Sunday, July 19, 2015

FSA & IFSA - Impact on Death Claims (Published in Insurance magazine by the Malaysian Insurance Institute)

FSA & IFSA – Impact on Death Claims
The Financial Services Act 2013 (FSA) and the Islamic Financial Services Act 2013 (IFSA), both of which have made a significant impact on the insurance and Takaful industry, came into effect on 30th June 2013. As is common knowledge by now, the FSA repealed four legislations. Amongst the most importance of this was the Insurance Act of 1996 (IA 1996). Similarly, the IFSA repealed the Takaful Act 1984. These two legislations have been described as mirror images of each other because of the similar provisions of law contained therein. However there is one significant difference: the IFSA provides for legislation to be compliant where relevant, to Islamic law and Shariah principles. These statutory provisions and rules are of course, particularly significant to the Takaful industry. The operational aspects of   the law dealing with insurance policy contracts and Takaful certificates can be found Schedules 8, 9 and 10 in both the respective Acts.
Although the principles of many of the provisions in these schedules have been retained from the previous legislations, there are nevertheless significant changes in some important areas of the law. This article seeks to discuss those provisions that particularly relate to the payment of death claims in insurance policies and Takaful contracts. To have an easy understanding, the provisions of the FSA on this topic will be discussed first, followed in the second part by that of the IFSA.
FSA 2013
The rules for payment of death claims for life and personal accident insurance policies under the FSA ,  where the policy owner is also the insured life and has named  a nominee, is generally the same. Thus, if a claim is deemed valid, it is mandatory for the insurer to pay the claim proceeds to a named nominee. The significant change imposed by the FSA is seen in “trust policies”.  A trust policy is one whereby a non-Muslim policy owner takes up an insurance policy on his own life and names either the spouse, children or parents as nominees. The benefit of such a trust is that the death claim proceeds do not form part of the estate of the deceased and are thereby not subject to the claims of creditors. Whereas previously the law was silent as to who can be appointed as a trustee, the FSA now directs that the policy owner cannot name himself as a trustee or be deemed as one. The appointment of trustees in trust policies has always been optional. The role of trustees in insurance trust policies being (during the lifetime of the policy owner), to give consent to contractual changes whenever applied by the policy owner to the insurer.
Prior to the FSA, insurers adopted one of two practices when no trustee was appointed in the policy and when consent was required. Some insurers deemed the named nominee in the policy as the trustee (“presumed trustee”) while others considered the policy owner as the trustee (“default trustee”). The Act now only recognizes the concept of “presumed trustees”. This means that in the absence of a trustee being (expressly) appointed by the policy owner, the consent of such named nominees are required when the policy owner applies to make contractual changes to the insurer. Upon the death of the policy owner however, the law remains the same in that the claim proceeds are made to the appointed trustee or in the absence of one, to the competent nominees.
Other notable differences introduced by the FSA are as follows:
i)                    If there is no nominee named in the policy or it is deemed that there is no nominee named in the policy contract.  
As a general rule the insurer will request for a grant of representation i.e. probate, letters of administration, a distribution order by the land office or Public Trustee Berhad (Amanah Raya Berhad). The insurer is however, given a discretion to make payments directly to the beneficiaries of the estate according to their beneficial rights as allowed by the law. This distribution process will follow the rules as provided in the Distribution Act 1958 (as amended by the 1997 Act), the Intestate Succession Ordinance 1960 (Sabah) or the Faraid rules for Muslims.
 It is strongly believed that insurers will not undertake the “cumbersome process” and responsibility to determine the rightful beneficiaries and pay out the claim accordingly. Previously, under these circumstances, the IA 1996 permitted the insurer to pay to one or more individuals and placed the burden and responsibility on them to distribute the moneys to the rightful beneficiaries. In making payments to such individuals, the insurer was deemed to have received a proper discharge of their responsibility.
ii)                  Interest on late payments.
Insurers are required by the law to pay interest for late payments of death claims, for policies which were on the life of the deceased policy owner. A payment is considered late if it is paid out after 60 days of notification of the death to the insurer. Such interest will accrue irrespective of the reasons that caused the delay. This rule was introduced by the IA 1996 and is retained in the FSA. The rate of interest has however, been changed by the FSA. Whereas previously it was “.... a minimum compound interest of 4%  per annum or other such rate as may be prescribed....”, it is now “.... a minimum compound interest at the average fixed deposit rate applicable for the period of 12 months for licensed banks as published by Bank Negara Malaysia plus one percent or other rates as may be specified....” . Thus, based on current rates the interest payable by insurers for late payments is definitely higher than 4 %.
IFSA 2013
The payment of death claims to nominees in Takaful contracts has been significantly changed by the IFSA. Traditionally, a nominee who received death claim proceeds had a duty and responsibility to distribute them according to relevant laws of distribution. In the case of Muslims for example, these moneys were often expected to be distributed according to the Faraid rules.  If a Takaful participant had written a Will, whether Muslim or Non- Muslim, the terms of the Will would apply (subject to the relevant limitations for Muslims). Under the IFSA however, a participant is given the additional option to declare that the nominee is to receive the moneys as a beneficiary of a conditional hibah.
A nominee receiving these moneys as a hibah or gift is entitled to the full proceeds and has no obligation to distribute it to any other beneficiaries of the estate. Moreover, the moneys received “shall not form part of the estate of the deceased Takaful participant or be subject to his debts”. This effectively makes the death claim benefits a “ creditor proof “ source of funds for the named nominee . In life insurance contract this privilege was given only to trust policies and that too, to selected nominees of Non - Muslim policy owners, namely, spouse, children and in some cases parents. As for Takaful participants, be they Muslims or Non- Muslims, the beneficiaries of a conditional hibah can be any natural person and is not necessarily restricted to family members. Moreover, the IFSA does not prescribe any restrictions or conditions if the certificate holder decides to change his nominee.  From a marketing point of view all these benefits   allow for very powerful sales ideas!
On the subject matter of delayed payment of death claims, the rules specified in the IFSA are very much similar to the FSA as stated above, with the following exception on the quantum, the “Takaful operator shall pay a minimum compensation at the rate of investment yield of the participant’s risk fund plus one percent or such other rate as may be specified by Bank Negara Malaysia....”.
Author’s note: The discussion above is based on the relevant the provisions of Schedule 10 of the FSA and IFSA respectively . The main changes in the law and the consequent impact have been highlighted while other details which have not seen significant changes, are not discussed.

