyholder will be required if the policyholder exercises his right tocancel the contract within such period (Article 48).

ii) Insurance companies and intermediaries will be expressly prohibited against carrying out mis-selling activities and unauthorized sale or disclosure of personal information of the policyholders and insured. Insurance companies will have the statutory duty to pay insurance claims within the periods set out in the insurance contracts (Articles 124 and 140).

iii) A formal dispute resolution system will be introduced by the CIRC to resolve insurance-related disputes(Article 174).

b) Incorporation of C-ROSS, the second generation of thesolvency supervision regime

i) Requirements relating to the core solvency adequacy ratio and the aggregated solvency adequacy ratio, and the requirement for an insurance company to divide its available capital into core capital and supplementary capital, etc., will be included in the legislation (Articles 102 and 103).

ii) An insurance company may issue equity or debt instruments to enhance its solvency adequacy ratio (Article 104).

c) Expansion of the scope of permitted use of insurance funds

i) An insurance company will be permitted to invest its insurance funds in equity investment and insurance asset management products. The funds may also be invested in financial derivatives for risk management purposes (Article 109).

d) Greater supervisory and intervention powers of the CIRC

i) CIRC's approval will be required for a change of the "actual controller" of a shareholder holding at least 5% interest in an insurance company. The approval requirement for the "actual controller" is not present in the existing PRC Insurance Law (Article 85).

ii) The insurance security fund required to be maintained by an insurance company can be utilized in the circumstances where the insurance company is at significant risks, and if it has the potential to cause severe market disorder and adversely affect the interests of the insured. Previously, the insurance security fund generally can only be utilized when an insurance company is closed down or declared insolvent (Article 101).

iii) For insurance company considered to be at significant risk, the CIRC will have express intervention powers in relation to the capital allocation, asset disposal, management activities and staff deployment, etc. (Article 152).

e) Miscellaneous amendments

i) The concept of personal insurance business will be expanded to include annuities insurance (e.g.,enterprise annuity and occupational annuity, etc.)(Article 96).

ii) Currently, an insurance company is required to allocate 20% of its total registered capital as a security bond and deposit the same with a designatedbank. Such security bond may not be used except for discharging debts when the company is liquidated.The proposed amendments will lower such limit to10% and cap the amount at RMB200 million (Article 98).

iii) The insurance asset management institution of an insurance company may issue insurance asset management products, subject to segregation requirements (Article 111).

iv) Insurance agencies and brokerage companies that cease to carry on businesses for a continuous period of six months after commencement of business will have their licenses revoked by the CIRC (Article 195).

v) The state will establish a catastrophe insurance system with financial support (Article 207).

vi) Loss adjusters will be specifically defined under thePRC Insurance Law, and will be subject to thesupervision of the CIRC (Article 137).

vii) The level of penalties for various contravention of the PRC Insurance Law will be increased (Chapter 8).

The consultation draft has introduced a number of changesaffecting the key operations of insurers and insurance intermediaries in the PRC. Most of these changes reflect theefforts of the CIRC to address the regulatory issues identified over the past years, and are generally consistent with the trends adopted by regulators in other jurisdictions. Some of the provisions in the consultation draft, however, may require furtherclarification, and the industry looks forward to the outcome of the consultation.

Circular Regarding Formation of Private Equity Funds by Insurers

By Martin Tam and Jacques Yue

In one of our 2015 newsletters, we reported on the announcement by the CIRC, which allows Chinese insurers to set up and manage private equity funds (PE funds). On 10 September 2015, the CIRC issued the Circular on Matters relating to the Formation of Insurance Private Equity Funds (中国保监会关于设立保险私募基金有关事项的通知). This circular laid down the specific details and requirements for the formation of PE funds by PRC insurers.

In a nutshell, Chinese insurers are encouraged to set up their own GPs and launch PE funds in the form of buyout funds, emerging strategic industry-focused funds, mezzanine funds, real estate funds, fund-of-funds and venture capital funds. The PE funds shall invest in the country's infrastructure projects, cash-strapped small and medium enterprises (SMEs), retirement healthcare services, and other emerging industries such as Internet finance. The sponsor and the fund manager of the PE funds must be determined before the formation of the funds. 

a) The sponsor

The sponsor launching the PE fund shall be chaired by an affiliate of an insurance asset management institution.  The main responsibilities of the sponsor include setting up the fund, deciding on the fund managers, safeguarding the interests of investors and assuming the legal liabilities. There should be a clear distinction of the duties between the sponsor and the relevant insurance asset management institution to ensure their independence. The rights and responsibilities of investors should also be contractually defined clearly and there should be full disclosure of investment risks.

b) The fund manager

The fund manager may be chaired by the sponsor, or by an insurance asset management institution appointed by the sponsor or other affiliate of the insurance asset management institution. The main responsibilities of the fund manager include matters relating to fund raising, investment management, information disclosure and fund exit, etc.

If the fund manager is chaired by an insurance asset management institution, such institution should possess relevant investment management capacity and have not fewer than three investment projects. On the other hand, if the fund manager is chaired by an affiliate of the insurance asset management institution, such institution and its associated insurance institutions should hold 30% or more of the shares in the affiliate. Such affiliate should have a stable management team with not fewer than three core decision makers who have more than eight years' experience in relevant industry. The team members should also have completed not fewer than three exited projects.

c) Requirements for the PE fund

The PE fund should also comply with the following requirements:

i) the expected investment scale of the decided reserve projects should cover at least 20% of the amount of funds raised;

ii) the sponsor and its associated insurance institution must contribute not less than 30% of funds to be raised;

iii) the fund must establish an investment management team with at least three investment managers with over three years of relevant industry experience;

iv) the fund must establish an investment advisory board formed by major investors focusing on dealing with related party transactions and conflict of interests.

d) Ongoing maintenance of the PE fund

A registration system will be introduced for PE funds formed by insurance capital. Upon approval of the plan to establish the fund, the insurance asset management institution or sponsor should file the plan to the CIRC or its designated authorities.

