Billions up in the air? Why haven't other foreign insurers operating in Malaysia complied with the divestment condition?
With only Great Eastern having contributed to the mySalam Trust Fund, where’s the contribution from the other players?
Muhammad Hafiz Ipaldin
According to this Bloomberg article (Malaysia Set 2023 Cutoff for Foreign Insurer Stake Sales, Sources Say), the deadline for divesting was set at the end of 2023. It also says foreign insurers are required to contribute to the B40 Health Protection Fund aka mySalam Trust Fund, if they’ve not pared down their stakes by then. Well, 2023 has come and gone, and so far, no other foreign insurer has either pared down their stakes or publicly committed to making a contribution. Not a public peep has been heard updating us on this matter. Only ‘noble silence’ all the way from Finance Minister I (Anwar Ibrahim) & II (Lim Hui Ying), the current Bank Negara Malaysia (BNM) Governor (Abdul Rasheed Gaffour) to the foreign insurers (e.g. AIA, Prudential, Tokio Marine, Zurich, Chubb, AIG) concerned. If we go by the 2022 - 2023 combined annual earnings of these insurers and using the ‘30% profit forgone on 10 times annual earnings’ contribution calculation method (Great Eastern’s RM 2.37 billion contribution amount was arrived at using the same formula based on Great Eastern Malaysia’s 2017 net comprehensive earnings) as a base gauge - setting aside its appropriateness as a valuation measure, that's perhaps a minimum RM 6 BILLION CONTRIBUTION AMOUNT UP IN THE AIR!!!!!!! Now, why would that be the case??? Let's take a short stroll through recent history to understand why the rest of the foreign insurers may not be willing to contribute to the mySalam Trust Fund.
It starts with the obvious. Why would any foreign insurer want to comply with a condition when there clearly is not a level playing field for everyone involved?
Recap: Great Eastern Life Assurance (Malaysia) Berhad (GELM) was allowed, with BNM and Ministry of Finance’s (MOF) aid and blessings, to plunder the policyholders’ portion from surplus distribution proceeds, more than 4 years ago on 3 March 2020, to the tune of RM 2.37 billion ( pages 11, 39, 40, 68, 81, 105, 122, 123, 161, 162 gelm-annual-report-2020 page 159 GEH-2020-annual-report). This was ultimately done in service of their parent company, Great Eastern Holdings (GEH), so that GEH may fulfil the replacement to the divestment condition - contribution to the mySalam Trust Fund. MOF granted GELM a RM 569 million (24% of RM 2.37 billion) income tax exemption on that amount transferred to their shareholders’ fund (total transferred from the unallocated surplus of GELM’s closed participating funds amounted to RM 2.64 billion with 90% of it, or RM 2.37 billion, aka the policyholders’ portion, exempted from income tax) and GELM subsequently paid dividends to GEH, amounting to the same, on 4 March 2020. GEH then made the RM 2.37 billion contribution to the mySalam Trust Fund on 5 March 2020.
Policyholders within GELM’s closed participating funds lost out on bonuses worth RM 2.37 billion (above RM 2000 per policy on average), both immediately payable and accrued bonuses, due to this deal (Note: In a strange twist, it is also true to say that GEH shareholders lost out on dividends worth more than SGD$ 0.5 billion, excluding the tax exemption, as the mySalam contribution was not made directly from the unallocated surplus within GELM’s closed participating funds, but from GEH’s retained earnings. This goes against the former GEH Chairman Koh Beng Seng’s (KBS) claim in its 2019 AGM and GEH’s own announcement that the mySalam contribution would have no material impact on its earnings (GEH 2019 AGM Minutes,
GEH 2019 Announcement ). The implication being that the contribution would be directly made from GELM’s unallocated surplus, thus not impacting the P&L of GELM and GEH. This implication was unfortunately not supported by GELM’s own admission that it would not utilise participating fund assets for Corporate Social Responsibility (CSR) purposes unrelated to its operations and management. One can only surmise that BNM allowed a reattribution, where the rights and interests of GEH and participating policyholders in the unallocated surplus were redefined in favour of GEH, thus giving it ‘free reign’ to use the surplus distribution proceeds for its private purpose. So far, no clarification has been forthcoming from GEH on this discrepancy and SGX doesn't seem interested in making sure GEH notifies their shareholders and the wider investor base of the change in material ‘facts’ and the reasons behind it. Why? Truly perplexing.)
