Guidelines on Differential Levy Systems Framework for Insurance Companies ("DLS Guidelines")
Insurer Member (Levy)
GUIDELINES ON DIFFERENTIAL LEVY SYSTEMS FRAMEWORK FOR INSURANCE COMPANIES
ISSUE DATE : 30 MARCH 2020
Ref No: TIPS/GL12-A4/2020(DLS) Issued on: 30 March 2020 TITLE: Guidelines on Differential Levy Systems Framework for Insurance Companies
TABLE OF CONTENTS
PART 1: INTRODUCTION ........................................................................................................1 BACKGROUND ..................................................................................................................1
PART 2: SCOPE OF APPLICATION............................................................................................4
PART 3: DIFFERENTIAL LEVY SYSTEMS FRAMEWORK .............................................................5 OVERVIEW .......................................................................................................................5 QUANTITATIVE CRITERIA .................................................................................................6 QUALITATIVE CRITERIA....................................................................................................7
PART 4: QUANTITATIVE CRITERIA ..........................................................................................8 CAPITAL MEASURE...........................................................................................................8 OPERATIONAL AND SUSTAINABILITY MEASURE
- GENERAL INSURANCE BUSINESS ..................................................................................8 OPERATIONAL AND SUSTAINABILITY MEASURE - LIFE INSURANCE BUSINESS ...............9
PART 5: QUALITATIVE CRITERIA ............................................................................................11 SUPERVISORY RATING ...................................................................................................11 OTHER INFORMATION...................................................................................................11
PART 6: LEVY CATEGORY AND LEVY RATE .............................................................................13 LEVY CATEGORY.............................................................................................................13 LEVY RATE .....................................................................................................................13
PART 7: REPORTING, SUBMISSION AND APPEAL ..................................................................14 REPORTING REFERENCE DATE ........................................................................................14 INSUFFICIENT QUANTITATIVE INFORMATION ...............................................................14 SUBMISSION DATE..........................................................................................................15 FILING RESUBMISSION....................................................................................................15 INFORMATION INTEGRITY ..............................................................................................16 COMPUTATION AND NOTIFICATION OF SCORE..............................................................16 APPEAL PROCESS.............................................................................................................17 PROHIBITION AGAINST PUBLIC DISCLOSURE .................................................................17
PART 8: REPORTING MANUAL AND FORMS..........................................................................19 GENERAL REQUIREMENT................................................................................................19
PART 9: NEW INSURANCE COMPANY AND AMALGAMATED INSURER MEMBER ................. 20 NEW INSURANCE COMPANY..........................................................................................20 AMALGAMATED INSURER MEMBER................................................................................ 20
LIST OF TABLES
TABLE 1: SCOPE OF APPLICATION ..........................................................................................4 TABLE 2: SUMMARY OF OPERATIONAL AND SUSTAINABILITY MEASURE ...............................6 TABLE 3: QUANTITATIVE CRITERIA MATRIX............................................................................7 TABLE 4: QUANTITATIVE CRITERIA SCORE..............................................................................7 TABLE 5: SCORE RANGE FOR SUPERVISORY RATING ............................................................11 TABLE 6: SCORE RANGE FOR OTHER INFORMATION ............................................................12 TABLE 7: OVERALL DLS SCORE RANGE AND LEVY CATEGORIES..............................................13
LIST OF APPENDICES
APPENDIX 1: CAPITAL MEASURE: FREE CAPITAL INDEX ............................................................23 APPENDIX 2: OPERATIONAL AND SUSTAINABILITY MEASURE FOR GENERAL INSURANCE BUSINESS: GROSS PREMIUM GROWTH RATE ......................................................24 APPENDIX 3: OPERATIONAL AND SUSTAINABILITY MEASURE FOR GENERAL INSURANCE BUSINESS: BUSINESS DIVERSIFICATION RATIO ....................................................25 APPENDIX 4: OPERATIONAL AND SUSTAINABILITY MEASURE FOR GENERAL INSURANCE BUSINESS: RECEIVABLE RATIO............................................................................26 APPENDIX 5: OPERATIONAL AND SUSTAINABILITY MEASURE FOR GENERAL INSURANCE BUSINESS: COMBINED RATIO.............................................................................27 APPENDIX 6: OPERATIONAL AND SUSTAINABILITY MEASURE FOR GENERAL INSURANCE BUSINESS: MEAN-ADJUSTED RETURN VOLATILITY...............................................28 APPENDIX 7: OPERATIONAL AND SUSTAINABILITY MEASURE FOR LIFE INSURANCE BUSINESS: NEW BUSINESS GROWTH RATE...........................................................................30 APPENDIX 8: OPERATIONAL AND SUSTAINABILITY MEASURE FOR LIFE INSURANCE BUSINESS: BUSINESS CONCENTRATION RATIO .....................................................................31 APPENDIX 9: OPERATIONAL AND SUSTAINABILITY MEASURE FOR LIFE INSURANCE BUSINESS: BUSINESS CONSERVATION RATIO .......................................................................32 APPENDIX 10: OPERATIONAL AND SUSTAINABILITY MEASURE FOR LIFE INSURANCE BUSINESS: ASSET MATCHING AND RETURN .........................................................................33 APPENDIX 11: OPERATIONAL AND SUSTAINABILITY MEASURE FOR LIFE INSURANCE BUSINESS: EXPENSE RATIO .................................................................................................37
LIST OF ILLUSTRATIONS
ILLUSTRATION 1: COMPUTATION OF FREE CAPITAL INDEX...................................................39 ILLUSTRATION 2: COMPUTATION OF GROSS PREMIUM GROWTH RATE ...............................40 ILLUSTRATION 3: COMPUTATION OF BUSINESS DIVERSIFICATION RATIO..............................41 ILLUSTRATION 4: COMPUTATION OF RECEIVABLE RATIO.....................................................42 ILLUSTRATION 5: COMPUTATION OF COMBINED RATIO......................................................43 ILLUSTRATION 6: COMPUTATION OF MEAN-ADJUSTED RETURN VOLATILITY........................44 ILLUSTRATION 7: COMPUTATION OF NEW BUSINESS GROWTH RATE...................................46 ILLUSTRATION 8: COMPUTATION OF BUSINESS CONCENTRATION RATIO .............................48 ILLUSTRATION 9: COMPUTATION OF BUSINESS CONSERVATION RATIO................................49 ILLUSTRATION 10: COMPUTATION OF ASSET MATCHING AND RETURN .................................50 ILLUSTRATION 11: COMPUTATION OF EXPENSE RATIO..........................................................53 ILLUSTRATION 12: DLS SCORING AND LEVY CATEGORISATION ..........................................54 ILLUSTRATION 13: DLS SCORING AND LEVY CATEGORISATION FOR AN INSURANCE COMPANY WITH INSUFFICIENT QUANTITATIVE INFORMATION. .................................55
LIST OF DIAGRAM
DIAGRAM 1: THE DLS FRAMEWORK ........................................................................................5
PART 1: INTRODUCTION
BACKGROUND
1.1 Pursuant to Malaysia Deposit Insurance Corporation (Differential Premium Systems in respect of Insurer Members) Regulations 2012 (“Regulations”),¹ Perbadanan Insurans Deposit Malaysia (“PIDM”) implemented the Differential Levy Systems (“DLS”) framework for insurance companies. The DLS framework was implemented in line with PIDM’s mandate to administer the takaful and insurance benefits protection system.
1.2 The objectives of implementing the DLS framework are as follows: (a) to differentiate insurance companies according to their risk profiles; (b) to introduce fairness into the levy system process where insurance companies assessed to be of higher risk will pay higher levies as opposed to insurance companies assessed to be of lower risk; (c) to provide incentives for insurance companies to adopt sound risk management practices; and (d) to promote stability of the financial system via the overall improvement in risk management practices of insurance companies.
1.3 In exercise of the power conferred by paragraph 209(1)(b) of the PIDM Act, PIDM issued the Guidelines on the Differential Levy Systems Framewok for Insurance Companies (“Guidelines”). These Guidelines set out the assessment approach under the DLS framework, including the formula, threshold and score range for each of the indicators under the quantitative criteria and qualitative criteria. The requirements for reporting and submission of quantitative information by insurance companies to PIDM are also elaborated in the Guidelines.
¹ The Regulations were amended in 2016 pursuant to the Malaysia Deposit Insurance Corporation (Differential Premium Systems in respect of Insurer Members)(Amendment) Regulations 2016, and in 2019 pursuant to Malaysia Deposit Insurance Corporation (Differential Premium Systems in respect of Insurer Members) (Amendment) Regulations 2019.
1.4 PIDM continuously reviews the DLS framework to reflect changes in the regulatory developments and operating environment. PIDM also enhances the DLS framework to address feedback and comments during its implementation.
1.5 The current enhancement to the DLS framework are as follows:
| Insurance Business Type | Enhancement |
|---|---|
| Life Insurance | Introduce new indicator – Asset Matching and Return. |
| General Insurance | Refinement to existing indicator – Mean-Adjusted Return Volatility excludes changes in gross Available-For-Sale (“AFS”) reserve and provides clarification on “other income/outgo” component. |
1.6 In view of the enhancements, the Guidelines are updated accordingly.
1.7 These Guidelines are effective beginning assessment year 2020 and shall supersede the Guidelines on the Differential Levy System Framework for Insurance Companies issued on 31 January 2020.
1.8 For purposes of these Guidelines, “Guidelines for Insurance Companies Statistical Submission” or “Guidelines for ICSS” means the Guidance Notes for Insurance Companies Statistical System on Submission of Monthly/Quarterly/Annual Statistical Returns as may be issued by Bank Negara Malaysia (“BNM”).
1.9 Unless expressly stated otherwise, any information or document required to be submitted to PIDM under these Guidelines, including any letter, report, form, returns and action plan, shall be submitted online through PIDM’s portal. The original hardcopy shall be kept by the insurer member.
1.10 A reference to a statute or other law includes regulations and other instruments under it and consolidations, amendments, re-enactments or replacements of any of them.
1.11 PIDM may specify such other periods or dates for compliance with any of the provisions in these Guidelines, or for any act to be done, in such form and subject to such terms and conditions as PIDM thinks fit.
1.12 Enquiries relating to these Guidelines may be directed to:
Risk Assessment & Resolution Division General Lines: 03-2173 7436 / 03-2265 6565 Fax: 03-21737494 Email: [email protected]
PART 2: SCOPE OF APPLICATION
2.1 The DLS Framework is applicable to all insurance companies that are licensed to carry on insurance business under Section 10 of the Financial Services Act 2013, except for insurers licensed to carry on solely reinsurance business and Danajamin Nasional Berhad. Table 1 depicts the application of the DLS framework in respect of an insurance company’s business.
Table 1: Scope of Application
| Insurance Business Type | General Insurance DLS Criteria | Life Insurance DLS Criteria |
|---|---|---|
| General Insurance | | |
| Life Insurance | |
PART 3: DIFFERENTIAL LEVY SYSTEMS FRAMEWORK
OVERVIEW
3.1 An insurance company shall be assessed and classified into different categories in an assessment year based on a combined quantitative and qualitative criteria approach.
3.2 In order to achieve higher objectivity and transparency, a heavier weightage is assigned to the quantitative criteria which carries a score of 60%, while the qualitative criteria carries the remaining score of 40% out of a total score of 100%.
3.3 The DLS Framework is summarised in Diagram 1.
PART 4: QUANTITATIVE CRITERIA
3.4 The assessment of the quantitative criteria is based on a ‘matrix approach’, which enables the risk profile of the insurance companies to be better differentiated based on two (2) independent components of assessment.
3.5 The horizontal axis of the matrix approach measures the capital strength, i.e. Free Capital Index. Capital strength is important as it provides a cushion against any unexpected adverse events in the insurance companies’ earnings and assets quality.
3.6 On the other side, the vertical axis of the matrix approach reflects the operational and sustainability measure, which aims to assess the efficiency of the insurance companies’ operational management and sustainability of the financial performance. This measure is made up of different sets of indicators which are assigned specific weightages. The indicators and their respective weightages for both general and life insurance businesses are set out in Table 2 below.
Table 2: Summary of Operational and Sustainability Measure
| General Insurance Business | Life Insurance Business | ||
|---|---|---|---|
| Indicators | Weightage | Indicators | Weightage |
| Gross premium growth rate | 20% | New business growth rate | 15% |
| Business diversification ratio | 25% | Business concentration ratio | 25% |
| Receivable ratio | 15% | Business conservation ratio | 25% |
| Combined ratio | 25% | Asset matching and return | 20% |
| Mean-adjusted return volatility | 15% | Expense ratio | 15% |
| Total | 100% | Total | 100% |
3.7 The combined score of the capital measure and the operational and sustainability measure, will determine the position of an insurance company in the quantitative criteria matrix, as represented by the symbols M1 to M7 as set out in Table 3 in the following page.
Table 3: Quantitative Criteria Matrix
| Operational and Sustainability Measure | Capital Measure | |||
|---|---|---|---|---|
| < 1.00 | 1.00 ≤ but ≤1.10 | 1.10< but ≤1.20 | >1.20 | |
| ≥ 85 | M6 | M4 | M2 | M1 |
| ≥ 65 but < 85 | M6 | M4 | M3 | M2 |
| ≥ 50 but < 65 | M7 | M5 | M4 | M3 |
| < 50 | M7 | M7 | M5 | M4 |
3.8 Each of the seven (7) categories within the matrix is then assigned a quantitative score as set out in Table 4 below. The score reflects the overall quantitative performance of the insurance company.
Table 4: Quantitative Criteria Score
| Quantitative Criteria Matrix Category | Score (%) |
|---|---|
| M1 | 60 |
| M2 | 55 |
| M3 | 45 |
| M4 | 40 |
| M5 | 30 |
| M6 | 25 |
| M7 | 15 |
QUALITATIVE CRITERIA
3.9 The qualitative criteria include both the supervisory rating of insurance companies assigned by BNM, and any other information that will have implication on the safety and soundness of the insurance companies. The ‘Supervisory Rating’ carries a maximum score of 35%, while the remaining score of 5% is assigned to ‘Other Information’.
PART 4: QUANTITATIVE CRITERIA
4.1 Capital Measure
Free Capital Index
Free capital index is a measure of the capital buffer above the individual target capital level (“ITCL”). This index reflects the insurance company’s capital sufficiency and its resilience to adverse situations.
4.2 Operational and Sustainability Measure – General Insurance Business
(a) Gross Premium Growth Rate The gross premium growth rate measures the insurance company’s total business growth. The growth in premiums provides a constant stream of income to support the insurance company’s business operations and enhances its market share.
(b) Business Diversification Ratio The business diversification ratio measures the extent of the insurance company’s portfolio diversification. A well-diversified portfolio helps the insurance company to avoid being significantly affected by any adverse experience in its line of business.
(c) Receivable Ratio The receivable ratio measures the extent of insurance receivables against the total premiums income. This ratio indicates the operational efficiency of the insurance company based on its ability to manage its receivables collection i.e. collect its outstanding premiums, agents balances and reinsurance balances.
(d) Combined Ratio The combined ratio measures the performance and profitability of the insurance company’s core business activities. An insurance company needs to ensure that the inflow of insurance premium exceeds the outgo including expenses, as this is an indication of a profitable insurance business.
(e) Mean-Adjusted Return Volatility Mean-adjusted return volatility (“MARV”) measures the downside risk of profitability. It gauges the downside volatility of the profits over a 3-year period and hence provides an indication on the profits’ sustainability. Volatile earnings trend will render the insurance company’s capital position more vulnerable in the event of losses, as capital may be eroded if the earnings are inadequate to absorb the losses.
4.3 Operational and Sustainability Measure - Life Insurance Business
(a) New Business Growth Rate The new business growth rate measures the total growth of an insurance company’s new business. The consistent growth of new business premiums will ensure a constant stream of income to support the insurance company’s business operations and enhances its market share.
(b) Business Concentration Ratio The business concentration ratio measures the proportion of regular premiums policy business to single premiums policy business. An appropriate composition of single and regular premiums products ensures continuous future stream of income.
(c) Business Conservation Ratio The business conservation ratio measures the proportion of policies that remain in-force at the end of a period out of the total policies that were in-force at the beginning of the period. This indicator assesses the business retention ability of the insurance company and reflects the sustainability level of its business.
(d) Asset Matching and Return Asset matching and return (“AMR”) measures the ability of a life insurer in strategically investing its assets in the life insurance fund to match the exposure from its insurance liabilities, while maintaining an appropriate level of investment returns.
This indicator is based on a matrix approach, comprising two sub-indicators: (a) Asset-Liability Duration Matching (“ALDM”) and (b) Investment Yield (“IY”). The ALDM measures the estimated dollar duration mismatch between interest rate related assets and liabilities, emphasising on the exposure under a stressed interest rate environment. Meanwhile, the IY measures the investment performance in terms of the life insurance company’s investment income in proportion to the investment assets held by the life insurance company.
(e) Expense Ratio The expense ratio measures the expenses incurred to produce every Ringgit of premiums income. It indicates how efficient the insurance company in managing its operating costs to generate premiums income, by benchmarking its management expenses and agency remuneration against the premiums income generated.
4.4 For the detailed requirements of all the above indicators, please refer to the attached Appendices. As for the computations of the indicators, please refer to the attached Illustrations.
PART 5: QUALITATIVE CRITERIA
5.1 For the qualitative criteria, each insurance company shall be assessed based on BNM’s supervisory rating and other information i.e. other qualitative factors.
(a) Supervisory Rating The supervisory rating, namely the composite risk rating (“CRR”), as assessed by BNM for the assessment period up to 31 December of the preceding assessment year will be used. The insurance company shall be assigned scores as set out in Table 5 below.
Table 5: Score Range for Supervisory Rating
| Supervisory Rating Range of Results | Score (%) |
|---|---|
| Supervisory Rating of LOW or equivalent | 35 |
| Supervisory Rating of MODERATE or equivalent | 22 |
| Supervisory Rating of ABOVE AVERAGE or equivalent | 10 |
| Supervisory Rating of HIGH or equivalent | 0 |
(b) Other Information The score shall be determined by PIDM based on information relating to the insurance company’s safety and soundness, its viability or its financial condition.
