This article first appeared in The Edge Malaysia Weekly on March 31, 2025 - April 6, 2025

The Edge: How does Bank Negara Malaysia verify and ensure that the increase in premiums is not being used to compensate for insurers’ past mispricing rather than due to rising medical costs or claims trends? What measures are in place so that policyholders do not get the short end of the stick and Bank Negara does not come across as being easy on the insurers?

Bank Negara: Medical and health insurance/takaful (MHIT) products are priced to take into account reasonable estimates of future claims over the period of cover and repricing cycles. Insurers and takaful operators (ITOs) would account for the expected cost of claims (driven by expected frequency and severity of claims), expenses and their expected profit margins when setting the premiums and charges. As MHIT products are not new to Malaysia, ITOs utilise past claim experiences to set their expected cost of claims. If actual claims inflation is lower than expected, the need for repricing will not be triggered as expected (for instance, repricing happens in five years instead of three years as expected). Nevertheless, as medical costs continued to grow, coupled with a more-than-expected increase in the frequency of claims (observed pent-up demand post-pandemic), this resulted in a higher-than-expected growth in claims compared with estimated levels.

Bank Negara requires ITOs to ensure that the pricing and management of MHIT products comply with generally accepted actuarial principles/practices and fair treatment considerations. The board of the ITO is responsible for providing oversight to ensure that this is observed. In line with this, the internal repricing policies and procedures of the ITO must be approved by its board and properly documented.

ITOs are currently not required to obtain Bank Negara’s prior approval for repricing that is undertaken in accordance with their board-approved internal policies and procedures.

Bank Negara sets out detailed expectations of what such internal policies must address. They include ensuring that ITOs adopt sound methodologies for setting technical risk rates for pricing. ITOs must also consider policyholders’ reasonable expectations and the approach they take to derive medical inflation assumptions, manage trade-offs between affordability and sustainability, and define risk pools.

Bank Negara also disallows rate increases that are not due to the underlying medical claim experience, for example, imputing higher profit and expense margins that are beyond the original pricing target.

However, repricing exercises must be notified to Bank Negara with detailed information such as how they comply with their own internal policies, justification for repricing, as well as information pertaining to the claim experience of the products that they intend to reprice. Products can only be repriced to the extent of restoring to/maintaining a target ratio of price relative to claims.

ITOs hold claim reserves to pay expected claims. With prudent reserving practices, this can help cover any shortfall between premiums collected and claims paid. But if losses persist and continue to rise for an extended period, repricing is necessary to ensure claims can continue to be paid in the future.

Premium increases occur when claim experience exceeds thresholds determined by the ITO. While the thresholds are self-determined, each ITO must set reasonable limits and demonstrate that price adjustments are to the extent necessary to maintain the insurer’s target ratio of price relative to claims. While this is the case for the overall product portfolio, some smoothing is also applied to ensure the reasonableness of premiums across age bands/plan types.

Bank Negara has intervened in cases where the repricing was not in line with the internal policies and procedures, although such cases are rare.

How does Bank Negara ensure that ‘smoothing’ across rating factors does not disproportionately disadvantage higher-risk groups such as older policyholders when conducting portfolio-level repricing?

Repricing adjustments must be supported by claim experience. This would include looking at claim experience across different age groups and benefit types that make up the portfolio so that relative differences in claim experience are accounted for. Smoothing is then generally done as an overlay to help moderate any significant impact from pure technical adjustments due to volatility, especially for higher-risk groups, and to ensure the price relativity makes sense (for example, higher plans with higher coverage limits should be priced higher than lower plans). Furthermore, some ITOs do apply caps on the premium adjustments for higher-risk groups such as older policyholders at repricing.

Does Bank Negara ensure that premium increases are not disproportionately targeting certain groups to avoid paying future claims that they had promised to cover in the first place when selling the product at attractive pricing?