Thursday, May 7, 2015

NEW WORKSHOP! 10th June 2015 - The FSA & IFSA Insurance and Family Takaful

Assignments and the Need for Conditional Assignments             
An Assignment Deed is a legal instrument that transfers the ownership of an asset from the owner to another.
                     ASSIGNOR ---------------- ASSIGNEE
                        (Owner)                        (New owner)
A life insurance policy is recognized as an asset of an individual and thereby its ownership is generally allowed to be transferred to another by an assignment deed. Upon an assignment being effected, it is a complete transfer of ownership and cannot be withdrawn by the assignor. However, (just like any other asset), the assignee can transfer the ownership back to the assignor if he/she wishes to do so. This is effected by means of a “Reassignment” or “Revocation” of the assignment as practiced by insurance companies.
When an insurance policy is assigned, the benefits in the policy (unless specifically excluded in the policy contract) are payable to the assignee. These benefits would include cash bonuses, survival benefits, loans, surrender or maturity proceeds and of course death claim proceeds. Hence, such assignments have been  labeled as “Absolute Assignments”.
It is believed that in the early 1960s, some life insurers created a “modified assignment” and called this instrument a “Conditional Assignment”. This instrument was probably created because the laws prevailing at that time did not allow a beneficiary to be legally entitled to the proceeds of an insurance policy and could only make a claim if the Grant of Probate or Letters of Administration of the deceased’s estate were produced. Section 44 of the Insurance Act 1963 was later introduced as an amendment (in 1983), to allow beneficiaries to receive all or part of the death claim proceeds under certain conditions. Thus, the object of the Conditional Assignment at that time was to allow the policy owner (the assignor) to give the entire death claim proceeds to the beneficiary (an assignee) without the need for Grant of Probate or Letters of Administration. The situation had changed because Section 165(1) of the Insurance Act 1996 and now Para 4 of Schedule 10 of the FSA 2013  makes it mandatory for the insurer to pay the entire death claim proceeds to the named nominee(s) in a insurance policy.
The FSA 2013, in directing insurers to pay death claim proceeds to the nominees directly, further stipulates that some of them are not entitled to these moneys beneficially. Para 2(4) Schedule 10 states “The licensed insurer shall prominently display in the nomination form that the policy owner has to assign the policy benefits to his nominee if his intention is for his nominee, other than his spouse, child or parent to receive the policy benefits beneficially and not as an executor;…….”
The words used in this statutory provision i.e. “assign the policy benefits” clearly directs the insurer to allow the policy owner to assign the policy benefits and not necessarily the ownership of the policy.
Thus, it is now onerous on the insurer to create an assignment that provides for nominees, who are other than spouse, children and sometimes parents (commonly called “non-trust nominees”), to receive death claims beneficially and not merely as executors as provided in Para 6(3) of the FSA 2013. This provision again uses the words “policy moneys “and not “policy” with regards to assignments.
Therefore, a “Conditional Assignment” is now necessary to give “non-trust nominees” beneficial interest in the death claim proceeds of both life and personal accident insurance policies. Such an assignment may be provided by the insurers as “standard forms” or drafted in any other manner acceptable to them. Although the primary purpose is to give the claim proceeds to the assignee, other conditions may be introduced to give effect to this objective.. For example, the condition that “if the assignee predeceases the assignor, then the assignment is revoked” will be a natural requirement for these purposes.
As an alternative to executing a conditional assignment, the policy owner may also give the beneficial interest of the policy moneys to “non- trust nominees” by means of specific directions in his/her will by virtue of  Para6(2) of Schedule 10 of the FSA 2013.

The above discussion is to impress upon insurers dealing in life insurance and personal accident policies the need for allowing policy owners to assign policy moneys to specific persons if they desire to receive the death claim moneys beneficially. Such assignments may carry the label “Conditional Assignment” or  any other suitable name. Academics and lawyers  may find this concept unacceptable because it is alien to the principles of assignments as seen and applied with other assets and as taught in law school. It must be noted that the FSA 2013 and its predecessor for the insurance industry, the Insurance Act 1996   had created several peculiar legal “phenomena” applicable  to insurance contracts. Among the most significant of this, apart from the concept of “conditional assignments” is the principle of “suspended trusts”. This of course, is a matter to be discussed in another paper.


21st April 2015