This information may include information about the insurance company other than that specified in the supervisory rating of the insurance company, which takes into account the following factors:
(i) the insurance company’s failure to comply with any subsidiary legislation made by PIDM, including guidelines or with any regulatory requirements that apply to the insurance company;
(ii) any action taken by any regulatory or other authority against the insurance company or any corporation related to the insurance company including but not limited to any notice, order or instruction relating to any deficiency or non-compliance in respect of the insurance company or such corporation, a letter of warning, or any requirement or instruction for issuance of a letter of undertaking or commitment or a resolution of the board of directors;
(iii) any correction or action plan of the insurance company or such corporation to address the action taken by such authority under subparagraph (ii) including but not limited to the progress report on the implementation by the insurance company of the terms of the letter of undertaking or commitment or the resolution of the board of directors;
(iv) any rating or assessment of the insurance company by any rating agency whether relating to the credit standing of the insurance company or its financial condition or otherwise;
(v) whether the insurance company has received or is receiving any form of assistance from BNM or PIDM, such assistance being financial or otherwise; and
(vi) any other information provided to PIDM or that comes to the attention of PIDM about the insurance company or any corporation related to the insurance company.
The scores for the other information criteria shall be determined as set out in Table 6 below.
Table 6: Score Range for Other Information
| Other Information Assessment Criteria | Score (%) |
|---|---|
| As at 30 April of the assessment year, no information has come to PIDM’s attention about any circumstances that represent a threat to or materially affect the financial condition, safety, soundness, or viability of the insurance company. | 5 |
| As at 30 April of the assessment year, information has come to PIDM’s attention about circumstances that represent a threat to or may materially affect the financial condition, safety, soundness, or viability of the insurance company. | 3 |
| As at 30 April of the assessment year, information has come to PIDM’s attention about circumstances that materially affect the financial condition, safety, soundness, or viability of the insurance company. | 0 |
PART 6: LEVY CATEGORY AND LEVY RATE
LEVY CATEGORY
6.1 The summation of the respective scores from the quantitative and qualitative criteria will determine the insurance company’s overall DLS score. All insurance companies shall be classified into one (1) of the four (4) levy categories based on their overall DLS score. The table below sets out the overall DLS score range and the respective levy categories:
Table 7: Overall DLS Score Range and Levy Categories
| Overall DLS Score | Levy Category |
|---|---|
| DLS Score ≥ 85% | 1 |
| 65% ≤ DLS Score < 85% | 2 |
| 50% ≤ DLS Score < 65% | 3 |
| DLS Score < 50% | 4 |
LEVY RATE
6.2 Each levy category carries a prescribed levy rate and the minimum levy amount for the purpose of determining the amount of levy payable by an insurance company to PIDM for the assessment year.
6.3 An insurance company shall pay its annual levy by 31 May (or the immediate preceding working day if 31 May falls on a weekend or a public holiday in Kuala Lumpur) of each assessment year based on the DLS score and levy category notified by PIDM.
6.4 An insurance company shall complete the return on calculation of levy based on the Guidelines on Takaful and Insurance Benefits Protection System: Submission of Returns on Calculation of Levies for Takaful and Insurance Businesses issued on 30 March 2020.
PART 7: REPORTING, SUBMISSION AND APPEAL
REPORTING REFERENCE DATE
QUANTITATIVE CRITERIA
7.1 The quantitative criteria shall be calculated based on an insurance company’s relevant financial statements as at 31 December of each preceding assessment year. In this respect, the financial statements shall be referred to as the following:
(a) For an insurance company with 31 December financial year end: audited financial statements (i.e. Insurance Companies Statistical System (“ICSS”), Risk-Based Capital (“RBC”) reporting forms, and other supporting information for the financial period); or
(b) For an insurance company with non-31 December financial year end: approved financial statements (i.e. ICSS, RBC reporting forms, and other supporting information for the financial period, which have been approved by the Management of the insurance company).
QUALITATIVE CRITERIA
7.2 For the supervisory rating criteria, the supervisory rating for each insurance company as at 31 December of the preceding assessment year shall be applied to determine the scores for levy calculation purposes for an assessment year. BNM will provide the supervisory ratings to PIDM.
7.3 For the other information criteria, an insurance company shall be assessed based on information received by PIDM on or before 30 April of the assessment year.
INSUFFICIENT QUANTITATIVE INFORMATION
7.4 For an insurance company with insufficient information for the purposes of calculating the scores of certain indicators for operational and sustainability measure, the scores for such indicator shall be determined on a proportionate basis as stated below:
[A ÷ (100 – B)] × B
where
A is the sum of the scores assigned to an insurance company for each indicator where quantitative information is available.
B is the sum of maximum scores for indicators where quantitative information is not available for computation.
An example of the computation of the overall DLS scores for an insurance company carrying on general insurance business with insufficient quantitative information is provided in Illustration 13.
SUBMISSION DATE
7.5 An insurance company must submit the certified quantitative information² to PIDM latest by 30 April (or the immediate preceding working day if 30 April falls on a weekend or a public holiday in Kuala Lumpur) of each assessment year for the purposes of computing the DLS score of the insurance company.
7.6 An insurance company’s Chief Executive Officer (“CEO”), and its Chief Financial Officer (“CFO”) or Head of Finance or Appointed Actuary, must certify that the quantitative information is accurate and reflective of the financial condition of the insurance company as at 31 December of the preceding assessment year. All reports that require certification /signatories shall be scanned and the scanned copy must be submitted to PIDM online through PIDM’s portal.
7.7 For an insurance company that fails to comply with the requirements in paragraphs 7.5 and 7.6, PIDM will assign a score to the insurance company according to any available information, and a levy surcharge may be imposed on such insurance company pursuant to Section 75 of the PIDM Act.
FILING RESUBMISSION
7.8 In circumstances where an insurance company submits its amended quantitative information to PIDM after the submission deadline i.e. 30 April of the assessment year, the amended submission shall reach PIDM by 10 May (or the immediate preceding working day if 10 May falls on a weekend or a public holiday in Kuala Lumpur) of that assessment year.
7.9 An insurance company shall be rated based on the latest information received by PIDM on or before 10 May of that assessment year.
² Certified quantitative information refers to DLS reporting form in pre-formatted excel spreadsheet and the certification in pdf format.
7.10 An insurance company that submits any amended information shall be expected to comply with the provisions for information integrity as specified under paragraph 7.11 (Information Integrity).
INFORMATION INTEGRITY
7.11 An insurance company shall be accountable to ensure the accuracy of the information submitted for DLS. For an insurance company that does not comply with the requirements with regard to information integrity, a levy surcharge may be imposed on such insurance company pursuant to Section 75 of the PIDM Act.
7.12 In respect of the accuracy of the DLS quantitative information and the Returns on Calculation of Levies (“RCL”) submitted to PIDM, an insurance company’s internal auditor and external auditor will perform an independent validation under the Guidelines on Validation Programme: Differential Levy Systems and Levies Calculation issued on 30 March 2020³.
7.13 Pursuant to Section 193 of the PIDM Act, any person who prepares, signs, approves or concurs in any account, statement, return, report or other document required for submission to PIDM that he or she knows or has reason to believe is false or contains false or misleading information, commits an offence punishable by fine or imprisonment or both.⁴
COMPUTATION AND NOTIFICATION OF SCORE
7.14 The overall DLS score shall be the sum of scores assigned for the quantitative and the qualitative criteria.
7.15 The score of each criterion is prescribed in the Malaysia Deposit Insurance Corporation (Differential Premium Systems in Respect of Insurer Members) Regulations 2012.⁵
7.16 PIDM will compute the overall DLS score for each insurance company and notify the insurance companies of their respective score, levy category and applicable levy rate by 15 May of each assessment year. This will provide sufficient time for an insurance company to make the necessary arrangement for the payment of levy that is due to PIDM by 31 May (or the immediate preceding working day or if 31 May falls on a weekend or a public holiday in Kuala Lumpur) of each assessment year. Please refer to Illustration 12 for an example of DLS scoring and levy categorisation.
³ Which supersedes the “Guidelines on Validation Programme: Differential Levy Systems and Levies Calculation” issued on 31 January 2020. ⁴ Section 193 of the Act, applies to officers of the insurance companies, internal auditors and external auditors with regard to the DLS framework and RCL reporting and the validation programme. ⁵ As amended by the Malaysia Deposit Insurance Corporation (Differential Premium Systems in respect of Insurer Members) (Amendment) Regulations 2016 and Malaysia Deposit Insurance Corporation (Differential Premium Systems in respect of Insurer Members) (Amendment) Regulations 2019.
APPEAL PROCESS
7.17 An appeal process is put in place to provide an avenue for any insurance company to request for a review of its final score, levy category and levy rate in certain circumstances.
7.18 An insurance company may appeal against its score, levy category and levy rate after 31 May of an assessment year and is required to formally submit its appeal in writing to PIDM within the time specified in paragraph 7.20. The reason(s) or ground(s) for the appeal, as set out in paragraph 7.19 must be included.
7.19 The appeal must be on the basis of an error in the quantitative information provided by an insurance company to PIDM or an error in PIDM’s computation of any of the quantitative criteria or an error in PIDM’s assessment of the qualitative criteria, other than the supervisory rating by BNM.
7.20 Any request for appeal shall be submitted in writing to PIDM no later than 31 August of that assessment year. PIDM will review and respond to the appeal by 30 September of that assessment year. Notwithstanding the appeal, an insurer member must pay the annual levy to PIDM on or before 31 May of that assessment year.
7.21 If the appeal results in PIDM determining that an insurance company has overpaid its annual levy for that assessment year, PIDM shall refund the difference to the insurance company after the appeal process is concluded. Conversely, if it is determined that an insurance company has underpaid its annual levy for that assessment year, the insurance company shall pay the difference to PIDM.
PROHIBITION AGAINST PUBLIC DISCLOSURE
7.22 An insurance company acknowledges that the following information (“Information”) is confidential:
(a) An insurance company’s score for any indicator or criteria of the DLS; (b) An insurance company’s total criteria score; (c) Levy category in which an insurance company is or has been classified; (d) Levy rate that is or was applicable to an insurance company; and (e) The amount of levy payable or paid by an insurance company.
7.23 No director, officer, employee or agent of an insurance company or any person who for any reason has by any means access to any of the Information or any document which discloses or contains any of the Information, shall provide or disclose to any other person or publish any such Information or document unless the disclosure is permitted under any law or court order or for the purpose of an insurance company performing its duties or carrying out the provisions of any law or any regulation, guideline or instruction made by BNM or PIDM.
7.24 A levy surcharge may be imposed on an insurance company that does not comply with the prohibition against public disclosure.
PART 8: REPORTING MANUAL AND FORMS
GENERAL REQUIREMENT
8.1 Any restatement made to an insurance company’s previous year’s financial information shall be reflected in the submission of quantitative information to PIDM. However, the insurance company’s previous year DLS score will not be amended.
8.2 All amounts shall be reported in thousands (‘000).
8.3 All percentages shall be expressed to two (2) decimal points.
8.4 An insurance company must use the pre-formatted excel spreadsheet provided in the PIDM’s corporate website for submission to PIDM. An insurance company must also ensure that no alteration or amendment is made to the pre-formatted excel spreadsheet. An insurance company shall only be required to fill-in the marked cells.
PART 9: NEW INSURANCE COMPANY AND AMALGAMATED INSURER MEMBER
NEW INSURANCE COMPANY
9.1 An insurance company shall be automatically categorised in the best levy category for the assessment year in which it becomes an insurer member (“first assessment year”), and the assessment year immediately after the first assessment year (“second assessment year”).
9.2 An insurance company is not required to submit the quantitative information to PIDM for the first assessment year and second assessment year. The insurance company is required to submit the quantitative information to PIDM from the third assessment year onwards.
9.3 In the event that an insurance company does not have sufficient information to calculate certain criteria in the third assessment year, the scores of these criteria shall be assigned proportionately according to paragraph 7.4 (Insufficient Quantitative Information).
9.4 For the computation of quantitative criteria for the third assessment year onwards, the quantitative information relating to the position as at 31 December of the first assessment year shall not be included in the computation. The scores of these criteria shall be assigned proportionately according to paragraph 7.4 (Insufficient Quantitative Information).
AMALGAMATED INSURER MEMBER
9.5 An amalgamated insurer member means an insurance company formed from the acquisition of one (1) insurance company by another insurance company or the merger of two (2) or more insurance companies at any time from 1 June of the preceding assessment year to 31 May of an assessment year.
9.6 The following provisions shall apply in determining the quantitative and qualitative scores of the amalgamated insurer member for a particular assessment year:
(a) An amalgamated insurer member is formed on or before 31 December of the preceding assessment year
The computation of each indicator of the amalgamated insurer member for the quantitative criteria shall be based on the financial information of the amalgamated insurer member as at 31 December of the preceding assessment year.
The scoring of the amalgamated insurer member for the qualitative criteria shall be based on the supervisory rating and other relevant information of the amalgamated insurer member as at 31 December of the preceding assessment year.
Example 1: Insurance Companies A and B were involved in the process of merger and acquisition and transferred whole or part of their insurance business to the amalgamated insurer member known as Insurance Company ‘X’. Insurance Company ‘X’ commences operations on 1 September 2019.
For the assessment year 2020, Insurance Company ‘X’ shall submit its quantitative information based on the financial information as at 31 December 2019.
(b) An amalgamated insurer member is formed after 31 December of the assessment year
The computation of each indicator of the amalgamated insurer member for the quantitative criteria shall be based on the financial information of the amalgamating insurer member⁶ as at 31 December of the preceding assessment year.
The scoring of the amalgamated insurer member for the qualitative criteria shall be based on the supervisory rating and other relevant information of the amalgamating insurer member as at 31 December of the preceding assessment year.
⁶ An amalgamating insurer member refers to any one of the insurer members involved in an amalgamation or a merger with the highest total scoring for quantitative criteria as of 31 December of the preceding assessment year.
Example 2:
Insurance Companies A and B were involved in the process of merger and acquisition. The process of transferring assets and liabilities is completed, resulting in the formation of an amalgamated insurer member, Insurance Company ‘Y’, on 2 January 2020. The table below depicts the scores of the quantitative, supervisory and other information of the insurance companies for position as at 31 December 2019:
| Criteria | Insurance Companies | |
|---|---|---|
| A | B | |
| Quantitative | ||
| Capital – FCI | 1.21 | 1.15 |
| Operational and sustainability score | 75% | 55% |
| Total Quantitative Score (a) | 55% | 40% |
| Qualitative | ||
| Supervisory rating | 22% | 10% |
| Other information criteria | 5% | 0% |
| Total Qualitative Score (b) | 27% | 10% |
| Total DLS Score (a) + (b) | 82% | 50% |
Insurance Company A (the amalgamating insurer member) has the highest quantitative score as at 31 December 2019. Insurance Company ‘Y’ shall submit its quantitative information forms based on the financial information of Insurance Company A for the assessment year 2020. Insurance Company A’s supervisory rating score of 22% and the other information score of 5% will be also applied to Insurance Company ‘Y’ to arrive at the overall DLS score for assessment year 2020.
Perbadanan Insurans Deposit Malaysia 30 March 2020
Appendix 1
CAPITAL MEASURE Free Capital Index
Formula: Free Capital Index = Capital adequacy ratio (%) / Individual target capital level (%)
Note: (i) Capital adequacy ratio (“CAR”) is as determined in the 'Risk-Based Capital (“RBC”) Framework for Insurers' specified by BNM. (ii) Individual target capital level (“ITCL”) is as determined in the 'Guidelines on Internal Capital Adequacy Assessment Process (“ICAAP”) for Insurers issued by BNM. (iii) The insurance company’s ITCL shall be based on the latest ITCL agreed by BNM as at 31 December of the preceding assessment year. (iv) In the case of amalgamated insurer member (please refer to paragraph 9.5), if the ITCL of an insurance company has yet to be determined as at 31 December of the preceding assessment year, the insurance company shall be categorised at the minimum required FCI (score range of 1.00 ≤ FCI ≤1.10) until the ITCL of the insurance company is determined.
| Data Requirement | Source of Information | Remarks |
|---|---|---|
| CAR | Form A of the RBC Framework - Reporting Form. | CAR is based on the average CAR of four (4) quarters within the preceding assessment year. |
| ITCL | As agreed by BNM, specified in Guidelines on ICAAP for Insurers. | - |
Score Range:
| Free Capital Index Range of Results |
|---|
| Free Capital Index > 1.20 |
| 1.10 < Free Capital Index ≤ 1.20 |
| 1.00 ≤ Free Capital Index ≤ 1.10 |
| Free Capital Index < 1.00 |
Appendix 2
OPERATIONAL AND SUSTAINABILITY MEASURE - GENERAL INSURANCE BUSINESS Gross Premium Growth Rate
Formula: Gross Premium Growth Rate = [Gross premiums (t) – Gross premiums (t-1)] / Gross premiums (t-1) x 100%
3-year weighted average Gross Premium Growth Rate = [50% x growth rate (t)] + [30% x growth rate (t-1)] + [20% x growth rate (t-2)]
where, t = one year immediately preceding the current assessment year; t-1= two years immediately preceding the current assessment year; and t-2 = three years immediately preceding the current assessment year.