MHIT products are priced considering reasonable estimates of future claims over the period of cover and repricing cycle. Pricing must be done at the portfolio level (not individual level) based on rating factors (for example, by age and/or plan level) subject to some smoothing to ensure the pricing curve is reasonable. During repricing, ITOs are not allowed to change rating factors to further differentiate the risk profiles of the policy owners/takaful participants as these would be unfair and would not be consistent with policy owners’/takaful participants’ expectations at the point of sale.

Bank Negara is also vigilant about mis-selling practices by ITOs and intermediaries. It will not hesitate to take strong action where there is evidence of such practices, including where ITOs and agents push MHIT products with excessive benefits and coverage limits that they know will be subject to significant repricing risks (as a result of ‘over-utilisation’ due to generous limits), or fail to give proper advice to customers purchasing such products.

Does Bank Negara require ITOs to disclose the long-term affordability risk of products (such as what kind of premium would one likely need to pay when one reaches age 50/60/70/80/90/100), especially those with high coverage limits, when MHIT products are being sold to consumers? If not, why not?

How is Bank Negara taking steps to ensure MHIT policyholders are aware of their rights and do not get caught off their guard by repricing cycles?

Given consumer concerns over the current and long-term affordability of MHIT products, what steps is Bank Negara taking to allay these concerns apart from staggering annual premium hikes to less than 10% for 80% of policyholders, for instance, in terms of raising awareness of and the transparency of potential policy hikes? Can and/or will Bank Negara mandate that ITOs disclose at the point of sale (and at the point of switching to alternative products) what is the schedule of premium increases and the assumptions taken?

The central bank has strengthened the requirements for the medical and health insurance/takaful (MHIT) policy document, which was published in February this year to ensure that policyholders know their rights and are better prepared for repricing cycles.

The requirements include:

1. Bank Negara has mandated that ITOs provide a clear and detailed product disclosure sheet (PDS). It requires every PDS to encompass, among others, the following key information to assist consumers in making informed decisions: 

(a)    Clear and concise description of the product to help consumers understand its purpose;

(b)    Detailed information on the scope of coverage provided to allow consumers to assess whether the product aligns with their needs;

(c)    Clear and transparent disclosure of the premium amounts payable to allow consumers to make informed financial decisions;

(d)    A comprehensive list of applicable fees and charges associated with the product to ensure consumers understand the total cost of ownership;

(e)    Concise outline of key terms and conditions concerning the product to ensure consumers understand the rights and obligations associated with the product; and

(f)    A comprehensive list of major exclusions from coverage to allow consumers to make informed decisions about whether the product adequately addresses their needs and concerns.

The PDS is crucial to help consumers make informed financial decisions. There is a strong alignment between the information consumers find relevant when deciding whether to purchase a financial product and the information provided in the PDS.

Beginning in 2025, ITOs are required to provide a revised PDS for individual medical reimbursement insurance/takaful products, which should provide clear, step-by-step information on key features, benefits, fees, and the risk-pooling concept.

With the introduction of the revised PDS, consumers will be better informed about how pooled funds are managed, including the impact of increased claims on fund sustainability. The revised PDS will also provide greater transparency on premium adjustments, which will depend on actual medical inflation. This will help policyholders understand their contributions and increase transparency around repricing moving forward.

2. ITOs are also required to ensure that their staff and agents gather enough information about a consumer before giving any advice or product recommendation. This applies to all individual MHIT products, including any additional riders bought with or after the main policy. Based on the information gathered, staff and agents are required to ensure that policyholders receive proper advice on suitable products that meet their specific needs and circumstances.

What does Bank Negara deem as mis-selling when it comes to MHIT products? Has Bank Negara taken any action against insurers or their agents found guilty of mis-selling MHIT products and does Bank Negara have powers to decree a big enough penalty to deter mis-selling?