If the investment of the PE fund involves related party transactions, it should be approved by two-thirds of voting rights of unrelated parties in the decision-making bodies without objection of the investment advisory board, and the scale of investment should not exceed 50% of the target fund size.

The names of the sponsor and fund manager, senior management, key shareholders and actual controllers should not be changed arbitrarily. In case of a change of sponsor or fund manager or any core decision makers, the fund manager should report to the CIRC promptly and comply with all registration formalities. Any material events or adverse changes to the PE funds also need to be reported to the CIRC.

This new initiative will certainly allow Chinese insurers to make better use of their insurance funds given that their funds, which typically have a medium- or long-term investment horizon, can be invested in a more diversified alternative asset class. Allowing insurance funds to invest through such channels can also inject funding into emerging or strategic industries of the PRC, many of which rely on substantial funding to grow and expand. These emerging industries would be benefited by having greater and easier access to capital, which can alleviate the difficulties that they may face when borrowing from conventional lenders such as banks.

Hong Kong

Progress of Independent Insurance Authority Establishment

By Martin Tam and Jacques Yue

Enacted on 10 July 2015, the Insurance Companies (Amendment) Ordinance (the Amendment Ordinance) provides for, among other things, the establishment of an independent Insurance Authority (IIA) which will take over the duties of the existing Office of the Commissioner of Insurance (OCI) and the three self-regulatory organizations (SROs) for insurance intermediaries, and exercise new statutory powers to license and regulate insurance intermediaries.

A Commencement Notice (Commencement Notice) was published in the Gazette on 9 October 2015, appointing 7 December 2015 as the commencement date for the first batch of provisions (the Initial Provisions) of the Amendment Ordinance.  The Initial Provisions include provisions in relation to the following:

Establishment of the Provisional Insurance Authority (PIA) and its composition;
Powers of the PIA ‒ The PIA is to carry out mainly administrative functions such as recruiting key personnel, leasing office premises and procuring office and IT equipment, etc.
Scope for the PIA to delegate its functions to members, committees and employees;
Appointment and constitution of Industry Advisory Committees ‒ The PIA must appoint two industry advisory committees to advise it on any matters relating to long-term business and general business and may also appoint additional committees after consultation with the Financial Secretary;
Accounting and financial arrangements of the PIA; and
Checks and balances on the PIA.

The latest target timeline is as follows:

Stage 1:

On 28 December 2015, the Government announced the appointment of Dr. Moses Cheng Mo-chi as the chairman of the IIA and seven other persons as non-executive directors (the NEDs) of the IIA for a term of three years. The seven NEDs are from different background, ranging from consumer affairs to actuarial science.

The PIA will not serve any regulatory functions and will co-exist with the OCI, aiming to prepare relevant guidelines for insurers and the necessary subsidiary legislation before Stage 2 commences.

Stage 2:

Approximately one year after the commencement of Stage 1 (i.e., by the end of 2016), the OCI will cease to be in operation and the PIA will become the IIA. The IIA will take over the existing regulatory functions of the OCI such as the prudential and conduct regulation of insurers, frontline regulation of mandatory provident fund intermediaries and enforcement of the anti-money laundering regime. The self-regulatory regime of the SROs for insurance intermediaries will remain unchanged until the commencement of Stage 3.

Stage 3:

Likely to commence in 2018 or later, the IIA will impose a statutory licensing regime for insurance intermediaries which will replace the SROs.

Bill to Establish Resolution Regime for Financial Institutions

By Martin Tam and Jacques Yue

The government published the Financial Institutions (Resolution) Bill in the Gazette on 20 November 2015, which seeks to establish a cross-sector resolution regime for global systemically important financial institutions (FIs) (e.g., insurers, banks, securities firms, exchanges, etc.). The Bill contains 239 clauses and nine schedules.

a) Why was the Bill introduced?

After the global financial crisis that began in 2007, the Financial Stability Board (FSB) published the Key Attributes of Effective Resolution Regimes for Financial Institutions (Key Attributes) in 2011 to set the new international standards for effective resolution regimes for systemically important FIs. While the OCI, the Monetary Authority and the Securities and Futures Commission already possess a range of supervisory intervention powers for dealing with distressed FIs, not all powers required by the Key Attributes are currently available to such regulators in Hong Kong. As Hong Kong is a member jurisdiction of the FSB, the regime is designed to bring Hong Kong in line with the international standards under the Key Attributes, so that it can mitigate the risks that could be posed by the non-viability of such large FIs to the stability of the financial system.

b) For the insurance sector, which types of entities will be caught by the resolution regime?

Among other entities, the proposed scope of the regime will extend to the following entities in the insurance sector:

i) Certain insurers ‒ An authorized insurer under the ICO that is, or is a branch or a subsidiary of, a global systemically important insurer (within-scope FIs).

ii) Branches and holding companies ‒ Certain branches of foreign within-scope FIs, and certain holding companies of within-scope FIs, subject to specified criteria.

iii) Affiliated operational entities (AOEs) ‒ Generally, AOEs are companies which are in the same group of companies as a within-scope FI and which provide services to that FI. These services provided by the AOEs to a failed within-scope FI must be essential to that FI’s provision of critical financial functions.

c) Key Features of the Bill

i) Resolution Authority (RA)

The Insurance Authority, Monetary Authority and the Securities and Futures Commission are the proposed resolution authorities for the insurance, banking, securities and futures sectors respectively. 