Note: (i) Gross premium growth rate is based on a 3-year weighted average growth rate, i.e. weightages of 50% for one year immediately preceding the current assessment year, 30% for two years immediately preceding the current assessment year and 20% for three years immediately preceding the current assessment year. (ii) An insurance company which has less than four (4) years of data shall not be assigned a score for this indicator. The score of this indicator shall be determined on a proportionate basis as specified in paragraph 7.4 (Insufficient Quantitative Information).
| Data Requirement | Source of Information | Remarks |
|---|---|---|
| Gross premiums | Statement of Premiums, Form G6 as specified in the Guidelines for ICSS. | Gross premiums include premiums from direct business (less return premiums) and all reinsurances accepted. |
Score Range:
| Gross Premium Growth Rate Range of Results | Score (%) |
|---|---|
| Gross Premium Growth Rate > 10.00% | 20 |
| 5.00% < Gross Premium Growth Rate ≤ 10.00% | 14 |
| 0.00% < Gross Premium Growth Rate ≤ 5.00% | 7 |
| Gross Premium Growth Rate ≤ 0.00% | 0 |
Appendix 3
OPERATIONAL AND SUSTAINABILITY MEASURE - GENERAL INSURANCE BUSINESS Business Diversification Ratio
Formula: Business Diversification Ratio = [Provision of risk margin for adverse deviation (“PRAD”) – Fund provision of risk margin for adverse deviation (“FPRAD”)] / Provision of risk margin for adverse deviation (“PRAD”) x 100%
Note: (i) The PRAD refers to the provision of risk margin for adverse deviation, is the component of the value of the insurance liabilities that relates to the uncertainty inherent in the best estimate, as defined in the RBC Framework.
| Data Requirement | Source of Information | Remarks |
|---|---|---|
| PRAD | RBC Framework - Reporting Form: General insurance fund - Valuation liabilities, Form D and Form D-1. | The PRAD includes valuation of premium liabilities attributable to all classes of businesses, including those attributable to Malaysian Motor Insurance Pool (“MMIP”). |
| FPRAD | RBC Framework - Reporting Form: General insurance fund - Valuation liabilities, Form D and Form D-1. | The FPRAD includes valuation of premium liabilities attributable to all classes of businesses, including those attributable to MMIP. |
Score Range:
| Business Diversification Ratio Range of Results | Score (%) |
|---|---|
| Business Diversification Ratio > 30.00% | 25 |
| 20.00% < Business Diversification Ratio ≤ 30.00% | 16 |
| 15.00% ≤ Business Diversification Ratio ≤ 20.00% | 8 |
| Business Diversification Ratio < 15.00% | 0 |
Appendix 4
OPERATIONAL AND SUSTAINABILITY MEASURE - GENERAL INSURANCE BUSINESS Receivable Ratio
Formula: Receivable Ratio = Insurance receivables / Gross premiums x 100%
| Data Requirement | Source of Information | Remarks |
|---|---|---|
| Gross premiums | Statement of Premiums, Form G6 as specified in the Guidelines for ICSS. | Gross premiums include premiums from direct business (less return premiums) and all reinsurances accepted. |
| Insurance receivables | Ageing Schedule, Schedule 12, Form G3 as specified in the Guidelines for ICSS. | Insurance receivables refers to the aggregate of total gross outstanding premiums and agents’ balances of more than 60 days and total amount due from reinsurers or ceding companies of more than 90 days. |
Score Range:
| Receivable Ratio Range of Results | Score (%) |
|---|---|
| Receivable Ratio ≤ 10.00% | 15 |
| 10.00% < Receivable Ratio ≤ 15.00% | 10 |
| 15.00% < Receivable Ratio ≤ 20.00% | 5 |
| Receivable Ratio > 20.00% | 0 |
Appendix 5
OPERATIONAL AND SUSTAINABILITY MEASURE - GENERAL INSURANCE BUSINESS Combined Ratio
Formula: Combined Ratio = (Net claims incurred + Management expenses + Net commission) / Earned premium income x 100%
| Data Requirement | Source of Information | Remarks |
|---|---|---|
| Net claims incurred | Statement of Claims, Form G7 as specified in the Guidelines for ICSS. | Net claims incurred refers to the claims paid, increase or decrease in provisions for outstanding claims liabilities within the preceding assessment year and net of reinsurance recoveries. |
| Management expenses | General Business Revenue Account, Form G1 as specified in the Guidelines for ICSS. | Management expenses refer to all expenses relating to insurance business other than claims and commission. |
| Net commission | Statement of Commissions, Form G8 as specified in the Guidelines for ICSS. | Net commission refers to the commissions and profit commission and brokerage paid or payable on direct business and on reinsurance accepted business less commissions and profit commissions earned on reinsurance ceded. |
| Earned premium income | Statement of Premiums, Form G6 as specified in the Guidelines for ICSS. | Earned premium income refers to net premiums less increase or plus decrease in premium liabilities within the preceding assessment year. |
Score Range:
| Combined Ratio Range of Results | Score (%) |
|---|---|
| Combined Ratio < 90.00% | 25 |
| 90.00% ≤ Combined Ratio ≤ 95.00% | 16 |
| 95.00% < Combined Ratio ≤ 100.00% | 8 |
| Combined Ratio > 100.00% | 0 |
Appendix 6
OPERATIONAL AND SUSTAINABILITY MEASURE - GENERAL INSURANCE BUSINESS Mean-adjusted Return Volatility
Formula: Mean-Adjusted Return Volatility = Semi standard deviation of operating profit or loss over three (3) years / Mean operating profit or loss over three (3) years
Note: (i) Operating profit or loss refers to the profit or loss arising from business operation, which includes earned premium income, net claims incurred, management expenses, net commission, net investment income, net bad and doubtful debts/bad debts recovery, net capital gains or losses and other income or outgo (excludes any income or expenses arising from recognition of deferred taxation). (ii) For the computation of this indicator, operating profit should not include taxation for the year.
| Data Requirement | Source of Information | Remarks |
|---|---|---|
| Earned premium income | Statement of Premiums, Form G6 as specified in the Guidelines for ICSS. | Earned premium income refers to net premiums less increase or plus decrease in premium liabilities within the preceding assessment year. |
| Net claims incurred | Statement of Claims, Form G7 as specified in the Guidelines for ICSS. | Net claims incurred refers to the claims paid, increase or decrease in provisions for outstanding claims liabilities within the preceding assessment year and net of reinsurance recoveries. |
| Management expenses | General Business Revenue Account, Form G1 as specified in the Guidelines for ICSS. | Management expenses refer to all expenses relating to insurance business other than claims and commission. |
| Net commission | Statement of Commissions, Form G8 as specified in the Guidelines for ICSS. | Net commission refers to the commissions and profit commission and brokerage paid or payable on direct business and on reinsurance accepted business less commissions and profit commissions earned on reinsurance ceded. |
| Net bad and doubtful debts/ Bad debts recovery | General Business Revenue Account, Form G1 as specified in the Guidelines for ICSS. | - |
| Net investment income | General Business Revenue Account, Form G1 as specified in the Guidelines for ICSS. | - |
| Data Requirement | Source of Information | Remarks |
|---|---|---|
| Net capital gains or losses | General Business Revenue Account, Form G1 as specified in the Guidelines for ICSS. | Net capital gains or losses includes: (i) Profit on disposal of securities, properties and other properties, plant and equipment; (ii) Loss on disposal of securities, properties and other properties, plant and equipment; (iii) Accretion of discount on securities; (iv) Amortisation of premiums on securities; (v) Unrealised gain on securities and other investment (vi) Unrealised loss on securities and other investments; (vii) Write back of impairment loss of securities and other investments; and (viii) Impairment loss of securities and other investments. |
| Other income/outgo | General Business Revenue Account, Form G1 as specified in the Guidelines for ICSS. | Other income/outgo excludes: (i) any tax income/expense arising from recognition of deferred taxation; and (ii) any income/expense not arising from day-to-day business operations e.g: Day-1 adjustments due to the adoption of new accounting standards. |
Score Range:
| Mean-Adjusted Return Volatility Range of Results | Score (%) |
|---|---|
| 0 ≤ MARV ≤ 0.2 | 15 |
| 0.2 < MARV ≤ 0.5 | 10 |
| MARV > 0.5 | 0 |
| MARV is negative or the mean operating profit/(loss) over a period of three years is zero | 0 |
Appendix 7
OPERATIONAL AND SUSTAINABILITY MEASURE - LIFE INSURANCE BUSINESS New Business Growth Rate
Formula: New Business Growth Rate = [New business premiums (t) – New business premiums (t-1)] / New business premiums (t-1) x 100%
3-year weighted average New Business Growth Rate = [50% x growth rate (t)] + [30% x growth rate (t-1)] + [20% x growth rate (t-2)]
where, t = one year immediately preceding the current assessment year; t-1= two years immediately preceding the current assessment year; and t-2 = three years immediately preceding the current assessment year.
Note: (i) The new business premiums refer to both single and annual premiums for all types of businesses (ordinary life, annuity and investment-linked) as reported in the ‘Statement of New Policies’ as specified in the Guidelines for ICSS. (ii) The new business growth rate is based on a 3-year weighted average growth rate, i.e. weightages of 50% for one year immediately preceding the current assessment year, 30% for two years immediately preceding the current assessment year and 20% for three years immediately preceding the current assessment year. (iii) An insurance company which has less than four (4) years of data shall not be assigned a score for this indicator. The score of this indicator shall be determined on a proportionate basis as specified in paragraph 7.4 (Insufficient Quantitative Information).
| Data Requirement | Source of Information | Remarks |
|---|---|---|
| Single and annual/ regular premiums | Statement of New Policies, Form L6 as specified in the Guidelines for ICSS. | The annual premiums equivalent (“APE”) is adopted where it aggregates total new regular premiums with 10% new single premiums in the calculation. |
Score Range:
| New Business Growth Rate Range of Results | Score (%) |
|---|---|
| New Business Growth Rate > 10.00% | 15 |
| 5.00% < New Business Growth Rate ≤ 10.00% | 10 |
| 0.00% < New Business Growth Rate ≤ 5.00% | 5 |
| New Business Growth Rate ≤ 0.00% | 0 |
Appendix 8
OPERATIONAL AND SUSTAINABILITY MEASURE - LIFE INSURANCE BUSINESS Business Concentration Ratio
Formula: Business Concentration Ratio = New business regular premiums (t) / New business single premiums (t) x 100%
where, t = one year immediately preceding the current assessment year.
| Data Requirement | Source of Information | Remarks |
|---|---|---|
| New business regular premiums | “Annual Premiums” category in the Statement of New Policies, Form L6 as specified in the Guidelines for ICSS. | New business regular premiums refers to total annual premiums that include ordinary life, investment-linked and annuities. |
| New business single premiums | “Single Premiums” category in the Statement of New Policies, Form L6 as specified in the Guidelines for ICSS. | New business single premiums refers to total annual premiums that include ordinary life, investment-linked and annuities. |
Score Range:
| Business Concentration Ratio Range of Results | Score (%) |
|---|---|
| Business Concentration Ratio > 200.00% | 25 |
| 150.00% < Business Concentration Ratio ≤ 200.00% | 16 |
| 100.00% ≤ Business Concentration Ratio ≤ 150.00% | 8 |
| Business Concentration Ratio < 100.00% | 0 |
Appendix 9
OPERATIONAL AND SUSTAINABILITY MEASURE - LIFE INSURANCE BUSINESS Business Conservation Ratio
Formula: Business Conservation Ratio = Renewal premiums (t) / [Renewal premiums (t-1) + First year premiums (t-1)] x 100%
where, t = one year immediately preceding the current assessment year; and t-1= two years immediately preceding the current assessment year.
| Data Requirement | Source of Information | Remarks |
|---|---|---|
| Renewal premiums | Premiums Income/Consideration of Annuities Granted, Form L1-1 (Schedule 1) and Premiums/Net Creation of Units for Investment-Linked Business, Form L1-2 (Schedule 1) as specified in the Guidelines for ICSS. | Renewal premiums refer to premiums receivable subsequent to the first policy year, where the premiums payment term is two or more years. In calculating the renewal premiums, it includes the total gross direct premiums for renewal year’s premiums of all businesses and total investment-linked operating fund for renewal year premiums. |
| First year premiums | Premiums Income/Consideration of Annuities Granted, Form L1-1 (Schedule 1) and Premiums/Net Creation of Units for Investment-Linked Business, Form L1-2 (Schedule 1) as specified in the Guidelines for ICSS. | First year premiums refer to premiums receivable for the first policy year, where the premiums payment term is two or more years. In calculating the first year premiums, it includes the total gross direct premiums for first year’s premiums income of all businesses and total investment-linked operating fund for first year premiums. |
Score Range:
| Business Conservation Ratio Range of Results | Score (%) |
|---|---|
| Business Conservation Ratio > 90.00% | 25 |
| 85.00% < Business Conservation Ratio ≤ 90.00% | 16 |
| 80.00% ≤ Business Conservation Ratio ≤ 85.00% | 8 |
| Business Conservation Ratio < 80.00% | 0 |
Appendix 10
OPERATIONAL AND SUSTAINABILITY MEASURE - LIFE INSURANCE BUSINESS Asset Matching and Return
Asset Matching and Return (“AMR”) is based on a matrix approach, comprising two sub-indicators: (a) Asset-Liability Duration Matching (“ALDM”) and (b) Investment Yield (“IY”).
(a) Asset-Liability Duration Matching
Formula: ALDM = Asset Dollar Duration (“ADD”) / Liability Dollar Duration (“LDD”) x 100%
where, ADD = (A2 – A1) / [2 x (A0) x (Y/10000)] x A0 LDD = (L2 – L1) / [2 x (L0) x (Y/10000)] x L0
A0 = the value of assets under the base scenario; A1 = the value of assets when its interest rate/yield rises by Y basis points; A2 = the value of assets when its interest rate/yield falls by Y basis points; L0 = the value of liabilities under the base scenario; L1 = the value of liabilities when its interest rate/yield rises by Y basis points; L2 = the value of liabilities when its interest rate/yield falls by Y basis points; and Y/10000 = interest rate/yield changes (in 2 decimals). Note: For the calculation of ALDM, Y=100
| Data Requirement | Source of Information |
|---|---|
| Assets and liabilities valued at base interest rate/yield (A0 & L0) | RBC Framework – Reporting Form: Life Insurance Fund – (iii) Interest Rate Risks, Form C1-2 (aggregate base value⁷ for all life insurance funds⁸) |
| Assets and liabilities valued at base interest rate/yield + 100bps (A1 & L1) | Other supporting information |
| Assets and liabilities valued at base interest rate/yield - 100bps (A2 & L2) | Other supporting information |
⁷ As defined in BNM/RH/PD 032-12 Risk-Based Capital Framework for Insurers, Appendix II section 4. ⁸ Aggregated base value of assets and liabilities from Participating Ordinary Life Fund, Non-Participating Ordinary Life Fund, Participating Annuity Fund, Non-Participating Annuity Fund as well as Investment-Linked Operating Fund forms only.
Note: i. The assets component is computed based on all interest rate related assets as defined in BNM/RH/PD 032-12 Risk-Based Capital Framework for Insurers, Appendix II section 4 ii. The liabilities component is computed based on guaranteed insurance liabilities as defined in BNM/RH/PD 032-12 Risk-Based Capital Framework for Insurers, Appendix VII iii. The stress factor is ±100bps on the base scenario interest rate/yield. iv. The assets and liabilities refer to assets and liabilities of the ordinary life fund, annuity fund and investment-linked operating fund.
(b) Investment Yield
Formula: IY = 2 x [Net investment income (I) + Net capital gains or losses (C)] / [Total investment assets (t) + Total investment assets (t-1) – (I+C)] x 100%
where, t = one year immediately preceding the current assessment year; and t-1= two years immediately preceding the current assessment year.
| Data Requirement | Source of Information | Remarks |
|---|---|---|
| Net investment income | Life Business Revenue Account, Form L1-1 and Form L1-2, as specified in the Guidelines for ICSS. | Net investment income refers to the total net investment income of the ordinary life fund, annuity fund and investment-linked operating fund. |
| Net capital gains or losses | Life Business Revenue Account, Form L1-1 and Form L1-2, as specified in the Guidelines for ICSS. | Net capital gains or losses* include: (i) Profit on disposal of securities and properties; (ii) Loss on disposal of securities and properties; (iii) Accretion of discounts on securities; (iv) Amortisation of premiums on securities; (v) Unrealised gain on securities and other investments; (vi) Unrealised loss on securities and other investments; (vii) Write back of impairment loss of securities and other investments; (viii) Impairment loss of securities and other investments; and (ix) Changes in gross Available-For-Sale (“AFS”)/Fair Value through Other Comprehensive Income (“FVOCI”) reserves**. |
- Net capital gains or losses refer to the total net capital gains or losses of the ordinary life fund, annuity fund and investment-linked operating fund. ** *Changes in gross AFS/FVOCI reserves is the difference between AFS/FVOCI reserves, gross of tax as at 31 December of two years immediately preceding the current assessment year and the AFS/FVOCI reserves, gross of tax, as at 31 December of one year immediately preceding the current assessment year.
| Data Requirement | Source of Information | Remarks |
|---|---|---|
| Total investment assets | Life Fund Balance Sheet, Form L3-2 and Form L3-3, as specified in the Guidelines for ICSS. | Total investment assets refer to the total investment assets of the ordinary life fund, annuity fund and investment-linked operating fund. Total investment assets include: (i) Investment properties; (ii) Loans; (iii) Investments; (iv) Foreign assets; and (v) Cash and deposits. |
Asset Matching and Return Matrix
| IY Measure | ALDM Measure | ||
|---|---|---|---|
| 100.00% ≤ ALDM < 200.00% | 80.00% ≤ ALDM < 100.00% OR 200.00% ≤ ALDM < 300.00% | ALDM < 80.00% OR ALDM ≥ 300.00% | |
| IY ≥ BIR | Score 1 | Score 2 | Score 4 |
| IY < BIR | Score 2 | Score 3 | Score 4 |
Note: (i) The Bond Index Return (“BIR”) is based on the Malaysian Government Securities (“MGS”) 3-7 year index. The BIR comprises investment income and capital gains/losses over a period. It represents the change between the index value as at the last trading date of December for the two (2) years immediately preceding the current assessment year and the index value as at the last trading date of December for one (1) year immediately preceding the current assessment year, as published by Bond Pricing Agency Malaysia Sdn Bhd.
Each of the four (4) categories within the matrix is then assigned a quantitative score as set out below.
Score Range:
| AMR Category | Score (%) |
|---|---|
| Score 1 | 20 |
| Score 2 | 14 |
| Score 3 | 7 |
| Score 4 | 0 |
Appendix 11
OPERATIONAL AND SUSTAINABILITY MEASURE - LIFE INSURANCE BUSINESS Expense Ratio
Formula: Expense Ratio = (Management expenses + Agency remuneration) / Net premium income x 100%
| Data Requirement | Source of Information | Remarks |
|---|---|---|
| Management expenses | Life Business Revenue Account, Form L1, as specified in the Guidelines for ICSS. | Management expense is defined as all expenses relating to insurance and investment-linked business, other than claims and agency remuneration, from all businesses, i.e. ordinary life, investment-linked, and annuity. |
| Agency remuneration | Life Business Revenue Account, Form L1, as specified in the Guidelines for ICSS. | Agency remuneration is defined as total commission paid to agents, agency leaders or other intermediaries (such as banks) in respect of single premiums, premiums relating to the first policy year and renewal policy years of the insurance contracts, net of reinsurance commission and agency-related expenses*. For investment-linked business, agency remuneration refers to remuneration or reward for bringing in business. In calculating the agency remuneration, it should include all the agency remuneration for all businesses, i.e. ordinary life, investment-linked, and annuity. *Agency-related expenses include material incentives, fringe benefits, break-away benefits and office maintenance expenses paid/payable to agents or agency leaders. |
| Net premium income | Life Business Revenue Account, Form L1, as specified in the Guidelines for ICSS. | Net premium income is defined as total net premium income from all businesses, i.e. ordinary life, investment-linked, and annuity. |
Score Range:
| Expense Ratio Range of Results | Score (%) |
|---|---|
| Expense Ratio < 20.00% | 15 |
| 20.00% ≤ Expense Ratio < 30.00% | 10 |
| 30.00% ≤ Expense Ratio < 40.00% | 5 |
| Expense Ratio ≥ 40.00% | 0 |
ILLUSTRATION 1: COMPUTATION OF FREE CAPITAL INDEX
Insurance Company A
| Four (4) Quarters Within the Preceding Assessment Year | ||||
|---|---|---|---|---|
| 31 March | 30 June | 30 September | 31 December | |
| Capital Adequacy Ratio | 200.00% | 210.00% | 190.00% | 220.00% |
Individual Target Capital Level: 200.00%
Free Capital Index = Capital adequacy ratio (%) * / Individual target capital level (%) = (200.00% + 210.00% + 190.00% + 220.00%) / 4 / 200.00% = 205.00% / 200.00% = 1.03
- Average CAR of four (4) quarters within the preceding assessment year.