Mis-selling of MHIT products occurs when consumers are misled, given improper advice or subject to misleading representations, resulting in unsuitable product recommendations or sales. This can happen due to aggressive sales tactics, omission or misrepresentation of facts or failure to disclose essential product features and risks.

If there is clear evidence, such as documentation or recordings, indicating that licensed ITOs, or their agents or bancassurance partners have engaged in mis-selling, Bank Negara is empowered under the Financial Services Act (FSA) 2013 or the Islamic Financial Services Act (IFSA) 2013 to take action against them. The action may include administrative monetary penalties, warnings, public or private reprimand, order to comply, order to make restitution or other supervisory measures to address the misconduct.

For example, in July 2024, it came to Bank Negara’s attention that misleading social media posts were being circulated by some registered agents of ITOs and financial adviser representatives (FARs) urging customers to purchase medical reimbursement products without co-payment features before September 2024, falsely claiming that customers would not be able to do so moving forward.

This misrepresentation led to Bank Negara issuing warnings, including requiring ITOs to investigate and carry out surveillance exercises on social media postings to ascertain these misleading posts and to take appropriate disciplinary action against intermediaries found to share these misleading posts.

Bank Negara takes the misconduct of ITOs, agents and FARs seriously, particularly where it jeopardises consumer interests. It will not hesitate to take punitive or corrective action to deter future misconduct, if any, to ensure accountability within the industry and safeguard consumers’ interests.

Repricing by ITOs seems rather self-regulatory, given that Bank Negara’s prior approval is currently not required “for repricing that is undertaken in accordance with board-approved internal policies and procedures”. Has Bank Negara found the need to intervene, modify or reject a repricing decision for MHIT products that the central bank deemed unfair? Can you provide an example that warranted/would warrant Bank Negara’s intervention?

Does Bank Negara plan to introduce rules for stronger regulatory oversight, such as requiring prior approval for the repricing of certain MHIT products for greater accountability and enhanced consumer protection? Why? Is it within Bank Negara’s existing powers to do so?

Repricing by ITOs is not self-regulatory. Bank Negara sets out governance and fair treatment requirements for managing MHIT businesses in the MHIT Policy Document. It sets out detailed expectations of what such internal policies must address. They include ensuring that ITOs adopt sound methodologies for setting technical risk rates for pricing. ITOs must also consider policyholders’ reasonable expectations and the approach they take to derive medical inflation assumptions, manage trade-offs between affordability and sustainability and define risk pools. ITOs are also required to ensure support mechanisms are in place for policy owners/takaful participants, including those on the lowest plans, to seek assistance and strategies to maintain their coverage. This ensures that even the most vulnerable participants have avenues to preserve their insurance or takaful benefits.

As part of Bank Negara’s ongoing supervision, these policies are subject to review by it to ensure that expectations are met. Bank Negara also intervenes to disallow rate increases that are not due to the underlying medical claim experience, for example, imputing higher profit and expense margins that are beyond the original pricing target.

Bank Negara has rejected repricing submissions in cases where the claim experience had yet to breach the trigger (notwithstanding that it is projected to breach within a short period of time) and where the adjustment included changes to expense loading.

Fundamentally, the repricing of MHIT products is driven by medical cost inflation. Price controls without addressing the root cause of medical cost inflation will reduce access to MHIT products. This may occur due to products becoming prohibitively expensive if ITOs are not allowed to periodically reprice in line with medical inflation or the withdrawal of ITOs from the product line if premiums are insufficient to meet rising claim costs.

Effective stakeholder management and communication strategies are also essential requirements imposed. Beginning in 2025, ITOs are required to provide a revised PDS for individual medical reimbursement insurance/takaful products, which should provide clear, step-by-step information on key features, benefits, fees and the risk-pooling concept.

With the introduction of the revised PDS, consumers will be better informed about how pooled funds are managed, including the impact of increased claims on fund sustainability. The revised PDS will also provide greater transparency of premium adjustments, which will depend on actual medical inflation. This will help policyholders understand their contributions and increase transparency of repricing moving forward.