The Financial Secretary (FS) may designate a lead RA to coordinate the resolution planning for, and if necessary the resolution of, the within-scope FI that belongs to part of a cross-sector group (i.e., a group consisting of within-scope FIs from more than one sector).

ii) Preparatory Powers

The RAs may possess the powers to (a) gather or obtain information or investigate into a within-scope FI or group company; (b) devise resolution planning, perform resolvability assessments and direct FI or its holding company to remove impediments of resolvability; (c) exercise rule-making powers by imposing requirements relating to the loss-absorbing capacity of within-scope FIs; (d) give directions to a within-scope FI or a group company of the FI, their directors, chief executive officer (CEO) or deputy chief executive officer (DCEO) in the run-up to resolution; and (e) remove one or more directors, the CEO or DCEO of the failing FI or its holding company in the run-up to resolution.

iii) Stabilization Options

The RAs can stabilize the failing FI's business by the following five stabilization options: (a) transfer of some or all of the failing FI's business to a purchaser; (b) transfer of some or all of the failing FI's business to a bridge institution; (c) transfer of assets, rights or liabilities of the failing FI to an asset management vehicle; (d) statutory bail-in (i.e., write-off or conversion into shares) of liabilities of the failing FI to absorb losses and recapitalize the failing FI; and (e) transfer of the failing FI to temporary public ownership.

iv) General resolution powers

To ensure effective application of stabilization options to a non-viable within-scope FI, the RA can exercise a range of general resolution powers such as (a) impose a temporary (not longer than two days) stay of early termination rights; (b) temporarily prohibit the filing of a winding-up petition to the court; (c) direct a residual FI or AOE to provide services essential to support any business of the non-viable FI; (d) temporarily (for no longer than two days) suspend obligations (moratorium) on payments to certain creditors and impose a stay on creditor actions; (e) operate and manage an FI in resolution; (f) claw-back remuneration from certain senior management of an FI through the courts; and (g) temporarily defer certain authorization requirements in certain circumstances.

v) Safeguards

The three safeguards include (a) "no creditor worse off than in liquidation" (NCWOL) safeguard; (b) the Resolution Compensation Tribunal to handle appeals against NCWOL valuation; and (c) protection from civil liability.

vi) Funding

Temporary public funding support is allowed for orderly resolution of a failed FI. Any such support can be subsequently recouped and only within-scope FIs operating in the same sector as the FI in resolution can be levied to recover losses once resolution is completed.

vii) Cross-border recognition

A statutory recognition framework is provided for in the Bill to enable an RA to recognize all or part of a foreign resolution action, so that it would have legal effect in Hong Kong.  An RA must not recognize a foreign resolution action if it is of the view that (a) recognition would have an adverse effect on financial stability in Hong Kong; (b) outcomes of recognition are inconsistent with resolution objectives; or (c) recognition would disadvantage Hong Kong shareholders or creditors (or both) in relation to their counterparts outside Hong Kong

Indonesia

New Rules on Self-Retention and Domestic Reinsurance Support Take Effect
By Mark Innis, Zaki Jaihutan and Andrew Frans

Background
For more than five years now, the balance of payments of Indonesian reinsurance transactions has been in deficit with an average of IDR5.65 trillion per year, due to a lack of  a domestic reinsurance capacity. As part of government policy as well as the mandate of the Insurance Law, the Indonesian Financial Services Authority (Otoritas Jasa Keuangan or OJK) on 10 November 2015 issued Regulation No. 14/POJK.05/2015 on Self-Retention and Domestic Reinsurance Support (Regulation 14). This was followed by an implementing regulation in the form of OJK Circular Letter No. 31/SEOJK.05/2015 on Self-Retention Limitation, Portion of Reinsurance Support and Reports on Reinsurance and Retrocession Program (Circular Letter 31), which was issued on 16 November 2015.
Both Regulation 14 and Circular Letter 31 (Regulations) became effective on 1 January 2016.

Self-Retention
Under the Regulations, the insurance companies' minimum self-retention targets are now 1.5 up to 2 times of the minimum self-retention target that was stipulated under the previous regulations.

Reinsurance Support for “Simple Risks”
Insurance companies are now required to have 100% domestic reinsurance support for products that cover “simple risks.” A simple risk can be assessed based on, among other things, the value of the coverage amount and/or the insured object, e.g., motor vehicle insurance, health insurance, personal accident insurance, credit insurance, life insurance and suretyship. Exempted from the requirement, but there are still minimum domestic retention requirements, are insurance companies whose products (a) provide international coverage, (b) are specifically designed for multinational companies and (c) are newly developed and supported by a foreign reinsurer.

Automatic Reinsurance
An insurance company must have automatic reinsurance support from domestic reinsurers of at least 25% of the automatic reinsurance capacity of each line of insurance business or the minimum amount set out in Circular Letter 31, whichever is higher.

Automatic reinsurance support must be implemented based on the following level of priority.

For general insurance companies:

a) obtain automatic reinsurance support from at least two domestic reinsurers

b) if general insurance companies fail to meet requirement (a) above, obtain automatic reinsurance support from at least one domestic reinsurer and one domestic general insurer; and

c) if general insurance companies fail to meet requirements (a) and (b) above, obtain automatic reinsurance support from foreign conventional reinsurers, provided that:

i) the relevant insurance product is an exempted simple risks product; and/or
ii) all domestic reinsurers and two domestic general insurers have declined to give support.