As a result, Insurance Company A will be placed at the free capital index range of 1.00 to 1.10.
ILLUSTRATION 2: COMPUTATION OF GROSS PREMIUM GROWTH RATE
Insurance Company B Gross premiums for 2019(RM’ 000): 620,000 Gross premiums for 2018 (RM’ 000): 560,000 Gross premiums for 2017 (RM’ 000): 520,000 Gross premiums for 2016 (RM’ 000): 480,000
Gross Premium Growth Rate = [Gross premiums (t) – Gross premiums (t-1)] / Gross premiums (t-1) x 100%
One year immediately preceding the current assessment year (t) Gross Premium Growth Rate = (RM620 million – RM560 million) / RM560 million x 100% = RM60 million / RM560 million x 100% = 10.71%
Two years immediately preceding the current assessment year (t-1) Gross Premium Growth Rate = (RM560 million – RM520 million) / RM520 million x 100% = RM40 million / RM520 million x 100% = 7.69%
Three years immediately preceding the current assessment year (t-2) Gross Premium Growth Rate = (RM520 million – RM480 million) / RM480 million x 100% = RM40 million / RM480 million x 100% = 8.33%
3-Year Weighted Average Gross Premium Growth Rate = [50% x growth rate (t)] + [30% x growth rate (t-1)] + [20% x growth rate (t-2)] = [50% x 10.71%] + [30% x 7.69%] + [20% x 8.33%] = 9.33%
As a result, Insurance Company B will get a score of 14% under the gross premium growth rate indicator.
ILLUSTRATION 3: COMPUTATION OF BUSINESS DIVERSIFICATION RATIO
Insurance Company C
| As at 31 December of the Preceding Assessment Year | RM’000 |
|---|---|
| Provision of risk margin for adverse deviation | 120,000 |
| Fund provision of risk margin for adverse deviation | 100,000 |
Business Diversification Ratio = (Provision of risk margin for adverse deviation - Fund provision of risk margin for adverse deviation) / Provision of risk margin for adverse deviation x 100% = (RM120 million - RM100 million) / RM120 million x 100% = 16.67%
As a result, Insurance Company C will get a score of 8% under the business diversification ratio indicator.
ILLUSTRATION 4: COMPUTATION OF RECEIVABLE RATIO
Insurance Company D
| As at 31 December of the Preceding Assessment Year | RM’000 |
|---|---|
| Gross premiums | 180,000 |
| Insurance receivable | |
| Total outstanding premiums and agent's balances * | 15,000 |
| Total amount due from reinsurers/ceding companies ** | 15,000 |
| Total insurance receivable | 30,000 |
- Only includes outstanding balances more than 60 days. ** Only includes amount due more than 90 days.
Receivable Ratio = Insurance receivables / Gross premiums x 100% = RM30 million / RM180 million x 100% = 16.67%
As a result, Insurance Company D will get a score of 5% under the receivable ratio indicator.
ILLUSTRATION 5: COMPUTATION OF COMBINED RATIO
Insurance Company E
| As at 31 December of the Preceding Assessment Year | RM’000 |
|---|---|
| Earned premium income | 95,000 |
| Net claims incurred | 50,000 |
| Management expenses | 25,000 |
| Net commission | 15,000 |
Combined Ratio = (Net claims incurred + Management expenses + Net commission) / Earned premium income x 100% = (RM50 million + RM25 million + RM15 million) / RM95 million x 100% = 94.74%
As a result, Insurance Company E will get a score of 16% under the combined ratio indicator.
ILLUSTRATION 6: COMPUTATION OF MEAN-ADJUSTED RETURN VOLATILITY
Formula: Semi-standard deviation of operating profit/(loss) over three (3) years* / Mean operating profit/(loss) over three (3) years
- Semi-standard Deviation = √[1 / (n – 1) x Σ(ri - Mean)²], only when ri < Mean
where, ri = operating profit; Mean = the average operating profit over three (3) years; t = one year immediately preceding the current assessment year; t-1= two years immediately preceding the current assessment year; t-2 = three years immediately preceding the current assessment year; and n = number of observations. i.e. 3.
Illustration 6.1:
Insurance Company F Operating Profit for 2017 (RM’ 000) : 240,000 (rt-2) Operating Profit for 2018 (RM’ 000) : 150,000 (rt-1) Operating Profit for 2019 (RM’ 000) : 180,000 (rt)
Mean = (RM240 million + RM150 million + RM180 million) / 3 = RM190 million
Given the operating profit for 2014 (rt-1) and 2015 (rt) were less than the mean of RM190 million, the semi-standard deviation will be computed as follows:
Semi-standard deviation = √[(0)²+(150-190)²+(180-190)²] / (3-1) = √[1,700 / 2] = 29.15
Mean-Adjusted Return Volatility = Semi-standard deviation of operating profit / Mean operating profit = 29.15 / 190 = 0.15
In this case, Insurance Company F scores 15% for this indicator.
Illustration 6.2:
Insurance Company G Operating Loss for 2017 (RM’ 000) : (60,000) (rt-2) Operating Profit for 2018 (RM’ 000) : 100,000 (rt-1) Operating Profit for 2019 (RM’ 000) : 150,000 (rt)
Mean = (RM(60 million) + RM100 million + RM150 million) / 3 = RM63.33 million
Given the operating loss for 2017 (rt-2) was less than the mean of RM63.33 million, the semi-standard deviation will be computed as follows:
Semi-standard deviation = √[(-60-63.33)²+(0)²+(0)²] / (3-1) = √[15,210.29 / 2] = 87.21
Mean-Adjusted Return Volatility = Semi-standard deviation of operating profit / Mean operating profit = 87.21 / 63.33 = 1.38
In this case, Insurance Company G scores 0% for this indicator.
ILLUSTRATION 7: COMPUTATION OF NEW BUSINESS GROWTH RATE
Insurance Company H
| New Business Premiums | |||
|---|---|---|---|
| Year | Single Premiums (“SP”) | Annual Premiums (“AP”) | Annual Premium Equivalent (“APE”) [(SP x 10%) +AP] |
| (RM’ 000) | |||
| 2015 | 20,000 | 130,000 | 132,000 |
| 2014 | 20,000 | 125,000 | 127,000 |
| 2013 | 10,000 | 120,000 | 121,000 |
| 2012 | 10,000 | 100,000 | 101,000 |
New Business Growth Rate = [New business premiums (t) – New business premiums (t-1)] / New business premiums (t-1) x 100%
One year immediately preceding the current assessment year (t) New Business Growth Rate = (RM132 million – RM127 million) / RM127 million x 100% = RM5 million / RM127 million x 100% = 3.94%
Two years immediately preceding the current assessment year (t-1) New Business Growth Rate = (RM127 million – RM121 million) / RM121 million x 100% = RM6 million / RM121 million x 100% = 4.96%
Three years immediately preceding the current assessment year (t-2) New Business Growth Rate = (RM121 million – RM101 million) / RM101 million x 100% = RM20 million / RM101 million x 100% = 19.80%
3-Year Weighted Average New Business Growth Rate = [50% x growth rate (t)] + [30% x growth rate (t-1)] + [20% x growth rate (t-2)] = [50% x 3.94%] + [30% x 4.96%] + [20% x 19.80%] = 7.42%
As a result, Insurance Company H will get a score of 10% under the new business premium growth rate indicator.
ILLUSTRATION 8: COMPUTATION OF BUSINESS CONCENTRATION RATIO
Insurance Company I
| As at 31 December of the Preceding Assessment Year | RM’000 |
|---|---|
| Annual premiums – New policies | 300,000 |
| Single premiums – New policies | 180,000 |
Business Concentration Ratio = New business regular premiums (t) / New business single premiums (t) x 100% = RM300 million / RM180 million x 100% = 166.67%
where, t = one year immediately preceding the current assessment year.
As a result, Insurance Company I will get a score of 16% under the business concentration ratio indicator.
ILLUSTRATION 9: COMPUTATION OF BUSINESS CONSERVATION RATIO
Insurance Company J
| Type of Premiums | 2018 (t-1) | 2019 (t) |
|---|---|---|
| RM’ 000 | ||
| First year premiums : | ||
| Ordinary life | 15,000 | |
| Annuity | 10,000 | |
| Investment-linked operating fund | 15,000 | |
| Total | 40,000 | |
| Renewal premiums: | ||
| Ordinary life | 70,000 | 73,000 |
| Annuity | 30,000 | 32,000 |
| Investment-linked operating fund | 90,000 | 95,000 |
| Total | 190,000 | 200,000 |
Business Conservation Ratio = Renewal premiums (t) / [Renewal premiums (t-1) + First year premiums (t-1)] x 100% = RM200 million / (RM190 million + RM40 million) x 100% = 86.96%
where, t = one year immediately preceding the current assessment year; and t-1 = two years immediately preceding the current assessment year.
As a result, Insurance Company J will get a score of 16% under the business conservation ratio indicator.
ILLUSTRATION 10: COMPUTATION OF ASSET MATCHING AND RETURN
Insurance Company K
(a) ALDM
ALDM = Asset Dollar Duration (ADD) / Liability Dollar Duration (LDD) x 100%
where, ADD = (A2 – A1) / [2 x (A0) x (Y/10000)] x A0 LDD = (L2 – L1) / [2 x (L0) x (Y/10000)] x L0
| Risk-Based Capital Framework Reporting Form C1-2, Market Risk Capital Charges (Interest Rate Risk): As at 31 December 2019 | Asset (A0) RM’000 | Liability (L0) RM’000 |
|---|---|---|
| Participating Fund | 8,200 | 5,600 |
| Non-Participating Fund | 1,200 | 1,300 |
| Annuity Participating Fund | 0 | 0 |
| Annuity Non-Participating Fund | 0 | 0 |
| Investment-Linked Operating Fund | 1,300 | 500 |
| Base value | 10,700 | 7,400 |
| Asset and Liability Values when Interest Rate/Yield Increase by 100 Basis Points: As at 31 December 2019 | Asset (A1) RM’000 | Liability (L1) RM’000 |
|---|---|---|
| Participating Fund | 7,600 | 5,100 |
| Non-Participating Fund | 900 | 1,100 |
| Annuity Participating Fund | 0 | 0 |
| Annuity Non-Participating Fund | 0 | 0 |
| Investment-Linked Operating Fund | 800 | 350 |
| Value when interest rate/yield increase by 100 basis points | 9,300 | 6,550 |
| Asset and Liability Values when Interest Rate/Yield Decrease by 100 Basis Points: As at 31 December 2019 | Asset (A2) RM’000 | Liability (L2) RM’000 |
|---|---|---|
| Participating Fund | 8,600 | 6,500 |
| Non-Participating Fund | 1,400 | 1,700 |
| Annuity Participating Fund | 0 | 0 |
| Annuity Non-Participating Fund | 0 | 0 |
| Investment-Linked Operating Fund | 1,500 | 650 |
| Value when interest rate/yield decrease by 100 basis points | 11,500 | 8,850 |
ADD = (RM11.5 million – RM9.3 million) / [2 x (RM10.7 million) x (100/10000)] x RM10.7 million = RM110 million LDD = (RM8.85 million – RM6.55 million) / [2 x (RM7.4 million) x (100/10000)] x RM7.4 million = RM115 million
ALDM = 95.65%
(b) Investment Yield
| Balance Sheet | 2018 (t-1) RM’000 | 2019 (t) RM’000 |
|---|---|---|
| Total investment assets | 600,000 | 700,000 |
where, t = one year immediately preceding the current assessment year; and t-1 = two years immediately preceding the current assessment year.
| Revenue Account: For the year ended 31 December 2019 | RM’000 | RM’000 |
|---|---|---|
| Net capital gains/loss: | ||
| Profit on disposal of securities and properties | 13,000 | |
| Loss on disposal of securities and properties | -1,000 | |
| Net | 12,000 | |
| Accretion of discounts on securities | 0 | |
| Amortisation of premiums on securities | -1,000 | |
| Net | -1,000 | |
| Unrealised gain on securities and other investments | 1,000 | |
| Unrealised loss on securities and other investments | -1,000 | |
| Net | 0 | |
| Writeback of impairment loss of securities and other investments | 1,000 | |
| Impairment loss of securities and other investments | -6,000 | |
| Net | -5,000 | |
| Gross AFS/FVOCI reserves - Two years immediately preceding the current assessment year | 2,000 | |
| Gross AFS/FVOCI reserves – One year immediately preceding the current assessment year | -1,000 | |
| Net | 1,000 | |
| Total net capital gains | 7,000 | |
| Net investment income | 23,000 |
Investment Yield = 2 x [Net investment income (I) + Net capital gains or losses (C)] / [Total investment assets (t) + Total investment assets (t-1) – (I + C)] x 100% = 2 x (RM23 million + RM7 million) / (RM700 million + RM600 million – (RM23 million + RM7 million)) x 100% = 4.72%
| Bond Index Return as at | 2018 (t-1) | 2019 (t) |
|---|---|---|
| Last trading date of December | 147.551 | 154.273 |
BIR 2017 = (154.273 – 147.551) / 147.551 x 100 = 4.56%
With score of 95.65% for ALDM and 4.72% for IY, Insurance Company K’s AMR indicator is placed at Score 2. As a result, Insurance Company K will get a score of 14%.
| 100.00% ≤ ALDM < 200.00% | 80.00% ≤ ALDM < 100.00% OR 200.00% ≤ ALDM < 300.00% | ALDM < 80.00% OR ALDM ≥ 300.00% | |
|---|---|---|---|
| IY ≥ 4.56% | Score 1 | Score 2 | Score 4 |
| IY < 4.56% | Score 2 | Score 3 | Score 4 |
| Score Range | Score (%) |
|---|---|
| Score 1 | 20 |
| Score 2 | 14 |
| Score 3 | 7 |
| Score 4 | 0 |
ILLUSTRATION 11: COMPUTATION OF EXPENSE RATIO
Insurance Company L
| As at 31 December of the Preceding Assessment Year | RM’000 |
|---|---|
| Management Expenses | 38,000 |
| Agency Remuneration | 53,000 |
| Net Premium Income | 480,000 |
Expense Ratio = (Management expenses + Agency remuneration) / Net premium income x 100% = (RM38 million + RM53 million) / RM480 million x 100% = 18.96%
As a result, Insurance Company L will get a score of 15% under the expense ratio indicator.
ILLUSTRATION 12: DLS SCORING AND LEVY CATEGORISATION
Calculation of total DLS score for a life insurance company
| Criteria & Indicators | Maximum Score | Insurance company Score |
|---|---|---|
| Quantitative | ||
| 1. Capital | ||
| FCI | NA | 1.30 |
| 2. Operational & Sustainability | ||
| (i) New Business Growth Ratio | 15% | 10% |
| (ii) Business Concentration Ratio | 25% | 16% |
| (iii) Business Conservation Ratio | 25% | 25% |
| (iv) Asset Matching and Return | 20% | 14% |
| (v) Expense Ratio | 15% | 10% |
| Total Operational & Sustainability Score | 100% | 75% |
| Total Quantitative Criteria Score (placed at M2 in Table 3: Quantitative Criteria Matrix) | 60% | 55% |
| Qualitative | ||
| 1. Supervisory Rating | 35% | 10% |
| 2. Other Information | 5% | 5% |
| Total Qualitative Score | 40% | 15% |
| Total DLS Score | 100% | 70% |
Based on the table above, the insurance company will be categorised in Category 2.
ILLUSTRATION 13: DLS SCORING AND LEVY CATEGORISATION FOR AN INSURANCE COMPANY WITH INSUFFICIENT QUANTITATIVE INFORMATION
Calculation of total DLS Score for an insurance company carrying on general insurance business with insufficient quantitative information
| Criteria & Indicators | Maximum Score | Insurance Company Score |
|---|---|---|
| Quantitative | ||
| 1. Capital | ||
| FCI | N/A | 1.21 |
| 2. Operational & Sustainability | ||
| (i) Gross Premium Growth Rate | 20% | 14% |
| (ii) Business Diversification Ratio | 25% | NI* |
| (iii) Receivable Ratio | 15% | NI* |
| (iv) Combined Ratio | 25% | 16% |
| (v) Mean-Adjusted Return Volatility | 15% | 10% |
| Total Operational & Sustainability Score | 100% | 67% |
| Total Quantitative Criteria Score (placed at M2 in Table 3: Quantitative Criteria Matrix) | 60% | 55% |
| Qualitative | ||
| 1. Supervisory Rating | 35% | 10% |
| 2. Other Information | 5% | 5% |
| Total Qualitative Score | 40% | 15% |
| Total DLS Score | 100% | 70% |
Note:
- NI denotes insufficient quantitative information.
Referring to paragraph 7.4 (Insufficient Quantitative Information), depicted below is the proportionate quantitative score for indicators with insufficient quantitative information (item ii and iii):
[40% / (100% - 40%)] x 40% = 27%
The table below shows the total operational and sustainability score for the insurance company:
| Description | Insurance Company Score |
|---|---|
| Quantitative score for indicators with sufficient score | 40% |
| Add: Proportionate quantitative score for indicators with insufficient quantitative information | 27% |
| Total Operational & Sustainability Score | 67% |
Based on the total DLS score, the insurance company will be categorised in Category 2.
