This article first appeared in The Edge Malaysia Weekly on January 17, 2022 - January 23, 2022

AFTER digital banking licences, Bank Negara Malaysia is now laying the groundwork for the issuance of licences to digital insurers, a development that is likely to generate much interest in the somewhat staid but increasingly important industry.

The central bank had, on Jan 4, issued a discussion paper outlining the proposed framework for licensing new digital insurers and takaful operators (DITOs). It aims to get written feedback on the paper by Feb 28, after which it will issue an exposure draft, which will then be followed by a policy document that sets out the prudential and business requirements for DITOs this year.

The application for a DITO licence will open “at a later date”, Bank Negara said. But first, the central bank is expected to issue up to five digital bank licences to successful applicants within this quarter after having attracted 29 applications last year.

Digital insurers, as the name suggests, are companies that ride on technology to offer products and services through digital or electronic means, usually through a mobile app. Their products tend to be different from what exists in the market, or variations of what already exists, and their policy tenures are typically shorter.

“Digital insurers adopt new business models to deliver insurance services and acquire customers through new products and channels, in particular by creating essential user experience. Digital insurers leverage off emerging technologies such as artificial intelligence, blockchain, robotics, drones, telematics and Internet of Things to deliver insurance services across the value chain,” Christina Low, financial services technology partner at Ernst & Young Consulting Malaysia Sdn Bhd, tells The Edge.

As it stands, digital-only insurers are a relatively new movement globally, and as such, there are not as many players out there as digital-only banks.

Some of the better known players today include UK-based bicycle insurance start-up Laka and US-based Lemonade, which offers protection for renters, homeowners, cars, pets and term life insurance policies for as low as US$9 (about RM38) a month. Lemonade is listed on the New York Stock Exchange.

In Malaysia’s case, digital insurers are meant to focus solely on the unserved and underserved market segments.

According to Low, interested applicants for the Malaysian licence may include foreign insurers that do not currently operate in the Malaysian market, financial technology (fintech) or technology groups, as well as telecommunications companies that may be looking to extend their reach into the financial services industry via partnerships.

Grab and Touch ’n Go are likely to be interested, industry sources say, and they do not exclude existing digital insurers such as Laka and Lemonade. Laka, in particular, was reported in 2019 to have been keen on venturing into Southeast Asia.

Industry sources say there is no need for incumbent insurance and takaful players to apply for a separate licence as they can already pursue a digitalisation agenda under their existing licence.

In its discussion paper, Bank Negara clarified that existing players are not required to obtain a separate licence to digitalise their current business operations.

“Existing players that wish to carry out digital insurance and takaful business separately from their current insurance or takaful business, may apply to carry on [such business] through a separate corporate body, such as their subsidiary or through a joint-venture arrangement with another party. However, the existing players are not required to obtain a separate licence … in digitalising their current business operations,” the central bank said.

As it stands, many of the incumbent players already have their own digital strategies in place, analysts point out.

The move to issue licences to DITOs is aimed at encouraging digital innovation in the insurance and takaful industry. DITOs are expected to contribute to a more inclusive, competitive and efficient industry.

“The licensing of DITOs is expected to complement existing players to address critical protection gaps in Malaysia, which include increasing insurance and takaful penetration among the lower-income segments of the population; expanding protection such as long-term care to the ageing population; as well as providing business protection for small businesses against business interruptions and new and emerging risks such as cyberthreats,” Bank Negara said in its discussion paper.

The central bank is considering a lower minimum paid-up capital requirement of RM40 million for licensed DITOs at the point of entry. It is open to considering risk-sharing models under the proposed framework, beyond the current business models adopted by licensed insurance and takaful operators.

With recent developments such as the Covid-19 pandemic and devastating floods, the need for insurance protection, especially for the bottom 40% (B40) income group, is seen as becoming more crucial. A Bank Negara article in March 2018 revealed that the B40 penetration rate for insurance and takaful among the working population stood at just 30.3% at end-2016 compared with 50.4% (2017) for the national working population.

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