For life insurance companies:

a) obtain automatic reinsurance support from at least two domestic reinsurers/one domestic reinsurer (for shariah); and

b) if life insurance companies fail to meet requirement (a) above, obtain automatic reinsurance support from foreign reinsurers, provided that:

i) the relevant insurance product is an exempted simple risks product; and/or

ii) all domestic reinsurers have declined to give support.

Facultative Reinsurance

An insurance company must have facultative reinsurance support from domestic reinsurers of at least 25% of the total sum insured for each line of insurance business or the minimum amount set out in Circular Letter 31, whichever is higher.

Facultative reinsurance support must be implemented based on the following level of priority:

For general insurance companies:

a) obtain facultative reinsurance support from at least two domestic reinsurers

b) if general insurance companies fail to meet requirement (a) above, obtain facultative reinsurance support from at least one domestic reinsurer and one domestic general insurer; and

c) if general insurance companies fail to meet requirements (a) and (b) above, obtain facultative reinsurance support from foreign reinsurers, provided that:

i) the relevant insurance product is an exempted simple risks product; and/or
ii) all domestic reinsurers and two domestic general insurers have declined to give support.

For life insurance companies:

a) obtain facultative reinsurance support from at least two domestic reinsurers/one domestic reinsurer (for shariah); and

b) if life insurance companies fail to meet requirement (a) above, obtain facultative reinsurance support from foreign reinsurers, provided that

i) the relevant insurance product is an exempted simple risks product; and/or
ii) all domestic reinsurers have refused to give support.

Transitional Periods
General insurance companies that have entered into automatic reinsurance agreements with foreign reinsurers before 10 November 2015 must adjust the agreements so that they comply with the Regulations before 9 November 2016.  
Life insurance companies that have entered into automatic reinsurance agreements with foreign reinsurers before 10 November 2015 are subject to the following requirements: (a) existing business can continue until the agreements expire and (b) new business must comply with the Regulations before 9 November 2016.

OJK Introduces Regulation on Statutory Managers for Financial Services Institutions
By Mark Innis, Zaki Jaihutan and Andrew Frans

Background
On 28 December 2015, the Financial Services Authority (OJK) enacted Regulation No.41/POJK.05/2015 on Appointment Procedures for Statutory Managers of Financial Services Institutions (Regulation 41), which immediately came into effect. To protect consumers, the OJK may take any actions deemed necessary, such as appointing a statutory manager. A statutory manager will be appointed if the management of a Financial Services Institution (FSI) is considered to be harming the interests of consumers, resulting in a need for management that can represent the OJK's and consumers' interests.

Definition
A statutory manager means an individual or legal entity that is appointed by the OJK to exercise its powers, such as ensuring compliance with the laws and regulations in the financial sector; preventing and reducing losses to consumers, the public and the financial sector; and/or eradicating financial crimes.

Requirements
Individual statutory managers must (i) be qualified to sit in the position in a financial services institution (FSI) that he/she will take over (as a member of the board of directors  or BOD, the board of commissioners  or BOC, and/or the sharia supervisory council or the SSC); and (ii) not have any conflict of interest with the FSI that he/she will manage.
Legal entity statutory managers must (i) engage in the same line of business activity as the FSI that will be managed; and (ii) not have a conflict of interest with shareholders, the BOD, the BOC and/or the SSC of the FSI that will be managed.

Appointment
The appointment and determination of a statutory manager should be made in accordance with the laws and regulations on the financial services sector, such as Law No. 40 of 2014 on Insurance. However, an appointment  can also be based on the OJK's discretion if an FSI fulfills one of the following criteria

a) its financial condition may harm the interests of consumers, the financial services sector and/or shareholders;
b) it has not been conducting business activities in accordance with laws and regulations;
c) it has been imposed with a business activity limitation sanction;
d) it has been exploited by certain parties to facilitate or to conduct financial crimes;
e) its shareholders, BOD, BOC and/or SSC are accused of conducting financial crimes that can disturb the operations of the FSI;
f) its BOD, its BOC, and/or its SSC are deemed to be incapable of solving problems in the FSI; and
g) it does not comply with a written instruction from the OJK to change its BOD, its BOC, and/or its SSC.

The Rights, Duties and Authorities
Upon appointment by the OJK, a statutory manager takes overall powers and functions of the BOD, the BOC and/or the SSC of the FSI. During the term of a statutory manager, the BOD, the BOC and/or the SSC of the FSI are prohibited from conducting their functions and powers and  resigning from their positions. The BOD, the BOC and/or the SSC of the FSI are also required to help the statutory manager in conducting its powers, functions and duties upon the statutory manager's request.

Statutory managers have duties to do the following:

a) rescue the assets and/or collection of funds of the FSI and/or consumers;

b) control and manage the business activities of the FSI in accordance with laws and regulations;

c) set a work plan, if based on its assessment the FSI still can be rescued;

d) submit a suggestion to the OJK to revoke the business license of an FSI, if based on its assessment the FSI cannot be rescued;

e) fulfill the provisions of laws and regulations;

f) comply with every written instruction of the OJK;

g) prevent and reduce losses of consumers, the public or the financial services sector;
h) eradicate financial crimes; and

i) report its activities to the OJK.

To implement the above duties, the statutory manager is authorized to do the following:

a) rescue the business continuity of the FSI;

b) cancel or terminate agreements between the FSI and third parties that are considered harmful to the interests of the FSI and/or its consumers;

c) transfer (entire or partially) the assets or business portfolios and/or funds of the FSI to mitigate further losses; and/or

d) transfer (entire or partially) the assets or business portfolios and/or funds of the consumers to mitigate further consumer losses.