# GUIDELINES ON DIFFERENTIAL LEVY SYSTEMS FRAMEWORK FOR INSURANCE COMPANIES **ISSUE DATE : 30 MARCH 2020** --- **Ref No:** TIPS/GL12-A4/2020(DLS) **Issued on:** 30 March 2020 **TITLE:** Guidelines on Differential Levy Systems Framework for Insurance Companies --- ## TABLE OF CONTENTS PART 1: INTRODUCTION ........................................................................................................1 BACKGROUND ..................................................................................................................1 PART 2: SCOPE OF APPLICATION............................................................................................4 PART 3: DIFFERENTIAL LEVY SYSTEMS FRAMEWORK .............................................................5 OVERVIEW .......................................................................................................................5 QUANTITATIVE CRITERIA .................................................................................................6 QUALITATIVE CRITERIA....................................................................................................7 PART 4: QUANTITATIVE CRITERIA ..........................................................................................8 CAPITAL MEASURE...........................................................................................................8 OPERATIONAL AND SUSTAINABILITY MEASURE - GENERAL INSURANCE BUSINESS ..................................................................................8 OPERATIONAL AND SUSTAINABILITY MEASURE - LIFE INSURANCE BUSINESS ...............9 PART 5: QUALITATIVE CRITERIA ............................................................................................11 SUPERVISORY RATING ...................................................................................................11 OTHER INFORMATION...................................................................................................11 PART 6: LEVY CATEGORY AND LEVY RATE .............................................................................13 LEVY CATEGORY.............................................................................................................13 LEVY RATE .....................................................................................................................13 PART 7: REPORTING, SUBMISSION AND APPEAL ..................................................................14 REPORTING REFERENCE DATE ........................................................................................14 INSUFFICIENT QUANTITATIVE INFORMATION ...............................................................14 SUBMISSION DATE..........................................................................................................15 FILING RESUBMISSION....................................................................................................15 INFORMATION INTEGRITY ..............................................................................................16 COMPUTATION AND NOTIFICATION OF SCORE..............................................................16 APPEAL PROCESS.............................................................................................................17 PROHIBITION AGAINST PUBLIC DISCLOSURE .................................................................17 PART 8: REPORTING MANUAL AND FORMS..........................................................................19 GENERAL REQUIREMENT................................................................................................19 PART 9: NEW INSURANCE COMPANY AND AMALGAMATED INSURER MEMBER ................. 20 NEW INSURANCE COMPANY..........................................................................................20 AMALGAMATED INSURER MEMBER................................................................................ 20 ### LIST OF TABLES TABLE 1: SCOPE OF APPLICATION ..........................................................................................4 TABLE 2: SUMMARY OF OPERATIONAL AND SUSTAINABILITY MEASURE ...............................6 TABLE 3: QUANTITATIVE CRITERIA MATRIX............................................................................7 TABLE 4: QUANTITATIVE CRITERIA SCORE..............................................................................7 TABLE 5: SCORE RANGE FOR SUPERVISORY RATING ............................................................11 TABLE 6: SCORE RANGE FOR OTHER INFORMATION ............................................................12 TABLE 7: OVERALL DLS SCORE RANGE AND LEVY CATEGORIES..............................................13 ### LIST OF APPENDICES APPENDIX 1: CAPITAL MEASURE: FREE CAPITAL INDEX ............................................................23 APPENDIX 2: OPERATIONAL AND SUSTAINABILITY MEASURE FOR GENERAL INSURANCE BUSINESS: GROSS PREMIUM GROWTH RATE ......................................................24 APPENDIX 3: OPERATIONAL AND SUSTAINABILITY MEASURE FOR GENERAL INSURANCE BUSINESS: BUSINESS DIVERSIFICATION RATIO ....................................................25 APPENDIX 4: OPERATIONAL AND SUSTAINABILITY MEASURE FOR GENERAL INSURANCE BUSINESS: RECEIVABLE RATIO............................................................................26 APPENDIX 5: OPERATIONAL AND SUSTAINABILITY MEASURE FOR GENERAL INSURANCE BUSINESS: COMBINED RATIO.............................................................................27 APPENDIX 6: OPERATIONAL AND SUSTAINABILITY MEASURE FOR GENERAL INSURANCE BUSINESS: MEAN-ADJUSTED RETURN VOLATILITY...............................................28 APPENDIX 7: OPERATIONAL AND SUSTAINABILITY MEASURE FOR LIFE INSURANCE BUSINESS: NEW BUSINESS GROWTH RATE...........................................................................30 APPENDIX 8: OPERATIONAL AND SUSTAINABILITY MEASURE FOR LIFE INSURANCE BUSINESS: BUSINESS CONCENTRATION RATIO .....................................................................31 APPENDIX 9: OPERATIONAL AND SUSTAINABILITY MEASURE FOR LIFE INSURANCE BUSINESS: BUSINESS CONSERVATION RATIO .......................................................................32 APPENDIX 10: OPERATIONAL AND SUSTAINABILITY MEASURE FOR LIFE INSURANCE BUSINESS: ASSET MATCHING AND RETURN .........................................................................33 APPENDIX 11: OPERATIONAL AND SUSTAINABILITY MEASURE FOR LIFE INSURANCE BUSINESS: EXPENSE RATIO .................................................................................................37 ### LIST OF ILLUSTRATIONS ILLUSTRATION 1: COMPUTATION OF FREE CAPITAL INDEX...................................................39 ILLUSTRATION 2: COMPUTATION OF GROSS PREMIUM GROWTH RATE ...............................40 ILLUSTRATION 3: COMPUTATION OF BUSINESS DIVERSIFICATION RATIO..............................41 ILLUSTRATION 4: COMPUTATION OF RECEIVABLE RATIO.....................................................42 ILLUSTRATION 5: COMPUTATION OF COMBINED RATIO......................................................43 ILLUSTRATION 6: COMPUTATION OF MEAN-ADJUSTED RETURN VOLATILITY........................44 ILLUSTRATION 7: COMPUTATION OF NEW BUSINESS GROWTH RATE...................................46 ILLUSTRATION 8: COMPUTATION OF BUSINESS CONCENTRATION RATIO .............................48 ILLUSTRATION 9: COMPUTATION OF BUSINESS CONSERVATION RATIO................................49 ILLUSTRATION 10: COMPUTATION OF ASSET MATCHING AND RETURN .................................50 ILLUSTRATION 11: COMPUTATION OF EXPENSE RATIO..........................................................53 ILLUSTRATION 12: DLS SCORING AND LEVY CATEGORISATION ..........................................54 ILLUSTRATION 13: DLS SCORING AND LEVY CATEGORISATION FOR AN INSURANCE COMPANY WITH INSUFFICIENT QUANTITATIVE INFORMATION. .................................55 ### LIST OF DIAGRAM DIAGRAM 1: THE DLS FRAMEWORK ........................................................................................5 --- ## PART 1: INTRODUCTION ### BACKGROUND 1.1 Pursuant to Malaysia Deposit Insurance Corporation (Differential Premium Systems in respect of Insurer Members) Regulations 2012 (“Regulations”),¹ Perbadanan Insurans Deposit Malaysia (“PIDM”) implemented the Differential Levy Systems (“DLS”) framework for insurance companies. The DLS framework was implemented in line with PIDM’s mandate to administer the takaful and insurance benefits protection system. 1.2 The objectives of implementing the DLS framework are as follows: (a) to differentiate insurance companies according to their risk profiles; (b) to introduce fairness into the levy system process where insurance companies assessed to be of higher risk will pay higher levies as opposed to insurance companies assessed to be of lower risk; (c) to provide incentives for insurance companies to adopt sound risk management practices; and (d) to promote stability of the financial system via the overall improvement in risk management practices of insurance companies. 1.3 In exercise of the power conferred by paragraph 209(1)(b) of the PIDM Act, PIDM issued the Guidelines on the Differential Levy Systems Framewok for Insurance Companies (“Guidelines”). These Guidelines set out the assessment approach under the DLS framework, including the formula, threshold and score range for each of the indicators under the quantitative criteria and qualitative criteria. The requirements for reporting and submission of quantitative information by insurance companies to PIDM are also elaborated in the Guidelines. ¹ The Regulations were amended in 2016 pursuant to the Malaysia Deposit Insurance Corporation (Differential Premium Systems in respect of Insurer Members)(Amendment) Regulations 2016, and in 2019 pursuant to Malaysia Deposit Insurance Corporation (Differential Premium Systems in respect of Insurer Members) (Amendment) Regulations 2019. 1.4 PIDM continuously reviews the DLS framework to reflect changes in the regulatory developments and operating environment. PIDM also enhances the DLS framework to address feedback and comments during its implementation. 1.5 The current enhancement to the DLS framework are as follows: | Insurance Business Type | Enhancement | | :--- | :--- | | Life Insurance | Introduce new indicator – Asset Matching and Return. | | General Insurance | Refinement to existing indicator – Mean-Adjusted Return Volatility excludes changes in gross Available-For-Sale (“AFS”) reserve and provides clarification on “other income/outgo” component. | 1.6 In view of the enhancements, the Guidelines are updated accordingly. 1.7 These Guidelines are effective beginning assessment year 2020 and shall supersede the Guidelines on the Differential Levy System Framework for Insurance Companies issued on 31 January 2020. 1.8 For purposes of these Guidelines, “Guidelines for Insurance Companies Statistical Submission” or “Guidelines for ICSS” means the Guidance Notes for Insurance Companies Statistical System on Submission of Monthly/Quarterly/Annual Statistical Returns as may be issued by Bank Negara Malaysia (“BNM”). 1.9 Unless expressly stated otherwise, any information or document required to be submitted to PIDM under these Guidelines, including any letter, report, form, returns and action plan, shall be submitted online through PIDM’s portal. The original hardcopy shall be kept by the insurer member. 1.10 A reference to a statute or other law includes regulations and other instruments under it and consolidations, amendments, re-enactments or replacements of any of them. 1.11 PIDM may specify such other periods or dates for compliance with any of the provisions in these Guidelines, or for any act to be done, in such form and subject to such terms and conditions as PIDM thinks fit. 1.12 Enquiries relating to these Guidelines may be directed to: Risk Assessment & Resolution Division General Lines: 03-2173 7436 / 03-2265 6565 Fax: 03-21737494 Email: [email protected] --- ## PART 2: SCOPE OF APPLICATION 2.1 The DLS Framework is applicable to all insurance companies that are licensed to carry on insurance business under Section 10 of the Financial Services Act 2013, except for insurers licensed to carry on solely reinsurance business and Danajamin Nasional Berhad. Table 1 depicts the application of the DLS framework in respect of an insurance company’s business. **Table 1: Scope of Application** | Insurance Business Type | General Insurance DLS Criteria | Life Insurance DLS Criteria | | :--- | :---: | :---: | | General Insurance | | | | Life Insurance | | | --- ## PART 3: DIFFERENTIAL LEVY SYSTEMS FRAMEWORK ### OVERVIEW 3.1 An insurance company shall be assessed and classified into different categories in an assessment year based on a combined quantitative and qualitative criteria approach. 3.2 In order to achieve higher objectivity and transparency, a heavier weightage is assigned to the quantitative criteria which carries a score of 60%, while the qualitative criteria carries the remaining score of 40% out of a total score of 100%. 3.3 The DLS Framework is summarised in Diagram 1. --- ## PART 4: QUANTITATIVE CRITERIA 3.4 The assessment of the quantitative criteria is based on a ‘matrix approach’, which enables the risk profile of the insurance companies to be better differentiated based on two (2) independent components of assessment. 3.5 The horizontal axis of the matrix approach measures the capital strength, i.e. Free Capital Index. Capital strength is important as it provides a cushion against any unexpected adverse events in the insurance companies’ earnings and assets quality. 3.6 On the other side, the vertical axis of the matrix approach reflects the operational and sustainability measure, which aims to assess the efficiency of the insurance companies’ operational management and sustainability of the financial performance. This measure is made up of different sets of indicators which are assigned specific weightages. The indicators and their respective weightages for both general and life insurance businesses are set out in Table 2 below. **Table 2: Summary of Operational and Sustainability Measure** | General Insurance Business | | Life Insurance Business | | | :--- | :---: | :--- | :---: | | **Indicators** | **Weightage** | **Indicators** | **Weightage** | | Gross premium growth rate | 20% | New business growth rate | 15% | | Business diversification ratio | 25% | Business concentration ratio | 25% | | Receivable ratio | 15% | Business conservation ratio | 25% | | Combined ratio | 25% | Asset matching and return | 20% | | Mean-adjusted return volatility | 15% | Expense ratio | 15% | | **Total** | **100%** | **Total** | **100%** | 3.7 The combined score of the capital measure and the operational and sustainability measure, will determine the position of an insurance company in the quantitative criteria matrix, as represented by the symbols M1 to M7 as set out in Table 3 in the following page. **Table 3: Quantitative Criteria Matrix** | Operational and Sustainability Measure | Capital Measure | | | | | :--- | :---: | :---: | :---: | :---: | | | **< 1.00** | **1.00 ≤ but ≤1.10** | **1.10< but ≤1.20** | **>1.20** | | **≥ 85** | M6 | M4 | M2 | M1 | | **≥ 65 but < 85** | M6 | M4 | M3 | M2 | | **≥ 50 but < 65** | M7 | M5 | M4 | M3 | | **< 50** | M7 | M7 | M5 | M4 | 3.8 Each of the seven (7) categories within the matrix is then assigned a quantitative score as set out in Table 4 below. The score reflects the overall quantitative performance of the insurance company. **Table 4: Quantitative Criteria Score** | Quantitative Criteria Matrix Category | Score (%) | | :--- | :---: | | M1 | 60 | | M2 | 55 | | M3 | 45 | | M4 | 40 | | M5 | 30 | | M6 | 25 | | M7 | 15 | ### QUALITATIVE CRITERIA 3.9 The qualitative criteria include both the supervisory rating of insurance companies assigned by BNM, and any other information that will have implication on the safety and soundness of the insurance companies. The ‘Supervisory Rating’ carries a maximum score of 35%, while the remaining score of 5% is assigned to ‘Other Information’. --- ## PART 4: QUANTITATIVE CRITERIA ### 4.1 Capital Measure **Free Capital Index** Free capital index is a measure of the capital buffer above the individual target capital level (“ITCL”). This index reflects the insurance company’s capital sufficiency and its resilience to adverse situations. ### 4.2 Operational and Sustainability Measure – General Insurance Business (a) **Gross Premium Growth Rate** The gross premium growth rate measures the insurance company’s total business growth. The growth in premiums provides a constant stream of income to support the insurance company’s business operations and enhances its market share. (b) **Business Diversification Ratio** The business diversification ratio measures the extent of the insurance company’s portfolio diversification. A well-diversified portfolio helps the insurance company to avoid being significantly affected by any adverse experience in its line of business. (c) **Receivable Ratio** The receivable ratio measures the extent of insurance receivables against the total premiums income. This ratio indicates the operational efficiency of the insurance company based on its ability to manage its receivables collection i.e. collect its outstanding premiums, agents balances and reinsurance balances. (d) **Combined Ratio** The combined ratio measures the performance and profitability of the insurance company’s core business activities. An insurance company needs to ensure that the inflow of insurance premium exceeds the outgo including expenses, as this is an indication of a profitable insurance business. (e) **Mean-Adjusted Return Volatility** Mean-adjusted return volatility (“MARV”) measures the downside risk of profitability. It gauges the downside volatility of the profits over a 3-year period and hence provides an indication on the profits’ sustainability. Volatile earnings trend will render the insurance company’s capital position more vulnerable in the event of losses, as capital may be eroded if the earnings are inadequate to absorb the losses. ### 4.3 Operational and Sustainability Measure - Life Insurance Business (a) **New Business Growth Rate** The new business growth rate measures the total growth of an insurance company’s new business. The consistent growth of new business premiums will ensure a constant stream of income to support the insurance company’s business operations and enhances its market share. (b) **Business Concentration Ratio** The business concentration ratio measures the proportion of regular premiums policy business to single premiums policy business. An appropriate composition of single and regular premiums products ensures continuous future stream of income. (c) **Business Conservation Ratio** The business conservation ratio measures the proportion of policies that remain in-force at the end of a period out of the total policies that were in-force at the beginning of the period. This indicator assesses the business retention ability of the insurance company and reflects the sustainability level of its business. (d) **Asset Matching and Return** Asset matching and return (“AMR”) measures the ability of a life insurer in strategically investing its assets in the life insurance fund to match the exposure from its insurance liabilities, while maintaining an appropriate level of investment returns. This indicator is based on a matrix approach, comprising two sub-indicators: (a) Asset-Liability Duration Matching (“ALDM”) and (b) Investment Yield (“IY”). The ALDM measures the estimated dollar duration mismatch between interest rate related assets and liabilities, emphasising on the exposure under a stressed interest rate environment. Meanwhile, the IY measures the investment performance in terms of the life insurance company’s investment income in proportion to the investment assets held by the life insurance company. (e) **Expense Ratio** The expense ratio measures the expenses incurred to produce every Ringgit of premiums income. It indicates how efficient the insurance company in managing its operating costs to generate premiums income, by benchmarking its management expenses and agency remuneration against the premiums income generated. 