Malaysia - Illegal Practice of Tying Insurance Policies
Some general insurers in Malaysia appear to have adopted a practice of requiring consumers seeking motor insurance policies to also take out personal accident policies. Many general insurers are faced with low tariffs for motor policies and a high claims rates, thereby making motor policies a challenging business. The tying of personal accident policies to motor policies increases the total premiums on the motor policy business.
Generally, there are three classes of motor policies, i.e. the (Road Transport) Act only policies, third party motor policies and comprehensive policies. The risks of injury or death to the policy holder are not covered under any of the motor policies. For this purpose, a policy holder would need to maintain a personal accident policy.
The question then is whether the tying of a personal accident policy to a motor policy is permissible?
The Guidelines on Unfair Practices in Insurance Business (“Unfair Practices Guidelines”) is generally applicable to both life and general insurers. Bank Negara Malaysia (“BNM”), the regulator in theMalaysian insurance industry, prohibits an insurer from imposing undue pressure on, or coercing, a customer to purchase another insurance policy from the insurer as a condition to the purchase of the initial policy. BNM will consider the following 5 factors in determining if undue pressure or coercion has been imposed by the insurer on the customer:
(a) the perspective of the customer as to whether the tied selling was coercive;
(b) the nature of the representation made by the insurer to the purchaser when offering the product;
(c) whether the insurance is required by law;
(d) whether the insurance is a requirement imposed under established commercial business practice; and
(e) whether limited options exist for the purchaser to obtain the insurance required elsewhere.
An insurer is not, however, prohibited from offering a customer a combination of products for the reduction in cost of the packaged product. An insurer is also not prevented from selling a product as a rider to a basic insurance policy.
The Guidelines on Motor Premium Loading and Excess (“Motor Guidelines”) however is specifically relevant to general insurers as it relates to motor policies. It provides that an insurer should not force a customer to purchase non-motor policies before agreeing to extend motor insurance cover. The Motor Guidelines reiterated the guideline issued by BNM in 1992 which directed insurance companies to cease forcing policy holders from purchasing nonmotor policies (such as personalaccident policies) as a condition to obtain motor insurance policies. The General Insurance Association of Malaysia has reinforced this by issuing a member’s circular on 21 August 2009.
Whether or not the tying of a personal accident policy with a motor policy would amount to a breach of the Motor Guidelines hinges upon whether the “personal accident policy(ies)” is a “nonmotor policy.”
Based on the general classifications of “motor policy” and “non-motor policy” as they are generally understood, a personal accident policy which covers the risk of death or injury to the policyholder is a non-motor policy. No insurer may sell motor policies on the condition that personal accident policies must also be bought, and the practice of tied selling of motor policies and personal accident policies appear to contravene the guidelines and the Malaysian Insurance Act (“IA”).
Thus where there are complaints of a “forced sale of a non-motor policy”, BNM may direct the cancellation of the cover note and a full refund of the premiums to the complainant. The insurer must also recover the commission from the relevant agent and suspend the cover-note issuance authority of the agent pending investigations.
In any event, any tied selling of policies could still be subject to the overall principles under the Unfair Practices Guidelines.
The IA authorises BNM to issue guidelines, circulars or notices relating to the conduct of the business and affairs of a licensed insurer. There is no case law in respect of the legal effect of guidelines issued by BNM under the IA. However, the High Courthad the occasion to consider similar provisions under the Banking and Financial Institutions Act. The High Court held that guidelines issued by BNM have the force of law. It is likely that a similar interpretation will be adopted vis-à-vis guidelines issued by BNM pursuant to the IA. A breach of such guidelines will likely be treated as a contravention of the IA and punishable in accordance with the IA. © Baker & McKenzie 2010