Termination
The function of a statutory manager ends if (i) the OJK decides to terminate the statutory manager or (ii) the business license of the relevant FSI has been revoked.

Japan

Proposed Amendments to General Guidelines for Supervision of Insurance Companies
By Jiro Toyokawa and Seiji Tomimoto

On 15 December 2015, the Financial Services Agency (the FSA) published drafts of amendments to the General Guidelines for Supervision of Insurance Companies (the Guidelines) and put them on the public comments procedure.

The purpose of the proposed amendments is to provide that, for insurance products of non-leading underwriters of joint insurance policies, each individual application for approval or notification will not be required in relation to creation or revision of a rider, calculation method of insurance premium and some other matters if certain criteria are met.

The amended guidelines include, among other things, the following:

  • The items the FSA will take into account when it examines provisions in the statement of business procedures of an insurance company, which provide that the insurance company may, upon request of a policyholder, create or revise a rider without applying for approval of a new insurance product in relation to joint insurance policies, which the insurance company underwrites as non-leading underwriter.
  • A provision that, in case where the FSA detects any problem in the framework of underwriting examination and profit management, compliance of criteria for assessment of statement of business procedures or funding of policy reserves of joint insurance policies, it will require a report from the insurer as necessary, and that, in case where it detects any serious problem, it will take administrative actions.

The comment period in the public comments procedure finished on 14 January 2016 and the results will be issued in due course. These amendments to the guidelines may be adjusted as a result of the public comments procedures.

Malaysia

BNM Negara Malaysia Policy Documents on Life Insurance and Family Takaful Framework and Granting of Credit Facilities
By Brian Chia and Sue Wan Wong

Summary
In order to support the long-term development of the life insurance and family takaful industry in Malaysia, Bank Negara Malaysia (BNM) had recently introduced a new Life Insurance and Family Takaful Framework (Framework). The Framework aims to encourage innovation of a wider range of products and delivery channels to suit diverse consumer needs based on individual risk appetites, financial goals and levels of financial capability, as well as to promote a more competitive insurance market complemented by higher standards of professionalism and transparency. The Framework will be implemented in phases between 1 December 2015 and 2019.

In line with the liberalization pursuant to the Framework, BNM revised its policy document on the granting of credit facilities (Policy on Credit Facilities). The Policy on Credit Facilities was amended in light of the removal of the limits that were applicable to Agency Financing Schemes. It is anticipated that further policy documents will be issued by BNM between 2016 and 2019 to implement the various liberalization measures proposed under the Framework.

The Life Insurance and Family Takaful Framework
BNM is seeking to grow the life and family takaful businesses in Malaysia. Toward this end, the Framework seeks to remove cost control limits and thereby accord insurers with the flexibility to manage their expenses, diversify the touch points by which consumers can obtain insurance products and enhance safeguards for policy holders. These initiatives can be broadly summarized as follows

a) Gradual removal of limits on operational costs to promote product innovation while preserving policy/certificate value

The operating cost control (OCC) limits that are currently imposed by BNM on (i) management expenses, (ii) commissions and (iii) agency-related expenses (ARE) payable on insurance/takaful products, will gradually be removed to provide life insurers and family takaful operators with greater operational flexibility in managing their operating expenses in line with their respective business and competitive strategies.

b) Diversify distribution channels to widen outreach

This initiative seeks to promote consumer choice and competition in the market, so as to lower the cost of life insurance/family takaful products and create better accessibility to products through a wider range of distribution channels. In this regard, BNM will be: (i) aligning the limits on commission for annual premium/contribution for products marketed via bancassurance/bancatakaful with limits applicable to corporate agents with effect from 2017; (ii) requiring insurers to sell pure protection products through direct channels with effect from 2017, and implementing liberalization measures as it relates to commission for such products; (iii) requiring insurers to provide financial advisers with access to the full range of products offered by the insurers; and (iv) regulating online product aggregators, with such regulations to be released in 2016.

c) Enhance consumer protection

Although BNM will be liberalizing certain aspects of the life and family takaful businesses, it is also keen to ensure that insurers remain disciplined and the interest of consumers are safeguarded. Life insurers and family takaful operators are required to:

i) participate in the new remuneration policy through a balanced scorecard (BSC), to foster behavior that is consistent with fair treatment to consumers;

ii) strengthen product disclosure standards (e.g., by providing sales illustrations) in order for consumers to better understand product features;

iii) provide policy owners and takaful participants with online access to insurance and takaful accounts (real-time updates and information); and

iv) introduce service guides to enhance consumer awareness of financial advisory services for insurance and takaful products.

Given the far-reaching impact of measures under the Framework, and in light of rationalization plans by composite insurers and takaful operators to split their businesses, BNM will implement the changes through a phased approach between 1 December 2015 and 2019. Where relevant, insurers should review its overall business plan for the period between 2016 and 2020 and inform BNM by 30 June 2016 of key changes that it will be implementing in respect of product and distribution strategies, operational framework and risk management priorities.  

The Policy on the Granting of Credit Facilities
The Policy on Credit Facilities seeks to clarify that a licensed person is not required to obtain prior approval from BNM or notify BNM on credit facilities granted to its insurance or takaful agents. It nonetheless maintains that any credit facility granted by a licensed person to its insurance or takaful agent can only be granted from the licensed person's shareholders' funds.
The Policy on Credit Facilities removes the requirements applicable to the granting of unsecured credit facilities as well as Agency Financing Schemes (and such limits relating thereto recommended by the Life Insurance Association of Malaysia (LIAM) and the Malaysian Takaful Association (MTA), and approved by BNM in relation to the Agency Development Financing and Personal Development Financing Schemes). This change, which took effect from 1 December 2015, was necessitated by the removal of the limits applied to yearly commissions and AREs.