4.4 For the detailed requirements of all the above indicators, please refer to the attached Appendices. As for the computations of the indicators, please refer to the attached Illustrations. --- ## PART 5: QUALITATIVE CRITERIA 5.1 For the qualitative criteria, each insurance company shall be assessed based on BNM’s supervisory rating and other information i.e. other qualitative factors. (a) **Supervisory Rating** The supervisory rating, namely the composite risk rating (“CRR”), as assessed by BNM for the assessment period up to 31 December of the preceding assessment year will be used. The insurance company shall be assigned scores as set out in Table 5 below. **Table 5: Score Range for Supervisory Rating** | Supervisory Rating Range of Results | Score (%) | | :--- | :---: | | Supervisory Rating of LOW or equivalent | 35 | | Supervisory Rating of MODERATE or equivalent | 22 | | Supervisory Rating of ABOVE AVERAGE or equivalent | 10 | | Supervisory Rating of HIGH or equivalent | 0 | (b) **Other Information** The score shall be determined by PIDM based on information relating to the insurance company’s safety and soundness, its viability or its financial condition. This information may include information about the insurance company other than that specified in the supervisory rating of the insurance company, which takes into account the following factors: (i) the insurance company’s failure to comply with any subsidiary legislation made by PIDM, including guidelines or with any regulatory requirements that apply to the insurance company; (ii) any action taken by any regulatory or other authority against the insurance company or any corporation related to the insurance company including but not limited to any notice, order or instruction relating to any deficiency or non-compliance in respect of the insurance company or such corporation, a letter of warning, or any requirement or instruction for issuance of a letter of undertaking or commitment or a resolution of the board of directors; (iii) any correction or action plan of the insurance company or such corporation to address the action taken by such authority under subparagraph (ii) including but not limited to the progress report on the implementation by the insurance company of the terms of the letter of undertaking or commitment or the resolution of the board of directors; (iv) any rating or assessment of the insurance company by any rating agency whether relating to the credit standing of the insurance company or its financial condition or otherwise; (v) whether the insurance company has received or is receiving any form of assistance from BNM or PIDM, such assistance being financial or otherwise; and (vi) any other information provided to PIDM or that comes to the attention of PIDM about the insurance company or any corporation related to the insurance company. The scores for the other information criteria shall be determined as set out in Table 6 below. **Table 6: Score Range for Other Information** | Other Information Assessment Criteria | Score (%) | | :--- | :---: | | As at 30 April of the assessment year, no information has come to PIDM’s attention about any circumstances that represent a threat to or materially affect the financial condition, safety, soundness, or viability of the insurance company. | 5 | | As at 30 April of the assessment year, information has come to PIDM’s attention about circumstances that represent a threat to or may materially affect the financial condition, safety, soundness, or viability of the insurance company. | 3 | | As at 30 April of the assessment year, information has come to PIDM’s attention about circumstances that materially affect the financial condition, safety, soundness, or viability of the insurance company. | 0 | --- ## PART 6: LEVY CATEGORY AND LEVY RATE ### LEVY CATEGORY 6.1 The summation of the respective scores from the quantitative and qualitative criteria will determine the insurance company’s overall DLS score. All insurance companies shall be classified into one (1) of the four (4) levy categories based on their overall DLS score. The table below sets out the overall DLS score range and the respective levy categories: **Table 7: Overall DLS Score Range and Levy Categories** | Overall DLS Score | Levy Category | | :--- | :---: | | DLS Score ≥ 85% | 1 | | 65% ≤ DLS Score < 85% | 2 | | 50% ≤ DLS Score < 65% | 3 | | DLS Score < 50% | 4 | ### LEVY RATE 6.2 Each levy category carries a prescribed levy rate and the minimum levy amount for the purpose of determining the amount of levy payable by an insurance company to PIDM for the assessment year. 6.3 An insurance company shall pay its annual levy by 31 May (or the immediate preceding working day if 31 May falls on a weekend or a public holiday in Kuala Lumpur) of each assessment year based on the DLS score and levy category notified by PIDM. 6.4 An insurance company shall complete the return on calculation of levy based on the Guidelines on Takaful and Insurance Benefits Protection System: Submission of Returns on Calculation of Levies for Takaful and Insurance Businesses issued on 30 March 2020. --- ## PART 7: REPORTING, SUBMISSION AND APPEAL ### REPORTING REFERENCE DATE **QUANTITATIVE CRITERIA** 7.1 The quantitative criteria shall be calculated based on an insurance company’s relevant financial statements as at 31 December of each preceding assessment year. In this respect, the financial statements shall be referred to as the following: (a) For an insurance company with 31 December financial year end: audited financial statements (i.e. Insurance Companies Statistical System (“ICSS”), Risk-Based Capital (“RBC”) reporting forms, and other supporting information for the financial period); or (b) For an insurance company with non-31 December financial year end: approved financial statements (i.e. ICSS, RBC reporting forms, and other supporting information for the financial period, which have been approved by the Management of the insurance company). **QUALITATIVE CRITERIA** 7.2 For the supervisory rating criteria, the supervisory rating for each insurance company as at 31 December of the preceding assessment year shall be applied to determine the scores for levy calculation purposes for an assessment year. BNM will provide the supervisory ratings to PIDM. 7.3 For the other information criteria, an insurance company shall be assessed based on information received by PIDM on or before 30 April of the assessment year. ### INSUFFICIENT QUANTITATIVE INFORMATION 7.4 For an insurance company with insufficient information for the purposes of calculating the scores of certain indicators for operational and sustainability measure, the scores for such indicator shall be determined on a proportionate basis as stated below: [A ÷ (100 – B)] × B where A is the sum of the scores assigned to an insurance company for each indicator where quantitative information is available. B is the sum of maximum scores for indicators where quantitative information is not available for computation. An example of the computation of the overall DLS scores for an insurance company carrying on general insurance business with insufficient quantitative information is provided in Illustration 13. ### SUBMISSION DATE 7.5 An insurance company must submit the certified quantitative information² to PIDM latest by 30 April (or the immediate preceding working day if 30 April falls on a weekend or a public holiday in Kuala Lumpur) of each assessment year for the purposes of computing the DLS score of the insurance company. 7.6 An insurance company’s Chief Executive Officer (“CEO”), and its Chief Financial Officer (“CFO”) or Head of Finance or Appointed Actuary, must certify that the quantitative information is accurate and reflective of the financial condition of the insurance company as at 31 December of the preceding assessment year. All reports that require certification /signatories shall be scanned and the scanned copy must be submitted to PIDM online through PIDM’s portal. 7.7 For an insurance company that fails to comply with the requirements in paragraphs 7.5 and 7.6, PIDM will assign a score to the insurance company according to any available information, and a levy surcharge may be imposed on such insurance company pursuant to Section 75 of the PIDM Act. ### FILING RESUBMISSION 7.8 In circumstances where an insurance company submits its amended quantitative information to PIDM after the submission deadline i.e. 30 April of the assessment year, the amended submission shall reach PIDM by 10 May (or the immediate preceding working day if 10 May falls on a weekend or a public holiday in Kuala Lumpur) of that assessment year. 7.9 An insurance company shall be rated based on the latest information received by PIDM on or before 10 May of that assessment year. ² Certified quantitative information refers to DLS reporting form in pre-formatted excel spreadsheet and the certification in pdf format. 7.10 An insurance company that submits any amended information shall be expected to comply with the provisions for information integrity as specified under paragraph 7.11 (Information Integrity). ### INFORMATION INTEGRITY 7.11 An insurance company shall be accountable to ensure the accuracy of the information submitted for DLS. For an insurance company that does not comply with the requirements with regard to information integrity, a levy surcharge may be imposed on such insurance company pursuant to Section 75 of the PIDM Act. 7.12 In respect of the accuracy of the DLS quantitative information and the Returns on Calculation of Levies (“RCL”) submitted to PIDM, an insurance company’s internal auditor and external auditor will perform an independent validation under the Guidelines on Validation Programme: Differential Levy Systems and Levies Calculation issued on 30 March 2020³. 7.13 Pursuant to Section 193 of the PIDM Act, any person who prepares, signs, approves or concurs in any account, statement, return, report or other document required for submission to PIDM that he or she knows or has reason to believe is false or contains false or misleading information, commits an offence punishable by fine or imprisonment or both.⁴ ### COMPUTATION AND NOTIFICATION OF SCORE 7.14 The overall DLS score shall be the sum of scores assigned for the quantitative and the qualitative criteria. 7.15 The score of each criterion is prescribed in the Malaysia Deposit Insurance Corporation (Differential Premium Systems in Respect of Insurer Members) Regulations 2012.⁵ 7.16 PIDM will compute the overall DLS score for each insurance company and notify the insurance companies of their respective score, levy category and applicable levy rate by 15 May of each assessment year. This will provide sufficient time for an insurance company to make the necessary arrangement for the payment of levy that is due to PIDM by 31 May (or the immediate preceding working day or if 31 May falls on a weekend or a public holiday in Kuala Lumpur) of each assessment year. Please refer to Illustration 12 for an example of DLS scoring and levy categorisation. ³ Which supersedes the “Guidelines on Validation Programme: Differential Levy Systems and Levies Calculation” issued on 31 January 2020. ⁴ Section 193 of the Act, applies to officers of the insurance companies, internal auditors and external auditors with regard to the DLS framework and RCL reporting and the validation programme. ⁵ As amended by the Malaysia Deposit Insurance Corporation (Differential Premium Systems in respect of Insurer Members) (Amendment) Regulations 2016 and Malaysia Deposit Insurance Corporation (Differential Premium Systems in respect of Insurer Members) (Amendment) Regulations 2019. ### APPEAL PROCESS 7.17 An appeal process is put in place to provide an avenue for any insurance company to request for a review of its final score, levy category and levy rate in certain circumstances. 7.18 An insurance company may appeal against its score, levy category and levy rate after 31 May of an assessment year and is required to formally submit its appeal in writing to PIDM within the time specified in paragraph 7.20. The reason(s) or ground(s) for the appeal, as set out in paragraph 7.19 must be included. 7.19 The appeal must be on the basis of an error in the quantitative information provided by an insurance company to PIDM or an error in PIDM’s computation of any of the quantitative criteria or an error in PIDM’s assessment of the qualitative criteria, other than the supervisory rating by BNM. 7.20 Any request for appeal shall be submitted in writing to PIDM no later than 31 August of that assessment year. PIDM will review and respond to the appeal by 30 September of that assessment year. Notwithstanding the appeal, an insurer member must pay the annual levy to PIDM on or before 31 May of that assessment year. 7.21 If the appeal results in PIDM determining that an insurance company has overpaid its annual levy for that assessment year, PIDM shall refund the difference to the insurance company after the appeal process is concluded. Conversely, if it is determined that an insurance company has underpaid its annual levy for that assessment year, the insurance company shall pay the difference to PIDM. ### PROHIBITION AGAINST PUBLIC DISCLOSURE 7.22 An insurance company acknowledges that the following information (“Information”) is confidential: (a) An insurance company’s score for any indicator or criteria of the DLS; (b) An insurance company’s total criteria score; (c) Levy category in which an insurance company is or has been classified; (d) Levy rate that is or was applicable to an insurance company; and (e) The amount of levy payable or paid by an insurance company. 7.23 No director, officer, employee or agent of an insurance company or any person who for any reason has by any means access to any of the Information or any document which discloses or contains any of the Information, shall provide or disclose to any other person or publish any such Information or document unless the disclosure is permitted under any law or court order or for the purpose of an insurance company performing its duties or carrying out the provisions of any law or any regulation, guideline or instruction made by BNM or PIDM. 7.24 A levy surcharge may be imposed on an insurance company that does not comply with the prohibition against public disclosure. --- ## PART 8: REPORTING MANUAL AND FORMS ### GENERAL REQUIREMENT 8.1 Any restatement made to an insurance company’s previous year’s financial information shall be reflected in the submission of quantitative information to PIDM. However, the insurance company’s previous year DLS score will not be amended. 8.2 All amounts shall be reported in thousands (‘000). 8.3 All percentages shall be expressed to two (2) decimal points. 8.4 An insurance company must use the pre-formatted excel spreadsheet provided in the PIDM’s corporate website for submission to PIDM. An insurance company must also ensure that no alteration or amendment is made to the pre-formatted excel spreadsheet. An insurance company shall only be required to fill-in the marked cells. --- ## PART 9: NEW INSURANCE COMPANY AND AMALGAMATED INSURER MEMBER ### NEW INSURANCE COMPANY 9.1 An insurance company shall be automatically categorised in the best levy category for the assessment year in which it becomes an insurer member (“first assessment year”), and the assessment year immediately after the first assessment year (“second assessment year”). 9.2 An insurance company is not required to submit the quantitative information to PIDM for the first assessment year and second assessment year. The insurance company is required to submit the quantitative information to PIDM from the third assessment year onwards. 9.3 In the event that an insurance company does not have sufficient information to calculate certain criteria in the third assessment year, the scores of these criteria shall be assigned proportionately according to paragraph 7.4 (Insufficient Quantitative Information). 9.4 For the computation of quantitative criteria for the third assessment year onwards, the quantitative information relating to the position as at 31 December of the first assessment year shall not be included in the computation. The scores of these criteria shall be assigned proportionately according to paragraph 7.4 (Insufficient Quantitative Information). ### AMALGAMATED INSURER MEMBER 9.5 An amalgamated insurer member means an insurance company formed from the acquisition of one (1) insurance company by another insurance company or the merger of two (2) or more insurance companies at any time from 1 June of the preceding assessment year to 31 May of an assessment year. 9.6 The following provisions shall apply in determining the quantitative and qualitative scores of the amalgamated insurer member for a particular assessment year: (a) **An amalgamated insurer member is formed on or before 31 December of the preceding assessment year** The computation of each indicator of the amalgamated insurer member for the quantitative criteria shall be based on the financial information of the amalgamated insurer member as at 31 December of the preceding assessment year. The scoring of the amalgamated insurer member for the qualitative criteria shall be based on the supervisory rating and other relevant information of the amalgamated insurer member as at 31 December of the preceding assessment year. **Example 1:** Insurance Companies A and B were involved in the process of merger and acquisition and transferred whole or part of their insurance business to the amalgamated insurer member known as Insurance Company ‘X’. Insurance Company ‘X’ commences operations on 1 September 2019. For the assessment year 2020, Insurance Company ‘X’ shall submit its quantitative information based on the financial information as at 31 December 2019. (b) **An amalgamated insurer member is formed after 31 December of the assessment year** The computation of each indicator of the amalgamated insurer member for the quantitative criteria shall be based on the financial information of the amalgamating insurer member⁶ as at 31 December of the preceding assessment year. The scoring of the amalgamated insurer member for the qualitative criteria shall be based on the supervisory rating and other relevant information of the amalgamating insurer member as at 31 December of the preceding assessment year. ⁶ An amalgamating insurer member refers to any one of the insurer members involved in an amalgamation or a merger with the highest total scoring for quantitative criteria as of 31 December of the preceding assessment year. --- **Example 2:** Insurance Companies A and B were involved in the process of merger and acquisition. The process of transferring assets and liabilities is completed, resulting in the formation of an amalgamated insurer member, Insurance Company ‘Y’, on 2 January 2020. The table below depicts the scores of the quantitative, supervisory and other information of the insurance companies for position as at 31 December 2019: | Criteria | Insurance Companies | | | :--- | :---: | :---: | | | **A** | **B** | | **Quantitative** | | | | Capital – FCI | 1.21 | 1.15 | | Operational and sustainability score | 75% | 55% | | **Total Quantitative Score (a)** | **55%** | **40%** | | **Qualitative** | | | | Supervisory rating | 22% | 10% | | Other information criteria | 5% | 0% | | **Total Qualitative Score (b)** | **27%** | **10%** | | **Total DLS Score (a) + (b)** | **82%** | **50%** | Insurance Company A (the amalgamating insurer member) has the highest quantitative score as at 31 December 2019. Insurance Company ‘Y’ shall submit its quantitative information forms based on the financial information of Insurance Company A for the assessment year 2020. Insurance Company A’s supervisory rating score of 22% and the other information score of 5% will be also applied to Insurance Company ‘Y’ to arrive at the overall DLS score for assessment year 2020. Perbadanan Insurans Deposit Malaysia 30 March 2020 --- ### Appendix 1 **CAPITAL MEASURE** **Free Capital Index** **Formula:** Free Capital Index = Capital adequacy ratio (%) / Individual target capital level (%) **Note:** (i) Capital adequacy ratio (“CAR”) is as determined in the 'Risk-Based Capital (“RBC”) Framework for Insurers' specified by BNM. (ii) Individual target capital level (“ITCL”) is as determined in the 'Guidelines on Internal Capital Adequacy Assessment Process (“ICAAP”) for Insurers issued by BNM. (iii) The insurance company’s ITCL shall be based on the latest ITCL agreed by BNM as at 31 December of the preceding assessment year. (iv) In the case of amalgamated insurer member (please refer to paragraph 9.5), if the ITCL of an insurance company has yet to be determined as at 31 December of the preceding assessment year, the insurance company shall be categorised at the minimum required FCI (score range of 1.00 ≤ FCI ≤1.10) until the ITCL of the insurance company is determined. | Data Requirement | Source of Information | Remarks | | :--- | :--- | :--- | | CAR | Form A of the RBC Framework - Reporting Form. | CAR is based on the average CAR of four (4) quarters within the preceding assessment year. | | ITCL | As agreed by BNM, specified in Guidelines on ICAAP for Insurers. | - | **Score Range:** | Free Capital Index Range of Results | | :--- | | Free Capital Index > 1.20 | | 1.10 < Free Capital Index ≤ 1.20 | | 1.00 ≤ Free Capital Index ≤ 1.10 | | Free Capital Index < 1.00 | --- ### Appendix 2 **OPERATIONAL AND SUSTAINABILITY MEASURE - GENERAL INSURANCE BUSINESS** **Gross Premium Growth Rate** **Formula:** Gross Premium Growth Rate = [Gross premiums (t) – Gross premiums (t-1)] / Gross premiums (t-1) x 100% **3-year weighted average** Gross Premium Growth Rate = [50% x growth rate (t)] + [30% x growth rate (t-1)] + [20% x growth rate (t-2)] *where,* *t = one year immediately preceding the current assessment year;* *t-1= two years immediately preceding the current assessment year; and* *t-2 = three years immediately preceding the current assessment year.