Can an insurance agent issue policy on behalf of the insurer?

Central Bank has a way to most things.... internet-insurance? That's correct! You need approval!

Since the early 1990’s after the sun had dawn on the now defunct underwriting agency channel and their network of sub-agency, insurance companies had totally discontinued allowing the issuance of policy documents (other than cover notes) by agents. Moreover the Bank Negara then was very much against intermediaries issuing policy and settling claims on behalf of their principal(s).

In 1997 after the then new Malaysian 1996 Insurance Act came into force, this episode over agents’ role in policy issuing on behalf of their principals re-surfaced again. So…. it was back to the key question, “Are agents allowed to issue policy for and on behalf of their principal?”

Let us revisit the relevant section of the Malaysian Insurance Act 1996 – in particularly section 2:

Section 2 on definition of “insurance agent”
“insurance agent” means a person who does all or any of the following:

(a) solicits or obtains a proposal for insurance on behalf of an insurer;

(b) offers or assumes to act on behalf of an insurer in negotiating a policy; or

(c) does any other act on behalf of an insurer in relation to the issuance, renewal, or continuance, of a policy;

The meaning is very clear – agents are allowed to issue policy on behalf of the insurer, and this gets even clearer with the following definition on what’s deemed as “insurance broking business”, as depicted below….

Section 2 on definition of “insurance broker” and “insurance broking business”
“insurance broker” means a person who, as an independent contractor, carries on insurance broking business and includes a reinsurance broker; “insurance broking business” means the business of soliciting, negotiating or procuring a policy with an insurer, or the renewal or continuance of the policy, for a policy owner other than himself and includes reinsurance broking for an insurer,

Simply says, the Act is cleared – insurance brokers do not issue any cover or policy documents….

True to the facts, in May 30, 1997, Bank Negara vide PIAM’s member circular 159 of 1997 reinforced the understanding that agents are allowed to issue insurance policy for and on behalf of their principal….. the gist of the reply was as follow:

The Reply by Bank Negara – as compiled by PIAM’s MC 156 of 1997
Definition of Insurance Agent in Section 2 – Paragraph (c) of the definition of ‘insurance agent’ defines it to mean a person who “does any act on behalf of an insurer in relation to the issuance, renewal, or continuance of a policy”.

A distinction is made between an insurance agent issuing a policy on its own behalf or on behalf of its principal; the insurer. The current practice in the insurance industiy is for an insuranoe agent to issue cover notes, certificates of insurance and policies of an insurer on behalf of the insurer. As such, an insurance agent can continue to do so under the agency agreement he entered into with the insurer within the underwriting parameters laid down by his principal.

This simply confirmed agents are allowed to issue policy documents on behalf of their principal…. which I thought was contrary to the then industry practice of forbidding agents from being involved in such a process! But then no insurers actually allowed their agents to issue any policy despite such contention having made by BNM. “…perhaps, the industry practitioners were aware that the representative from BNM was misinformed about those policy-issuing practices then”

However in 2004, things changed a fair bit, as this was the year insurers were forced to embrace the electronic gateway e-cover note submission to Road Transport Department. Very quickly, instead of issuing e-cover notes at the point-of-sale (PoS) system, agents are thrust into the policy issuing regime. Main reason is to alleviate the ever increasing work load at the back-end….. With agents taking an active policy issuance role, information at the front-end PoS system can then be uploaded to the insurer’s back-end to complete the underwriting process loop…. with limited downstream processing activities.

While the interpretation of the Act concerning policy issuance by agents is very clear, but for internet-based transaction Bank Negara still requires insurers to submit their PoS system proposal and processes for approval – simply because this electronic transaction via the internet is a new thing and falls within:

  1. JPI 18/2004 (JPI:DG 15/2004) – Implementation of electronic Motor cover notes system – dated 9 August 2004
  2. JPI / GPI 26 (Consolidated) – Guidelines on Internet Insurance – dated 18 October 2000

But it was never an issue in securing BNM’s approval because firstly, those PoS systems are owned and operated by the insurers and secondly, the operating environment-framework is highly rigid with only three gateway providers providing the linkages to the Road Transport department’s main database system. “While Insurance Act allows agents to issue cover note and policy on behalf of insurer, things have certainly changed…. an approval by Central Bank is now required if such issuance falls under JPI/GPI 26”

One thing leads to another…. agents issuing policy documents on behalf of their principals became a norm! Was it some foresight by the Bank Negara or what….?

For this issuance task, agents are paid something like RM5 per policy…. this being the maximum allowable by the industry regulatory body… PIAM. Of course, there are some non-conforming insurers paying something like RM10 per policy against the flow of things.

The ANSWER to the question is very clear, “Yes! agents can certainly issue policy documents on behalf of their principal (insurance company) that they represent”, provided some proper agreement is made between the contracting parties. And, there is no necessity to approach BNM for any special approval.

However, for Motor insurance, which is now mostly transacted on electronic basis (or via internet), approval from BNM is deemed necessary – JPI / GPI 26 can be taken as a reference point. In this regard too, irregardless whether the document churned out by the PoS system be it a e-cover note or e-policy, approval from BNM is now a requirement! “….the supervision framework has changed with the advent of internet-based insurance transaction – immaterial whether it be cover note or policy issuing”

Now, this leads us to the next question – “Are those PoS systems owned and controlled by third party (or non-insurer) including agents themselves require similar approval by Bank Negara (BNM)?” The ANSWER is going to be YES and whether approval is to be granted or not would depend very much on the degree of control the principal (or insurer) has over the PoS system.

The final question – “If BNM’s approval was never granted to those PoS systems such as those owned and operated by some franchise dealers or by one sizeable internet-insurance agency, I think it is high time these systems are tendered to the Bank for scrutiny…… even if they are merely issuing e-Cover note.

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6 comments for “Can an insurance agent issue policy on behalf of the insurer?

  1. Anonymous
    March 4, 2012 at 19:33

    Amazing this analysis but can be complicated to alot of ppl, anyway good argument and pls do it more often!

  2. June 4, 2010 at 08:40

    I have always thought agent can never issue policy and settle claims on insurance company’s behalf. Puzzling your post state otherwise.

    • June 5, 2010 at 11:01

      Well, that’s what the Act says, and that was what the central bank replied many years ago….

  3. tony
    May 22, 2010 at 22:03

    awesome, some archaic laws?

  4. May 22, 2010 at 01:51

    [New Post] Can an insurance agent issue policy on behalf of the insurer? – via @twitoaster

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