Singapore

MAS Issues Series of Amendments to Various MAS Notices on Prevention of Money Laundering and Countering the Financing of Terrorism and Their Corresponding Guidelines
By Stephanie Magnus

Background

On 30 November 2015, the Monetary Authority of Singapore (MAS) issued a series of amendments to various MAS Notices on Prevention of Money Laundering and Countering the Financing of Terrorism (the Notices) and the corresponding guidelines for each notice.

Key Amendments

The key amendments are as follows:

a) Identification of beneficiary of life policies: Where a financial institution (which could be a bank, merchant bank, finance company or capital market intermediary) distributes life policies on behalf of a direct life insurer, the financial institution must:

i) as soon as a beneficiary of a life policy is identified to the financial institution as a specifically named natural person, legal person or arrangement, obtain the full name, including any aliases, of such beneficiary;
ii) as soon as a beneficiary of a life policy is designated by characteristics, class or other means and is known to the financial institution, obtain sufficient information concerning the beneficiary to satisfy the direct life insurer that such direct life insurer will be able to establish the identity of the beneficiary at the time of payout;

b) Identification of beneficial owner in relation to a customer that is a Singapore government or foreign government entity: financial institutions (i.e., banks, merchant banks, finance companies, credit card or charge card licensees, holders of money changers or remittance license, direct life insurers, financial advisers, capital market intermediaries, approved trustees, trust companies, and holders of stored value facilities) are no longer exempt from inquiring if there exists any beneficial owner in relation to a customer that is a Singapore government or foreign government entity; and

c) Various clarifications made to individual notices: it is specifically clarified that:

i) a credit card or charge card licensee must not undertake any transaction for any person without establishing business relations with that person;

ii) in determining whether business relations with or transactions undertaken for any customer present a higher risk of money laundering or terrorism financing, a direct life insurer must include each beneficiary as a relevant risk factor; and

iii) a direct life insurer must consider filing a suspicious transaction report where any beneficiary, or beneficial owner of a beneficiary is a politically exposed person (PEP), or a family member or close associate of a PEP, and higher risks are identified.

Effective Date

The amendments to the notices and the guidelines are effective from 30 November 2015.

Taiwan

Deregulation for Insurance Companies to Invest in Financial Technology Enterprises
By Hao-Ray Hu and Fang-Yi Jen

On 7 October 2015, the Financial Supervisory Commission (the FSC) issued a ruling permitting insurance companies to invest in a "financial technology enterprise" if the following requirements are met:

a) The financial technology enterprise shall engage in big data analysis, interface design, software development, Internet of Things and wireless communications.

b) The major business of the financial technology enterprise shall not be manufacturing, selling or leasing of hardware. If the financial technology enterprise provides or sells hardware devices, the purpose of such hardware device shall be compatible with the major business scope of the financial technology enterprise and be in connection with insurance-related programming software.

c) The annual business cost or annual business income of the financial technology enterprise contributed from financial enterprises (including financial holding companies, banks, securities firms, insurance companies and their subsidiaries) and from financial services shall be 51% or more of the total business cost or total business income of the financial technology enterprise, unless the investment by the insurance company is based on business collaboration and strategic alliance and will not constitute control of or material influence on the financial technology enterprise in accordance with the Regulations Governing the Preparation of Financial and Business Reports by Insurance Enterprises.

If the abovementioned ratio is not complied or cured within two years (which could be extended for another year), the investing insurance company shall either reduce its investment amount to 10% or less of the total paid capital of the financial technology enterprise or reduce the shareholding to 10% or less of the total number of issued shares of the enterprise.

In addition, if the investment in the financial technology enterprise by insurance companies involves any personal data, the insurance companies shall comply with relevant laws and regulations.

Deregulation on Online Insurance Business Engaged by Insurance Broker Companies, Insurance Agent Companies and Banks Concurrently Conducting Insurance Broker or Insurance Agent Business
By Hao-Ray Hu and Fang-Yi Jen

On 22 October 2015, the FSC has issued a press release announcing the pilot program for the online insurance business to be engaged by insurance broker companies, insurance agent companies and the banks concurrently conducting insurance broker or insurance agent business.  Initially, the FSC will issue 10 licenses for the qualified insurance broker companies, insurance agent companies or banks concurrently conducting insurance broker or insurance agent business to engage in online insurance.  An applicant shall submit its business plan and relevant documents to support the satisfaction of the following requirements:

a) The insurance broker company and insurance agent company shall have an annual business income of not less than NTD500  million (approximately USD15.15 million).

b) The applicant shall have established the regulatory internal control and audit system as well as business solicitation system.

c) The insurance broker company or insurance agent company has not been subject to material penalty or to cumulative fines of more than NTD1 million (approximately USD30,300) imposed by the competent authority for the past one year; in the event of the abovementioned situation, such company should have taken concrete improvement actions, which are recognized by the competent authority. The bank concurrently conducting insurance broker or insurance agent business has not been subject to material penalty or to cumulative fines of more than NTD3 million (approximately USD90,900) imposed by the competent authority for the past one year; in the event of the abovementioned situation, such company should have taken concrete improvement actions, which are recognized by the competent authority.

d) The annual financial statements of the applicant have been audited by a CPA.

Furthermore, the applicant shall also comply with the restrictions/requirements set forth in the Guidelines for Insurance Enterprises to Conduct Electronic Customer Services, including the permitted types of insurance products to be purchased online, establishment of Internet environment, limitation of premium and insurance amount, examination of purchasers' identification, process of payment, file and preservation of information, confirmation of the purchase and procedure to handling consumer dispute, etc.