* **Note:** (i) Gross premium growth rate is based on a 3-year weighted average growth rate, i.e. weightages of 50% for one year immediately preceding the current assessment year, 30% for two years immediately preceding the current assessment year and 20% for three years immediately preceding the current assessment year. (ii) An insurance company which has less than four (4) years of data shall not be assigned a score for this indicator. The score of this indicator shall be determined on a proportionate basis as specified in paragraph 7.4 (Insufficient Quantitative Information). | Data Requirement | Source of Information | Remarks | | :--- | :--- | :--- | | Gross premiums | Statement of Premiums, Form G6 as specified in the Guidelines for ICSS. | Gross premiums include premiums from direct business (less return premiums) and all reinsurances accepted. | **Score Range:** | Gross Premium Growth Rate Range of Results | Score (%) | | :--- | :---: | | Gross Premium Growth Rate > 10.00% | 20 | | 5.00% < Gross Premium Growth Rate ≤ 10.00% | 14 | | 0.00% < Gross Premium Growth Rate ≤ 5.00% | 7 | | Gross Premium Growth Rate ≤ 0.00% | 0 | --- ### Appendix 3 **OPERATIONAL AND SUSTAINABILITY MEASURE - GENERAL INSURANCE BUSINESS** **Business Diversification Ratio** **Formula:** Business Diversification Ratio = [Provision of risk margin for adverse deviation (“PRAD”) – Fund provision of risk margin for adverse deviation (“FPRAD”)] / Provision of risk margin for adverse deviation (“PRAD”) x 100% **Note:** (i) The PRAD refers to the provision of risk margin for adverse deviation, is the component of the value of the insurance liabilities that relates to the uncertainty inherent in the best estimate, as defined in the RBC Framework. | Data Requirement | Source of Information | Remarks | | :--- | :--- | :--- | | PRAD | RBC Framework - Reporting Form: General insurance fund - Valuation liabilities, Form D and Form D-1. | The PRAD includes valuation of premium liabilities attributable to all classes of businesses, including those attributable to Malaysian Motor Insurance Pool (“MMIP”). | | FPRAD | RBC Framework - Reporting Form: General insurance fund - Valuation liabilities, Form D and Form D-1. | The FPRAD includes valuation of premium liabilities attributable to all classes of businesses, including those attributable to MMIP. | **Score Range:** | Business Diversification Ratio Range of Results | Score (%) | | :--- | :---: | | Business Diversification Ratio > 30.00% | 25 | | 20.00% < Business Diversification Ratio ≤ 30.00% | 16 | | 15.00% ≤ Business Diversification Ratio ≤ 20.00% | 8 | | Business Diversification Ratio < 15.00% | 0 | --- ### Appendix 4 **OPERATIONAL AND SUSTAINABILITY MEASURE - GENERAL INSURANCE BUSINESS** **Receivable Ratio** **Formula:** Receivable Ratio = Insurance receivables / Gross premiums x 100% | Data Requirement | Source of Information | Remarks | | :--- | :--- | :--- | | Gross premiums | Statement of Premiums, Form G6 as specified in the Guidelines for ICSS. | Gross premiums include premiums from direct business (less return premiums) and all reinsurances accepted. | | Insurance receivables | Ageing Schedule, Schedule 12, Form G3 as specified in the Guidelines for ICSS. | Insurance receivables refers to the aggregate of total gross outstanding premiums and agents’ balances of more than 60 days and total amount due from reinsurers or ceding companies of more than 90 days. | **Score Range:** | Receivable Ratio Range of Results | Score (%) | | :--- | :---: | | Receivable Ratio ≤ 10.00% | 15 | | 10.00% < Receivable Ratio ≤ 15.00% | 10 | | 15.00% < Receivable Ratio ≤ 20.00% | 5 | | Receivable Ratio > 20.00% | 0 | --- ### Appendix 5 **OPERATIONAL AND SUSTAINABILITY MEASURE - GENERAL INSURANCE BUSINESS** **Combined Ratio** **Formula:** Combined Ratio = (Net claims incurred + Management expenses + Net commission) / Earned premium income x 100% | Data Requirement | Source of Information | Remarks | | :--- | :--- | :--- | | Net claims incurred | Statement of Claims, Form G7 as specified in the Guidelines for ICSS. | Net claims incurred refers to the claims paid, increase or decrease in provisions for outstanding claims liabilities within the preceding assessment year and net of reinsurance recoveries. | | Management expenses | General Business Revenue Account, Form G1 as specified in the Guidelines for ICSS. | Management expenses refer to all expenses relating to insurance business other than claims and commission. | | Net commission | Statement of Commissions, Form G8 as specified in the Guidelines for ICSS. | Net commission refers to the commissions and profit commission and brokerage paid or payable on direct business and on reinsurance accepted business less commissions and profit commissions earned on reinsurance ceded. | | Earned premium income | Statement of Premiums, Form G6 as specified in the Guidelines for ICSS. | Earned premium income refers to net premiums less increase or plus decrease in premium liabilities within the preceding assessment year. | **Score Range:** | Combined Ratio Range of Results | Score (%) | | :--- | :---: | | Combined Ratio < 90.00% | 25 | | 90.00% ≤ Combined Ratio ≤ 95.00% | 16 | | 95.00% < Combined Ratio ≤ 100.00% | 8 | | Combined Ratio > 100.00% | 0 | --- ### Appendix 6 **OPERATIONAL AND SUSTAINABILITY MEASURE - GENERAL INSURANCE BUSINESS** **Mean-adjusted Return Volatility** **Formula:** Mean-Adjusted Return Volatility = Semi standard deviation of operating profit or loss over three (3) years / Mean operating profit or loss over three (3) years **Note:** (i) Operating profit or loss refers to the profit or loss arising from business operation, which includes earned premium income, net claims incurred, management expenses, net commission, net investment income, net bad and doubtful debts/bad debts recovery, net capital gains or losses and other income or outgo (excludes any income or expenses arising from recognition of deferred taxation). (ii) For the computation of this indicator, operating profit should not include taxation for the year. | Data Requirement | Source of Information | Remarks | | :--- | :--- | :--- | | Earned premium income | Statement of Premiums, Form G6 as specified in the Guidelines for ICSS. | Earned premium income refers to net premiums less increase or plus decrease in premium liabilities within the preceding assessment year. | | Net claims incurred | Statement of Claims, Form G7 as specified in the Guidelines for ICSS. | Net claims incurred refers to the claims paid, increase or decrease in provisions for outstanding claims liabilities within the preceding assessment year and net of reinsurance recoveries. | | Management expenses | General Business Revenue Account, Form G1 as specified in the Guidelines for ICSS. | Management expenses refer to all expenses relating to insurance business other than claims and commission. | | Net commission | Statement of Commissions, Form G8 as specified in the Guidelines for ICSS. | Net commission refers to the commissions and profit commission and brokerage paid or payable on direct business and on reinsurance accepted business less commissions and profit commissions earned on reinsurance ceded. | | Net bad and doubtful debts/ Bad debts recovery | General Business Revenue Account, Form G1 as specified in the Guidelines for ICSS. | - | | Net investment income | General Business Revenue Account, Form G1 as specified in the Guidelines for ICSS. | - | --- | Data Requirement | Source of Information | Remarks | | :--- | :--- | :--- | | Net capital gains or losses | General Business Revenue Account, Form G1 as specified in the Guidelines for ICSS. | Net capital gains or losses includes: (i) Profit on disposal of securities, properties and other properties, plant and equipment; (ii) Loss on disposal of securities, properties and other properties, plant and equipment; (iii) Accretion of discount on securities; (iv) Amortisation of premiums on securities; (v) Unrealised gain on securities and other investment (vi) Unrealised loss on securities and other investments; (vii) Write back of impairment loss of securities and other investments; and (viii) Impairment loss of securities and other investments. | | Other income/outgo | General Business Revenue Account, Form G1 as specified in the Guidelines for ICSS. | Other income/outgo excludes: (i) any tax income/expense arising from recognition of deferred taxation; and (ii) any income/expense not arising from day-to-day business operations e.g: Day-1 adjustments due to the adoption of new accounting standards. | **Score Range:** | Mean-Adjusted Return Volatility Range of Results | Score (%) | | :--- | :---: | | 0 ≤ MARV ≤ 0.2 | 15 | | 0.2 < MARV ≤ 0.5 | 10 | | MARV > 0.5 | 0 | | MARV is negative or the mean operating profit/(loss) over a period of three years is zero | 0 | --- ### Appendix 7 **OPERATIONAL AND SUSTAINABILITY MEASURE - LIFE INSURANCE BUSINESS** **New Business Growth Rate** **Formula:** New Business Growth Rate = [New business premiums (t) – New business premiums (t-1)] / New business premiums (t-1) x 100% **3-year weighted average** New Business Growth Rate = [50% x growth rate (t)] + [30% x growth rate (t-1)] + [20% x growth rate (t-2)] *where,* *t = one year immediately preceding the current assessment year;* *t-1= two years immediately preceding the current assessment year; and* *t-2 = three years immediately preceding the current assessment year.* **Note:** (i) The new business premiums refer to both single and annual premiums for all types of businesses (ordinary life, annuity and investment-linked) as reported in the ‘Statement of New Policies’ as specified in the Guidelines for ICSS. (ii) The new business growth rate is based on a 3-year weighted average growth rate, i.e. weightages of 50% for one year immediately preceding the current assessment year, 30% for two years immediately preceding the current assessment year and 20% for three years immediately preceding the current assessment year. (iii) An insurance company which has less than four (4) years of data shall not be assigned a score for this indicator. The score of this indicator shall be determined on a proportionate basis as specified in paragraph 7.4 (Insufficient Quantitative Information). | Data Requirement | Source of Information | Remarks | | :--- | :--- | :--- | | Single and annual/ regular premiums | Statement of New Policies, Form L6 as specified in the Guidelines for ICSS. | The annual premiums equivalent (“APE”) is adopted where it aggregates total new regular premiums with 10% new single premiums in the calculation. | **Score Range:** | New Business Growth Rate Range of Results | Score (%) | | :--- | :---: | | New Business Growth Rate > 10.00% | 15 | | 5.00% < New Business Growth Rate ≤ 10.00% | 10 | | 0.00% < New Business Growth Rate ≤ 5.00% | 5 | | New Business Growth Rate ≤ 0.00% | 0 | --- ### Appendix 8 **OPERATIONAL AND SUSTAINABILITY MEASURE - LIFE INSURANCE BUSINESS** **Business Concentration Ratio** **Formula:** Business Concentration Ratio = New business regular premiums (t) / New business single premiums (t) x 100% *where,* *t = one year immediately preceding the current assessment year.* | Data Requirement | Source of Information | Remarks | | :--- | :--- | :--- | | New business regular premiums | “Annual Premiums” category in the Statement of New Policies, Form L6 as specified in the Guidelines for ICSS. | New business regular premiums refers to total annual premiums that include ordinary life, investment-linked and annuities. | | New business single premiums | “Single Premiums” category in the Statement of New Policies, Form L6 as specified in the Guidelines for ICSS. | New business single premiums refers to total annual premiums that include ordinary life, investment-linked and annuities. | **Score Range:** | Business Concentration Ratio Range of Results | Score (%) | | :--- | :---: | | Business Concentration Ratio > 200.00% | 25 | | 150.00% < Business Concentration Ratio ≤ 200.00% | 16 | | 100.00% ≤ Business Concentration Ratio ≤ 150.00% | 8 | | Business Concentration Ratio < 100.00% | 0 | --- ### Appendix 9 **OPERATIONAL AND SUSTAINABILITY MEASURE - LIFE INSURANCE BUSINESS** **Business Conservation Ratio** **Formula:** Business Conservation Ratio = Renewal premiums (t) / [Renewal premiums (t-1) + First year premiums (t-1)] x 100% *where,* *t = one year immediately preceding the current assessment year; and* *t-1= two years immediately preceding the current assessment year.* | Data Requirement | Source of Information | Remarks | | :--- | :--- | :--- | | Renewal premiums | Premiums Income/Consideration of Annuities Granted, Form L1-1 (Schedule 1) and Premiums/Net Creation of Units for Investment-Linked Business, Form L1-2 (Schedule 1) as specified in the Guidelines for ICSS. | Renewal premiums refer to premiums receivable subsequent to the first policy year, where the premiums payment term is two or more years. In calculating the renewal premiums, it includes the total gross direct premiums for renewal year’s premiums of all businesses and total investment-linked operating fund for renewal year premiums. | | First year premiums | Premiums Income/Consideration of Annuities Granted, Form L1-1 (Schedule 1) and Premiums/Net Creation of Units for Investment-Linked Business, Form L1-2 (Schedule 1) as specified in the Guidelines for ICSS. | First year premiums refer to premiums receivable for the first policy year, where the premiums payment term is two or more years. In calculating the first year premiums, it includes the total gross direct premiums for first year’s premiums income of all businesses and total investment-linked operating fund for first year premiums. | **Score Range:** | Business Conservation Ratio Range of Results | Score (%) | | :--- | :---: | | Business Conservation Ratio > 90.00% | 25 | | 85.00% < Business Conservation Ratio ≤ 90.00% | 16 | | 80.00% ≤ Business Conservation Ratio ≤ 85.00% | 8 | | Business Conservation Ratio < 80.00% | 0 | --- ### Appendix 10 **OPERATIONAL AND SUSTAINABILITY MEASURE - LIFE INSURANCE BUSINESS** **Asset Matching and Return** Asset Matching and Return (“AMR”) is based on a matrix approach, comprising two sub-indicators: (a) Asset-Liability Duration Matching (“ALDM”) and (b) Investment Yield (“IY”). **(a) Asset-Liability Duration Matching** **Formula:** ALDM = Asset Dollar Duration (“ADD”) / Liability Dollar Duration (“LDD”) x 100% *where,* ADD = (A2 – A1) / [2 x (A0) x (Y/10000)] x A0 LDD = (L2 – L1) / [2 x (L0) x (Y/10000)] x L0 *A0 = the value of assets under the base scenario;* *A1 = the value of assets when its interest rate/yield rises by Y basis points;* *A2 = the value of assets when its interest rate/yield falls by Y basis points;* *L0 = the value of liabilities under the base scenario;* *L1 = the value of liabilities when its interest rate/yield rises by Y basis points;* *L2 = the value of liabilities when its interest rate/yield falls by Y basis points; and* *Y/10000 = interest rate/yield changes (in 2 decimals).* *Note: For the calculation of ALDM, Y=100* | Data Requirement | Source of Information | | :--- | :--- | | Assets and liabilities valued at base interest rate/yield (A0 & L0) | RBC Framework – Reporting Form: Life Insurance Fund – (iii) Interest Rate Risks, Form C1-2 (aggregate base value⁷ for all life insurance funds⁸) | | Assets and liabilities valued at base interest rate/yield + 100bps (A1 & L1) | Other supporting information | | Assets and liabilities valued at base interest rate/yield - 100bps (A2 & L2) | Other supporting information | ⁷ As defined in BNM/RH/PD 032-12 Risk-Based Capital Framework for Insurers, Appendix II section 4. ⁸ Aggregated base value of assets and liabilities from Participating Ordinary Life Fund, Non-Participating Ordinary Life Fund, Participating Annuity Fund, Non-Participating Annuity Fund as well as Investment-Linked Operating Fund forms only. **Note:** i. The assets component is computed based on all interest rate related assets as defined in BNM/RH/PD 032-12 Risk-Based Capital Framework for Insurers, Appendix II section 4 ii. The liabilities component is computed based on guaranteed insurance liabilities as defined in BNM/RH/PD 032-12 Risk-Based Capital Framework for Insurers, Appendix VII iii. The stress factor is ±100bps on the base scenario interest rate/yield. iv. The assets and liabilities refer to assets and liabilities of the ordinary life fund, annuity fund and investment-linked operating fund. **(b) Investment Yield** **Formula:** IY = 2 x [Net investment income (I) + Net capital gains or losses (C)] / [Total investment assets (t) + Total investment assets (t-1) – (I+C)] x 100% *where,* *t = one year immediately preceding the current assessment year; and* *t-1= two years immediately preceding the current assessment year.* | Data Requirement | Source of Information | Remarks | | :--- | :--- | :--- | | Net investment income | Life Business Revenue Account, Form L1-1 and Form L1-2, as specified in the Guidelines for ICSS. | Net investment income refers to the total net investment income of the ordinary life fund, annuity fund and investment-linked operating fund. | | Net capital gains or losses | Life Business Revenue Account, Form L1-1 and Form L1-2, as specified in the Guidelines for ICSS. | Net capital gains or losses* include: (i) Profit on disposal of securities and properties; (ii) Loss on disposal of securities and properties; (iii) Accretion of discounts on securities; (iv) Amortisation of premiums on securities; (v) Unrealised gain on securities and other investments; (vi) Unrealised loss on securities and other investments; (vii) Write back of impairment loss of securities and other investments; (viii) Impairment loss of securities and other investments; and (ix) Changes in gross Available-For-Sale (“AFS”)/Fair Value through Other Comprehensive Income (“FVOCI”) reserves**. | * *Net capital gains or losses refer to the total net capital gains or losses of the ordinary life fund, annuity fund and investment-linked operating fund.* ** **Changes in gross AFS/FVOCI reserves is the difference between AFS/FVOCI reserves, gross of tax as at 31 December of two years immediately preceding the current assessment year and the AFS/FVOCI reserves, gross of tax, as at 31 December of one year immediately preceding the current assessment year.