In addition, ITOs are required to ensure that their staff and agents gather enough information about a consumer before giving any advice or product recommendation. Based on information gathered, staff and agents are required to ensure that policyholders receive proper advice on suitable products that meet their specific needs and circumstances.

How big a portion of MHIT products is being sold together with investment-linked products?

Based on 2023 data, investment-linked (IL) MHIT constitutes about 70% of the total individual MHIT business, as measured by the number of covered persons/insured.

Is investment income from premiums collected taken into consideration when calculating medical claim losses?

Investment income for ITOs arises mainly from the reserves and regulatory capital (including for other lines of business) that they are required to hold/set up as required by Bank Negara’s prudential requirements to remain safe and sound to preserve financial stability.

Unlike some insurance coverage such as death or critical illness (where the nature of claims event is more limited and the amount of expected claims can be known/predicted with better predictability), MHIT products are designed to pay when a person receives pre-specified medical treatments and the nature of these claims events means that there is considerable uncertainty in terms of frequency of claims (for example number of claims possible in a year) and the severity of claims (amount of monies paid for each claims event).

To ensure affordability and limit mispricing, ITOs collect premiums/contributions and insurance charges/tabarru (some annually or monthly, depending on policy type) to pay for the expected claims cost for that year (or month). This approach means that prices can be more affordable and that the price of coverage tracks prevailing experience.

Given that the timing of collection of premiums/charges is more closely aligned with the timing of claims, investment income to ITOs for medical business tends to be minimal. ITOs tend to invest in short-term assets to match the cash flow for liquidity reasons.

You mentioned investment income to ITOs for medical business ‘tends to be minimal’. Does the ‘minimal’ refer only to standalone MHIT products? Is investment income from investment-linked products sold alongside medical coverage also minimal?

Does Bank Negara require ITOs to disclose investment income from investment-linked products sold alongside medical coverage? If not, how does Bank Negara determine the cumulative investment income for the medical business and consider whether it is fair to exclude that when comparing premiums against claims for MHIT products? If investment income from investment products sold alongside medical coverage is substantial, is it fair to exclude it, given that consumers who bought the products are faced with rising premiums for MHIT products justified using what could be under-reported income versus claims?

Does Bank Negara require ITOs to allocate a portion of investment income from products sold alongside medical coverage to the medical claim reserves? If not, why?

For IL products, insurers receive the ‘cost of insurance/tabarru’ to cover the cost of claims in a particular year/month, which is deducted from each policyholder’s unit account. Like the standalone MHIT, the investment return earned by insurers for this part is minimal, given the timing of the premium/charges and claims. In managing the insurance fund, any surplus cash flow may form part of the amount of reserves to cover any expected shortfall of premiums/charges over claims in future years for the overall IL business, including for MHIT riders.

Meanwhile, the investment return/income within the unit account (where premiums are invested) belongs to individual policyholders. The investment return is dependent on the investment fund chosen, which would contribute to the balance of the unit account to pay for all the relevant charges, including ‘the cost of insurance/tabarru’. The unit account balance is also available to policyholders who may wish to make partial withdrawals at any time, although this would affect the policy’s sustainability, that is sufficient balance in the unit account to pay for all the relevant charges and to keep the policy in force until expiry.

ITOs do take into account the investment return when determining the amount of top-up premiums required upon repricing to ensure IL policy sustainability. Both the sustainability of an IL policy and investment return from the unit account are communicated to policyholders on an annual basis via the annual statements.

If a policyholder chooses not to top up premiums during repricing, it may affect the overall sustainability of the IL policy (including for the other protection components), that is, the ability of the unit account to pay for all the relevant charges. The current system ensures that there is transparency for the policyholder by informing the policyholder of changes in the cost of insurance and how this affects the overall sustainability of the IL policy so that the policyholder is fully informed.

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