The enterprises that obtain the license to engage in online insurance business shall secure ISO 27001 certification before 1 July 2016.

Thailand

Draft New Insurance Acts: Transfer, Amalgamation and Business Discontinuation Issues
By Sorachon Boonsong and Sivapong Viriyabusaya

Among the significant changes reflected in the Draft New Insurance Acts, in this edition we focus on three issues addressed by the draft new laws (transfer of insurance policies, consent of creditors and transfer of pending litigation cases) aimed to facilitate the Thai insurance industry from a legal perspective. Let's take a look at the following notable adjustments in the insurance laws:

Transfer of Insurance Policies

Under the current Insurance Acts, a major hurdle in the transfer of businesses is the requirement of express consent from policyholders. Legally speaking, the transfer of any reciprocal insurance contract by one insurer to another requires obtaining written consent from the insured.  However, in actual practice this process to obtain such consent from every  policyholder, which may number in the millions, is practically impossible.

Therefore, the Draft New Acts introduces the mechanism of implied consent as an approach to remedy this impediment. Under the Draft Acts, the acquiring company may notify policyholders en masse that there will be a business transfer, and if they have any objection to it, they may let them be known within one month. If no objection is lodged within such time, it will be deemed that the insured has granted consent. This new feature may also be applied in the case of transfer and amalgamation for the amendment of the condition or operation of an insurance company.

Creditor Consent
For amalgamations in particular, the Draft New Acts sets out a similar provision to the one above regarding matters relevant to the companies' creditors. Currently, this issue falls under the Public Limited Companies Act (1992, as amended), which requires that all companies to be amalgamated must notify their creditors about the amalgamation. Creditors are then entitled to raise objections to the amalgamation within two months from the date of receipt of notice; otherwise it will be deemed that they have no objection and the amalgamation shall be permitted to proceed accordingly. The Draft New Acts retains the same concept as mentioned, but the period for raising objections has been shortened to one month to expedite the amalgamation process.  

Pending Litigation
With regards to the pending claims in court, the Draft New Acts set out that responsibility over such cases shall be transferred to the acquirer upon the completion of the entire business transfer. In case of a partial business transfer, an acquirer would assume the rights and obligations of the transferor only for those cases that are relevant to the transferred business unit(s). Under the current Insurance Acts, the acquirer is not deemed responsible for pending cases of the transferor, who would still be accountable for any pending claims until they are finally settled.

For an in-depth overview of more proposed changes in Thailand's Draft New Insurance Acts, please visit Draft New Insurance Acts.

Vietnam

New Penal Code Criminalizes Insurance Fraud to Protect Insurers' Interest
By Oanh H. K. Nguyen, Dang Chi Lieu and Nguyen Thanh Hai

Recent Developments
Effective 1 July 2016, the New Penal Code[1] criminalizes insurance fraud and holds both violating individuals and commercial legal entities liable.

Situations giving rise to fraud in the insurance industry have become increasingly common and complex in Vietnam.  Moreover, the old regulations are incomplete and insufficiently stringent to effectively prohibit, sanction and prevent fraud in the insurance industry. Thus, this development will hopefully form an effective legal basis to contribute to the protection of insurers' interests, as well as the development of the insurance market in Vietnam in general.

Specific Regulations Provided by the New Penal Code

a) Those who commit one of the following acts appropriating insurance proceeds valued from VND20,000,000 (approximately USD920)[2]  and less than VND100,000,000 (approximately USD4,600) or causing damage valued from VND50,000,000 (approximately USD2,300) and less than VND200,000,000 (approximately USD9,200), shall be subject to a fine from VND30,000,000 to VND100,000,000 (approximately USD1,380 to USD4,600) or non-custodial reform for up to three (3) years:

i) being in collusion with the beneficiary of insurance proceeds to illegally settle indemnification or make payments of insurance proceeds

ii) forging documents, intentionally falsifying the information to refuse to indemnify and pay insurance proceeds when an insured event occurs;

iii) forging documents, intentionally falsifying the information in the documentation and dossier requesting indemnification and payment of insurance proceeds; and

iv) intentionally causing damages to one's own health and properties in order to benefit from an insurance policy, unless otherwise provided by law.

b) In the event of a crime committed in one of the following circumstances, the offenders shall be subject to a fine from VND100,000,000 to VND300,000,000 (approximately USD4,600 to USD13,800) or between one (1) and three (3) years of imprisonment:

i) in an organized manner;

ii) employing treacherous and dangerous tricks; and

iii) appropriating an amount of insurance proceedsbetween VND100,000,000 and under VND500,000,000(approximately USD4,600 to USD23,000);

iv) causing damage of between VND200,000,000 and under VND1,000,000,000 (approximately USD9,200 to USD46,000); and

v) dangerous recidivism.

c) In the event that a crime is committed in one of the following circumstances, the offenders shall be subject to between three (3) and seven (7) years of imprisonment:

i) appropriating an amount of insurance proceeds valued at VND500,000,000 (approximately USD23,000) or more; and

ii) causing damage valued at VND1,000,000,000 (approximately USD46,000) or more.

d) The offenders shall also incur a fine of betweenVND10,000,000 and VND100,000,000 (approximately USD460 to USD4,600), and/or a ban from holding certain posts, practicing certain occupations or doing certain jobs from one (1) to five (5) years.