* | Data Requirement | Source of Information | Remarks | | :--- | :--- | :--- | | Total investment assets | Life Fund Balance Sheet, Form L3-2 and Form L3-3, as specified in the Guidelines for ICSS. | Total investment assets refer to the total investment assets of the ordinary life fund, annuity fund and investment-linked operating fund. Total investment assets include: (i) Investment properties; (ii) Loans; (iii) Investments; (iv) Foreign assets; and (v) Cash and deposits. | **Asset Matching and Return Matrix** | IY Measure | ALDM Measure | | | | :--- | :---: | :---: | :---: | | | **100.00% ≤ ALDM < 200.00%** | **80.00% ≤ ALDM < 100.00% OR 200.00% ≤ ALDM < 300.00%** | **ALDM < 80.00% OR ALDM ≥ 300.00%** | | **IY ≥ BIR** | Score 1 | Score 2 | Score 4 | | **IY < BIR** | Score 2 | Score 3 | Score 4 | **Note:** (i) The Bond Index Return (“BIR”) is based on the Malaysian Government Securities (“MGS”) 3-7 year index. The BIR comprises investment income and capital gains/losses over a period. It represents the change between the index value as at the last trading date of December for the two (2) years immediately preceding the current assessment year and the index value as at the last trading date of December for one (1) year immediately preceding the current assessment year, as published by Bond Pricing Agency Malaysia Sdn Bhd. --- Each of the four (4) categories within the matrix is then assigned a quantitative score as set out below. **Score Range:** | AMR Category | Score (%) | | :--- | :---: | | Score 1 | 20 | | Score 2 | 14 | | Score 3 | 7 | | Score 4 | 0 | --- ### Appendix 11 **OPERATIONAL AND SUSTAINABILITY MEASURE - LIFE INSURANCE BUSINESS** **Expense Ratio** **Formula:** Expense Ratio = (Management expenses + Agency remuneration) / Net premium income x 100% | Data Requirement | Source of Information | Remarks | | :--- | :--- | :--- | | Management expenses | Life Business Revenue Account, Form L1, as specified in the Guidelines for ICSS. | Management expense is defined as all expenses relating to insurance and investment-linked business, other than claims and agency remuneration, from all businesses, i.e. ordinary life, investment-linked, and annuity. | | Agency remuneration | Life Business Revenue Account, Form L1, as specified in the Guidelines for ICSS. | Agency remuneration is defined as total commission paid to agents, agency leaders or other intermediaries (such as banks) in respect of single premiums, premiums relating to the first policy year and renewal policy years of the insurance contracts, net of reinsurance commission and agency-related expenses*. For investment-linked business, agency remuneration refers to remuneration or reward for bringing in business. In calculating the agency remuneration, it should include all the agency remuneration for all businesses, i.e. ordinary life, investment-linked, and annuity. *Agency-related expenses include material incentives, fringe benefits, break-away benefits and office maintenance expenses paid/payable to agents or agency leaders. | | Net premium income | Life Business Revenue Account, Form L1, as specified in the Guidelines for ICSS. | Net premium income is defined as total net premium income from all businesses, i.e. ordinary life, investment-linked, and annuity. | **Score Range:** | Expense Ratio Range of Results | Score (%) | | :--- | :---: | | Expense Ratio < 20.00% | 15 | | 20.00% ≤ Expense Ratio < 30.00% | 10 | | 30.00% ≤ Expense Ratio < 40.00% | 5 | | Expense Ratio ≥ 40.00% | 0 | --- **ILLUSTRATION 1: COMPUTATION OF FREE CAPITAL INDEX** **Insurance Company A** | | Four (4) Quarters Within the Preceding Assessment Year | | | | | :--- | :---: | :---: | :---: | :---: | | | **31 March** | **30 June** | **30 September** | **31 December** | | Capital Adequacy Ratio | 200.00% | 210.00% | 190.00% | 220.00% | Individual Target Capital Level: 200.00% Free Capital Index = Capital adequacy ratio (%) * / Individual target capital level (%) = (200.00% + 210.00% + 190.00% + 220.00%) / 4 / 200.00% = 205.00% / 200.00% = 1.03 * Average CAR of four (4) quarters within the preceding assessment year. As a result, Insurance Company A will be placed at the free capital index range of 1.00 to 1.10. --- **ILLUSTRATION 2: COMPUTATION OF GROSS PREMIUM GROWTH RATE** **Insurance Company B** Gross premiums for 2019(RM’ 000): 620,000 Gross premiums for 2018 (RM’ 000): 560,000 Gross premiums for 2017 (RM’ 000): 520,000 Gross premiums for 2016 (RM’ 000): 480,000 Gross Premium Growth Rate = [Gross premiums (t) – Gross premiums (t-1)] / Gross premiums (t-1) x 100% **One year immediately preceding the current assessment year (t)** Gross Premium Growth Rate = (RM620 million – RM560 million) / RM560 million x 100% = RM60 million / RM560 million x 100% = 10.71% **Two years immediately preceding the current assessment year (t-1)** Gross Premium Growth Rate = (RM560 million – RM520 million) / RM520 million x 100% = RM40 million / RM520 million x 100% = 7.69% **Three years immediately preceding the current assessment year (t-2)** Gross Premium Growth Rate = (RM520 million – RM480 million) / RM480 million x 100% = RM40 million / RM480 million x 100% = 8.33% **3-Year Weighted Average** Gross Premium Growth Rate = [50% x growth rate (t)] + [30% x growth rate (t-1)] + [20% x growth rate (t-2)] = [50% x 10.71%] + [30% x 7.69%] + [20% x 8.33%] = 9.33% As a result, Insurance Company B will get a score of 14% under the gross premium growth rate indicator. --- **ILLUSTRATION 3: COMPUTATION OF BUSINESS DIVERSIFICATION RATIO** **Insurance Company C** | As at 31 December of the Preceding Assessment Year | RM’000 | | :--- | :---: | | Provision of risk margin for adverse deviation | 120,000 | | Fund provision of risk margin for adverse deviation | 100,000 | Business Diversification Ratio = (Provision of risk margin for adverse deviation - Fund provision of risk margin for adverse deviation) / Provision of risk margin for adverse deviation x 100% = (RM120 million - RM100 million) / RM120 million x 100% = 16.67% As a result, Insurance Company C will get a score of 8% under the business diversification ratio indicator. --- **ILLUSTRATION 4: COMPUTATION OF RECEIVABLE RATIO** **Insurance Company D** | As at 31 December of the Preceding Assessment Year | RM’000 | | :--- | :---: | | Gross premiums | 180,000 | | Insurance receivable | | | Total outstanding premiums and agent's balances * | 15,000 | | Total amount due from reinsurers/ceding companies ** | 15,000 | | Total insurance receivable | 30,000 | * Only includes outstanding balances more than 60 days. ** Only includes amount due more than 90 days. Receivable Ratio = Insurance receivables / Gross premiums x 100% = RM30 million / RM180 million x 100% = 16.67% As a result, Insurance Company D will get a score of 5% under the receivable ratio indicator. --- **ILLUSTRATION 5: COMPUTATION OF COMBINED RATIO** **Insurance Company E** | As at 31 December of the Preceding Assessment Year | RM’000 | | :--- | :---: | | Earned premium income | 95,000 | | Net claims incurred | 50,000 | | Management expenses | 25,000 | | Net commission | 15,000 | Combined Ratio = (Net claims incurred + Management expenses + Net commission) / Earned premium income x 100% = (RM50 million + RM25 million + RM15 million) / RM95 million x 100% = 94.74% As a result, Insurance Company E will get a score of 16% under the combined ratio indicator. --- **ILLUSTRATION 6: COMPUTATION OF MEAN-ADJUSTED RETURN VOLATILITY** **Formula:** Semi-standard deviation of operating profit/(loss) over three (3) years* / Mean operating profit/(loss) over three (3) years * Semi-standard Deviation = √[1 / (n – 1) x Σ(ri - Mean)²], only when ri < Mean *where,* *ri = operating profit;* *Mean = the average operating profit over three (3) years;* *t = one year immediately preceding the current assessment year;* *t-1= two years immediately preceding the current assessment year;* *t-2 = three years immediately preceding the current assessment year; and* *n = number of observations. i.e. 3.* **Illustration 6.1:** **Insurance Company F** Operating Profit for 2017 (RM’ 000) : 240,000 (rt-2) Operating Profit for 2018 (RM’ 000) : 150,000 (rt-1) Operating Profit for 2019 (RM’ 000) : 180,000 (rt) Mean = (RM240 million + RM150 million + RM180 million) / 3 = RM190 million Given the operating profit for 2014 (rt-1) and 2015 (rt) were less than the mean of RM190 million, the semi-standard deviation will be computed as follows: Semi-standard deviation = √[(0)²+(150-190)²+(180-190)²] / (3-1) = √[1,700 / 2] = 29.15 --- Mean-Adjusted Return Volatility = Semi-standard deviation of operating profit / Mean operating profit = 29.15 / 190 = 0.15 In this case, Insurance Company F scores 15% for this indicator. **Illustration 6.2:** **Insurance Company G** Operating Loss for 2017 (RM’ 000) : (60,000) (rt-2) Operating Profit for 2018 (RM’ 000) : 100,000 (rt-1) Operating Profit for 2019 (RM’ 000) : 150,000 (rt) Mean = (RM(60 million) + RM100 million + RM150 million) / 3 = RM63.33 million Given the operating loss for 2017 (rt-2) was less than the mean of RM63.33 million, the semi-standard deviation will be computed as follows: Semi-standard deviation = √[(-60-63.33)²+(0)²+(0)²] / (3-1) = √[15,210.29 / 2] = 87.21 Mean-Adjusted Return Volatility = Semi-standard deviation of operating profit / Mean operating profit = 87.21 / 63.33 = 1.38 In this case, Insurance Company G scores 0% for this indicator. --- **ILLUSTRATION 7: COMPUTATION OF NEW BUSINESS GROWTH RATE** **Insurance Company H** | | New Business Premiums | | | | :--- | :---: | :---: | :---: | | **Year** | **Single Premiums (“SP”)** | **Annual Premiums (“AP”)** | **Annual Premium Equivalent (“APE”) [(SP x 10%) +AP]** | | | | **(RM’ 000)** | | | 2015 | 20,000 | 130,000 | 132,000 | | 2014 | 20,000 | 125,000 | 127,000 | | 2013 | 10,000 | 120,000 | 121,000 | | 2012 | 10,000 | 100,000 | 101,000 | New Business Growth Rate = [New business premiums (t) – New business premiums (t-1)] / New business premiums (t-1) x 100% **One year immediately preceding the current assessment year (t)** New Business Growth Rate = (RM132 million – RM127 million) / RM127 million x 100% = RM5 million / RM127 million x 100% = 3.94% **Two years immediately preceding the current assessment year (t-1)** New Business Growth Rate = (RM127 million – RM121 million) / RM121 million x 100% = RM6 million / RM121 million x 100% = 4.96% **Three years immediately preceding the current assessment year (t-2)** New Business Growth Rate = (RM121 million – RM101 million) / RM101 million x 100% = RM20 million / RM101 million x 100% = 19.80% --- **3-Year Weighted Average** New Business Growth Rate = [50% x growth rate (t)] + [30% x growth rate (t-1)] + [20% x growth rate (t-2)] = [50% x 3.94%] + [30% x 4.96%] + [20% x 19.80%] = 7.42% As a result, Insurance Company H will get a score of 10% under the new business premium growth rate indicator. --- **ILLUSTRATION 8: COMPUTATION OF BUSINESS CONCENTRATION RATIO** **Insurance Company I** | As at 31 December of the Preceding Assessment Year | RM’000 | | :--- | :---: | | Annual premiums – New policies | 300,000 | | Single premiums – New policies | 180,000 | Business Concentration Ratio = New business regular premiums (t) / New business single premiums (t) x 100% = RM300 million / RM180 million x 100% = 166.67% *where,* *t = one year immediately preceding the current assessment year.* As a result, Insurance Company I will get a score of 16% under the business concentration ratio indicator. --- **ILLUSTRATION 9: COMPUTATION OF BUSINESS CONSERVATION RATIO** **Insurance Company J** | Type of Premiums | 2018 (t-1) | 2019 (t) | | :--- | :---: | :---: | | | **RM’ 000** | | | First year premiums : | | | | Ordinary life | 15,000 | | | Annuity | 10,000 | | | Investment-linked operating fund | 15,000 | | | **Total** | **40,000** | | | Renewal premiums: | | | | Ordinary life | 70,000 | 73,000 | | Annuity | 30,000 | 32,000 | | Investment-linked operating fund | 90,000 | 95,000 | | **Total** | **190,000** | **200,000** | Business Conservation Ratio = Renewal premiums (t) / [Renewal premiums (t-1) + First year premiums (t-1)] x 100% = RM200 million / (RM190 million + RM40 million) x 100% = 86.96% *where,* *t = one year immediately preceding the current assessment year; and* *t-1 = two years immediately preceding the current assessment year.* As a result, Insurance Company J will get a score of 16% under the business conservation ratio indicator. --- **ILLUSTRATION 10: COMPUTATION OF ASSET MATCHING AND RETURN** **Insurance Company K** **(a) ALDM** ALDM = Asset Dollar Duration (ADD) / Liability Dollar Duration (LDD) x 100% *where,* ADD = (A2 – A1) / [2 x (A0) x (Y/10000)] x A0 LDD = (L2 – L1) / [2 x (L0) x (Y/10000)] x L0 | Risk-Based Capital Framework Reporting Form C1-2, Market Risk Capital Charges (Interest Rate Risk): As at 31 December 2019 | Asset (A0) RM’000 | Liability (L0) RM’000 | | :--- | :---: | :---: | | Participating Fund | 8,200 | 5,600 | | Non-Participating Fund | 1,200 | 1,300 | | Annuity Participating Fund | 0 | 0 | | Annuity Non-Participating Fund | 0 | 0 | | Investment-Linked Operating Fund | 1,300 | 500 | | **Base value** | **10,700** | **7,400** | | Asset and Liability Values when Interest Rate/Yield Increase by 100 Basis Points: As at 31 December 2019 | Asset (A1) RM’000 | Liability (L1) RM’000 | | :--- | :---: | :---: | | Participating Fund | 7,600 | 5,100 | | Non-Participating Fund | 900 | 1,100 | | Annuity Participating Fund | 0 | 0 | | Annuity Non-Participating Fund | 0 | 0 | | Investment-Linked Operating Fund | 800 | 350 | | **Value when interest rate/yield increase by 100 basis points** | **9,300** | **6,550** | | Asset and Liability Values when Interest Rate/Yield Decrease by 100 Basis Points: As at 31 December 2019 | Asset (A2) RM’000 | Liability (L2) RM’000 | | :--- | :---: | :---: | | Participating Fund | 8,600 | 6,500 | | Non-Participating Fund | 1,400 | 1,700 | | Annuity Participating Fund | 0 | 0 | | Annuity Non-Participating Fund | 0 | 0 | | Investment-Linked Operating Fund | 1,500 | 650 | | **Value when interest rate/yield decrease by 100 basis points** | **11,500** | **8,850** | --- ADD = (RM11.5 million – RM9.3 million) / [2 x (RM10.7 million) x (100/10000)] x RM10.7 million = RM110 million LDD = (RM8.85 million – RM6.55 million) / [2 x (RM7.4 million) x (100/10000)] x RM7.4 million = RM115 million ALDM = 95.65% **(b) Investment Yield** | Balance Sheet | 2018 (t-1) RM’000 | 2019 (t) RM’000 | | :--- | :---: | :---: | | Total investment assets | 600,000 | 700,000 | *where,* *t = one year immediately preceding the current assessment year; and* *t-1 = two years immediately preceding the current assessment year.* | Revenue Account: For the year ended 31 December 2019 | RM’000 | RM’000 | | :--- | :---: | :---: | | Net capital gains/loss: | | | | Profit on disposal of securities and properties | 13,000 | | | Loss on disposal of securities and properties | -1,000 | | | **Net** | | **12,000** | | Accretion of discounts on securities | 0 | | | Amortisation of premiums on securities | -1,000 | | | **Net** | | **-1,000** | | Unrealised gain on securities and other investments | 1,000 | | | Unrealised loss on securities and other investments | -1,000 | | | **Net** | | **0** | | Writeback of impairment loss of securities and other investments | 1,000 | | | Impairment loss of securities and other investments | -6,000 | | | **Net** | | **-5,000** | | Gross AFS/FVOCI reserves - Two years immediately preceding the current assessment year | 2,000 | | | Gross AFS/FVOCI reserves – One year immediately preceding the current assessment year | -1,000 | | | **Net** | | **1,000** | | **Total net capital gains** | | **7,000** | | **Net investment income** | | **23,000** | --- Investment Yield = 2 x [Net investment income (I) + Net capital gains or losses (C)] / [Total investment assets (t) + Total investment assets (t-1) – (I + C)] x 100% = 2 x (RM23 million + RM7 million) / (RM700 million + RM600 million – (RM23 million + RM7 million)) x 100% = 4.72% | Bond Index Return as at | 2018 (t-1) | 2019 (t) | | :--- | :---: | :---: | | Last trading date of December | 147.551 | 154.273 | BIR 2017 = (154.273 – 147.551) / 147.551 x 100 = 4.56% With score of 95.65% for ALDM and 4.72% for IY, Insurance Company K’s AMR indicator is placed at Score 2. As a result, Insurance Company K will get a score of 14%. | | 100.00% ≤ ALDM < 200.00% | 80.00% ≤ ALDM < 100.00% OR 200.00% ≤ ALDM < 300.00% | ALDM < 80.00% OR ALDM ≥ 300.00% | | :--- | :---: | :---: | :---: | | **IY ≥ 4.56%** | Score 1 | Score 2 | Score 4 | | **IY < 4.56%** | Score 2 | Score 3 | Score 4 | | Score Range | Score (%) | | :--- | :---: | | Score 1 | 20 | | Score 2 | 14 | | Score 3 | 7 | | Score 4 | 0 | --- **ILLUSTRATION 11: COMPUTATION OF EXPENSE RATIO** **Insurance Company L** | As at 31 December of the Preceding Assessment Year | RM’000 | | :--- | :---: | | Management Expenses | 38,000 | | Agency Remuneration | 53,000 | | Net Premium Income | 480,000 | Expense Ratio = (Management expenses + Agency remuneration) / Net premium income x 100% = (RM38 million + RM53 million) / RM480 million x 100% = 18.96% As a result, Insurance Company L will get a score of 15% under the expense ratio indicator. --- **ILLUSTRATION 12: DLS SCORING AND LEVY CATEGORISATION** **Calculation of total DLS score for a life insurance company** | Criteria & Indicators | Maximum Score | Insurance company Score | | :--- | :---: | :---: | | **Quantitative** | | | | 1. Capital | | | | FCI | NA | 1.30 | | 2. Operational & Sustainability | | | | (i) New Business Growth Ratio | 15% | 10% | | (ii) Business Concentration Ratio | 25% | 16% | | (iii) Business Conservation Ratio | 25% | 25% | | (iv) Asset Matching and Return | 20% | 14% | | (v) Expense Ratio | 15% | 10% | | Total Operational & Sustainability Score | 100% | 75% | | **Total Quantitative Criteria Score (placed at M2 in Table 3: Quantitative Criteria Matrix)** | **60%** | **55%** | | **Qualitative** | | | | 1. Supervisory Rating | 35% | 10% | | 2. Other Information | 5% | 5% | | **Total Qualitative Score** | **40%** | **15%** | | **Total DLS Score** | **100%** | **70%** | Based on the table above, the insurance company will be categorised in Category 2. --- **ILLUSTRATION 13: DLS SCORING AND LEVY CATEGORISATION FOR AN INSURANCE COMPANY WITH INSUFFICIENT QUANTITATIVE INFORMATION** **Calculation of total DLS Score for an insurance company carrying on general insurance business with insufficient quantitative information** | Criteria & Indicators | Maximum Score | Insurance Company Score | | :--- | :---: | :---: | | **Quantitative** | | | | 1. Capital | | | | FCI | N/A | 1.21 | | 2. Operational & Sustainability | | | | (i) Gross Premium Growth Rate | 20% | 14% | | (ii) Business Diversification Ratio | 25% | NI* | | (iii) Receivable Ratio | 15% | NI* | | (iv) Combined Ratio | 25% | 16% | | (v) Mean-Adjusted Return Volatility | 15% | 10% | | Total Operational & Sustainability Score | 100% | 67% | | **Total Quantitative Criteria Score (placed at M2 in Table 3: Quantitative Criteria Matrix)** | **60%** | **55%** | | **Qualitative** | | | | 1. Supervisory Rating | 35% | 10% | | 2. Other Information | 5% | 5% | | **Total Qualitative Score** | **40%** | **15%** | | **Total DLS Score** | **100%** | **70%** | **Note:** * NI denotes insufficient quantitative information. Referring to paragraph 7.4 (Insufficient Quantitative Information), depicted below is the proportionate quantitative score for indicators with insufficient quantitative information (item ii and iii): [40% / (100% - 40%)] x 40% = 27% The table below shows the total operational and sustainability score for the insurance company: | Description | Insurance Company Score | | :--- | :---: | | Quantitative score for indicators with sufficient score | 40% | | Add: Proportionate quantitative score for indicators with insufficient quantitative information | 27% | | **Total Operational & Sustainability Score** | **67%** | Based on the total DLS score, the insurance company will be categorised in Category 2.
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