Justin Ong
ON Nov 25, 2022, Bank Negara finally published the long-awaited exposure draft on Digital Insurer and Takaful Operators (DITOs). This brings the country one step closer to achieve its national aspiration of becoming a regional leader in the digital economy.
Echoing DITO discussion paper released in January 2022, this exposure draft details the requirements needed for DITO application.
What’s in the exposure draft on licensing framework for DITO? Similar to the discussion paper, what remains largely unchanged in the exposure draft is the requirement for DITO applicants to demonstrate a commitment to driving value propositions in a sustainable manner in the following areas:
> Inclusion – Enhanced financial resilience of consumers whose protection needs are currently either not served or not adequately served (unserved or underserved);
> Competition – Innovative insurance/takaful products to cater to the diverse protection needs of consumers;
> Efficiency – Convenient and seamless consumer experience with greater cost savings.
What the exposure draft include which was not covered in the discussion paper is an in-depth discussion covering the following key areas:
Eligible business model
There are two types of business models eligible to operate under this framework, including an underwriter model which fully assumes insurance/takaful risk, and a risk-sharing protection model.
Intermediaries like enablers, agents, brokers and managing general agents are carved out from this Framework.
Of the two types of models, greater attention has been given on the latter as the variations in the risk-sharing protection model may give rise to information asymmetry, which may lead to business conduct issues.
There are thus additional requirements governing the DITO applicant operating under risk-sharing model, including effective implementation mechanisms to assess the suitability and affordability of the customers, as well as effective management of the insurance/takaful risk inherent in the model, among others.
Physical access point
A licensed DITO is required to establish a registered office in Malaysia, for only administrative purposes and to facilitate communication with Bank Negara and investigations by the authorities, while the end-to-end operations are required to be carried out through digital means.
However, exceptions are granted for the utilisation of limited physical access points in cases where necessary digital infrastructures are unavailable.
Distribution channel
In a similar vein, the products and services are only permitted to be distributed through digital channels such as web-based or mobile-based applications, or through approved advisers, brokers and aggregators or third-party digital platforms.
No distribution is to be done via agency or bancassurance/bancatakaful channels, which rely on face-to-face or in-person interactions. There is also a separate set of requirements governing the offering of embedded protection products which are integrated within the purchase journey of a product to ensure no mis-selling of products to customers.
How is it similar or different from the central bank’s policy document on licensing framework for digital banks?
In our opinion, the exposure draft on DITO has laid down key items (which seems to be largely similar to the requirements in the licensing framework for digital banks). They are:
Licensing application
The due date for the application of DITO licence is six months from the licensing commencement announcement date. In cases where an applicant wishes to carry out both general and life/family businesses, they will be required to apply for two DITO licences.
Thereafter, successful applicants will be notified in writing of the decision. The licensed DITO is required to undergo operational readiness review prior to the commencement of business operations.
Business plan and exit plan
A five-year business plan is required. This will showcase the viability of the business strategies, the ability to deliver committed value propositions and the adequate availability of financial managerial and organisational resources.The applicant is also required to submit an exit plan for the first five-year of its operations covering operational aspects such as governance policies, technical details of the management information system and detailed information of stakeholders.
Shareholder assessment factors
Shareholders play a part in influencing business decisions made by licensed DITO, they are required to submit shareholder applications together with the licensing applications.
Shareholders are expected to give constructive contributions to the licensed DITO in areas such as risk management and compliance, the ability to apply transformative technology, access to consumer analytics, source of financial strength for the applicant and Shariah expertise for takaful business application.
Foundational phase
A foundational phase serves as a period for the licensed DITO to demonstrate its viability and operational soundness, with the period ranging from a minimum of three years and up to five years.
During the foundational phase, the licensed DITO needs to file an annual submission on business plan implementation progress and a report on compliance status with any licensing and/or shareholding conditions imposed.
To reduce barriers to entry, the minimum paid-up capital for the foundational phase is lower (versus RM100mil post-foundational) at RM40mil for a licensed DITO and RM30mil for two licensed DITOs within a financial group.
A targeted regulatory adjustment may be applied on licensed DITO administering a risk-sharing protection model.
Secret sauce to winning a DITO licence – What can we learn from the digital banking and digital insurance applications across Asia?
Drawing from the recent digital banking wave in Malaysia, as well as observations from successful digital insurance applicants across Asia, we have identified five critical winning factors:
Fulfilment of value propositions
The primary goal of introducing digital players alongside conventional players is to have a business model driven by the innovative use of technology. The ability to reach the unserved and underserved segments of the market is the key differentiator.
DITO licence applicants are encouraged to portray their ability to fulfill the above mentioned three value propositions – inclusion, competition, efficiency.
This is observed in Hong Kong, where several digital insurers offer customisation and innovative products including Bowtie, a life and medical insurer offering coverage without commission and the need to do medical examination; Avo, a general insurer offering coverage for Covid-19 related unemployment, home office health problem and eWallet; and OneDegree offering customisable digital asset insurance.
Self-sustaining financial ecosystem
A key consideration in awarding the licence is the ability of the applicant to implement the proposal.
Having an existing functional business and operating model are advantageous as applicants can leverage on the readily available infrastructure and distribution channels in rolling out digital products and services. They help support new digital endeavours as an extension of the brand in a timely manner.
In Hong Kong, success is accredited to the incumbent Blue, an insurance company turned digital insurer, offering products with affordable prices without any involvement of intermediaries. This can also be seen in Digital Banking licence awardees where non-bank financial service providers enter the banking industry, supported by their current business operations.
Sustainability of the business
Beyond just functional, business sustainability is another key consideration. In both Malaysia and Singapore, regulators consider the financial reputation, track record, strength and commitment of the applicant’s shareholders when assessing applicants.
Interested applicants are thus recommended to demonstrate a sound level of understanding on the key risks in the insurance industry, as well as robustness of regulatory compliance and risk management plans in meeting prudential standards of the regulator.
Contributing to the betterment of the society
Furthermore, the growth prospect and how the business impacts the wider economy are also taken into account in the application. For instance, the jobs created by the DITO, its commitment to develop the skills of the local workforce, the capabilities (including technology) that will be located into the country, the headquarters functions it will be anchoring as well as its regional expansion plans.
In the United States, one interesting feature of the offerings from the life insurer Lemonade is that unclaimed premiums will be donated to customer-selected charities, impacting a wider society.
Growing market share and brand reputation
Lastly, market positioning and branding are also important as it represents one’s market presence and its reach.
Leveraging on the existing customer base, applicants can continue to grow their market share by introducing new or supplementary products and services to meet the needs of the unserved and underserved segments for example gig workers.
We have seen in the market whereby being adaptable and embracing technology development have helped FWD Group, a life and general insurer, to grow their market share to over 10 million customers in Asia only within 10 years of establishment.
Conclusion
The exposure draft on licensing framework for DITO shares quite a number of similarities in the policy document on licensing framework for digital banks such as the business and exit plan, shareholder assessment factors, and foundational phase requirements.
As such, much can be learnt from the journey made by the successful digital banks in Malaysia by drawing reference from the prudential, technology, and financial inclusion perspective, as well as how the banks intend to meet the best interest of Malaysia.
In fulfilling Bank Negara’s long-term aspiration towards digitalising the financial services industry, the next likely trend of digital wave will be the insurance and takaful sector.
Justin Ong is a financial services industry leader of Deloitte Malaysia. The views expressed here are the writer’s own.