e) If an offender is a commercial legal entity (e.g., a company), the offender shall be subject to the following:

i) committing one of the acts provided in Item 1 above and appropriating an amount of money valued between VND200,000,000 and under VND1,000,000,000 (approximately USD9,200 to USD46,000) or causing damage valued of between VND400,000,000 and under VND2,000,000,000 (approximately USD18,400 to USD92,000), shall incur a fine of between VND200,000,000 and VND1,000,000,000 (approximately USD9,200 to USD46,000);

ii) committing one of the acts provided in Items b(i), (ii), (iii) or (iv) above and appropriating an amount of money valued between VND1,000,000,000 and VND3,000,000,000 (approximately USD46,000 to USD138,000) or causing damage valued between VND2,000,000,000 and VND 5,000,000,000 (approximately USD92,000 to USD230,000), shall incur a fine of between VND1,000,000,000 and VND3,000,000,000 (approximately USD46,000 to USD138,000);

iii) committing a crime and appropriating an amount of money valued at VND3,000,000,000 (approximately USD138,000) or more, or causing damage valued at VND5,000,000,000 (approximately USD230,000) or more, shall incur a fine of between VND3,000,000,000 and VND7,000,000,000 (approximately USD138,000 to USD322,000); and

iv) a violating commercial legal entity shall also be banned from conducting its business, or from operating in certain sectors or areas, or from mobilizing capital for a period of between one (1) to three (3) years.

New Decree Creates More Opportunities for Non-Life Insurers on the Provision of Compulsory Insurance Products in Construction Projects
By Oanh H. K. Nguyen, Dang Chi Lieu and Nguyen Thanh Hai

Recent Developments
Effective 10 February 2016, Decree No. 119 [3] imposes new requirements for compulsory insurance products in construction and investment activities. The overarching aim of Decree No. 119 is to address practical issues and improve the effectiveness in the implementation of these types of insurance products.  Accordingly, this can create more opportunities for non-life insurers in the market. In particular, it aims to improve support from the insurance market to cover risks for construction facilities and repair damages quickly and sufficiently to ensure the thorough implementation of investment projects. It is also intended to help investors, contractors and workers feel more secure when participating in construction and investment activities in Vietnam. With these aims in mind, Decree No. 119 provides for, among others, certain regulations on investors and contractors' responsibility for purchasing compulsory construction insurance products, as well as the conditions for insurers to provide such products, and standards for premiums and minimum insured amounts. 

Compulsory Purchase Requirements for Investors and Contractors
Under Decree No. 119, investors must purchase insurance products during the construction period for certain works and facilities, including the following:

  • facilities or part of facilities having an impact on public/community safety; [4]
  • investment and construction facilities having a significant impact on the environment and projects that are on the list of projects subject to environmental impact assessment; and [5]
  • facilities with specific technical requirements and complex construction conditions.

An exception to this requirement is in the case where any such facility is related to national defense, public security or state's secret.
In the case where the insurance premium is included in the price of the contract (between the contractor and the investor), the contractor must purchase insurance products for those facilities.
In addition, consulting contractors must purchase construction consultancy professional liability insurance for construction survey or design works for construction facilities at certain levels (level II or higher levels), as classified by the Ministry of Construction. Construction contractors must also purchase insurance for their employees who work on these construction sites.

Specific Conditions for Insurers and Reinsurers
Under Decree No. 119, a local insurer or a local reinsurer must meet the following conditions to provide compulsory construction insurance products:

  • It has been licensed under its establishment and operation license to provide products under property and damage insurance or liability insurance classes (for a local insurer), or to provide non-life reinsurance services (for a local reinsurer).
  • It must satisfy all the conditions on financial capability, and on expertise and professional qualifications of its relevant professional staff as prescribed in the Law on Insurance Business and its implementing guidelines.

For offshore reinsurance, Decree No. 119 requires that in order for an offshore re-insurer to receive compulsory construction insurance ceded from a local insurer in Vietnam, such offshore re-insurer must be:

  • lawfully operating under the laws of the country where it is headquartered; and
  • rated at least “BBB” by Standard & Poor’s, or “B++” by A.M. Best, or gets equivalent ratings from other experienced and accredited rating institutions in the latest fiscal year of reinsurance.

Insurance Coverage and Exclusions
Under Decree No. 119, insurers are liable to pay out insurance coverage for the following:

  • losses and damages to construction works and facilities arising from all risks (applicable to insurance for construction works and facilities during the construction period);
  • consulting contractors for sums that they are liable to pay arising from their work, for losses and damages to third parties plus related expenses in accordance with law (applicable to construction consultancy professional liability insurance); and
  • building construction contractors for sums that they are liable to pay to their employees for injury or deaths  due to a work-related accident or occupational disease within the scope of the insurance liability (applicable to insurance for contractors’ employees doing building works on construction sites).

Decree No. 119 also provides for certain cases of exclusion of insurance liability. Particularly, insurers are not liable to pay insurance proceeds for the following:

  • losses arising from deliberate conduct;
  • losses not in the nature of accidental losses;
  • losses unable to be measured in monetary terms;
  • losses arising from a disaster; and
  • losses arising in a case where the insurance purchaser does not have an insurable interest.

Minimum Sum Insured
Decree No. 119 imposes minimum insurance requirements as follows:

a) for construction facility insurance during the construction period, the minimum sum insured is the full value of the construction facility on completion and must not be less than the total value of the construction contract, including any amended or supplemented value;

b) for construction consultancy professional liability insurance, the sum insured must be at least equal to the value of the design or consultancy contract; and

c) for the insurance of contractors’ employees doing building works in construction sites, the minimum sum insured must be VND100 million (approximately USD4,500) per person per case. The specific sum of indemnification is determined in accordance with the regulations of the Ministry of Finance, depending on the specific case whether the work-related accident or occupational disease results in the injury or death of the employee.