It was a CRIMINAL, yes, CRIMINAL BREACH OF TRUST perpetrated by GELM, aided by BNM and MOF, for the benefit of GEH. Abusing policyholder funds for shareholder purposes, and with the aid of government administrators of the day and a so-called ‘independent body’ enacted under an act of parliament - sadly, not the first time for Malaysia. Instead of distributing surplus within closed funds in line with the 90:10 profit-sharing principle, with policyholders receiving 90% of the distribution proceeds, as is contractually obligated; as is disclosed within its own financial statements; as per its past practices; and as required by the Financial Services Act and BNM’s insurance regulations, GELM chose to deviate from its own norm to increase the shareholders' portion from 10% of the distribution proceeds to 100%. The excuse given was that GELM’s estate, i.e. surplus from previous generations, which in 2018 amounted to more than RM 10 billion and was the ultimate source of funds for GEH’s mySalam contribution, was something that could be distributed based on a ratio other than 90:10 due to the uncertainty of the rights and interests of the current generations of policyholders in it. This excuse completely upends key implied terms of a participating contract - as stipulated within BNM’s regulations and the Financial Services Act: that there are intergenerational transfers of surplus, from one generation¹ of policyholders to the next, and that the proportionate interests of policyholders, as a class, and shareholders in any surplus distribution, whether from the estate or otherwise, are maintained throughout the course of the fund in line with the 90:10 profit sharing principle. It also conveniently forgets that GELM had all this while, prior to the 3 March 2020 distribution, been distributing the estate on a 90:10 basis. In fact, it was how GELM distributed special bonuses from the estate for financial years 2004 and 2007. (Note: So far, no acknowledgement of wrongdoing and consumer harm has been forthcoming from any of the parties (GELM, GEH, MOF & BNM) involved. At the very least, affected policyholders have to be restituted by the amount misappropriated, RM 2.37 billion, and for the time value of money. But with BNM having failed in their duty to protect consumer interests and by being party to the conspiracy; and with the subject matter heavily intertwined with actuarial considerations & technicalities, thus making it somewhat outside the scope of the Ombudsman for Financial Services (OFS); and perhaps, this needs confirming, with the OFS Chairman, Dr. Foong Cheng Yuen, allegedly being part of the very ‘Independent’ Review Panel tasked with reviewing the usage of GELM’s estate for shareholder purposes; short of going to court and the police, affected policyholders have only the Minister in charge of Consumer Affairs (Armizan Mohd Ali) as their last recourse. But, how aware is he of this matter and how willing would he be to take this on? Oh, the sweet irony of currently having the media's spotlight on the aforementioned Minister seeking to manage price increases and other issues due to the rationalisation of diesel subsidy yet, I doubt he's even aware of this particular juggernaut of a failure of BNM in protecting financial consumer interests and their role in perpetrating the crime. What would he have to say when it might, in the end, eventually come to haunt him? Perhaps - Sorry, not my area/expertise)
Back to the rest of foreign insurers having to contend with the divestment condition. Here are the salient points for why there isn't a level playing field:
Not all foreign insurers have an estate. Those without an estate, such as Prudential, AIG, Chubb, would have to finance the contributions solely from their capital and earnings.
Not all foreign insurers with an estate have an excess estate that is large enough to make a contribution at the required amount (assuming 30% of 10 times annual earnings as the contribution calculation method) without compromising the security of the remaining participating policies. Tokio Marine’s (TM) unallocated surplus (including fair value and revaluation reserves) for participating policies amounted to around RM 580 million in 2022 and its net comprehensive earnings for 2023 was around RM 165 million. Applying the assumed contribution calculation method, TM’s minimum contribution would have to be around RM 500 million, or more than 85% of its 2022 unallocated surplus. In contrast, GELM only utilised less than 25% of its 2019 participating funds’ unallocated surplus for the mySalam contribution. Assuming the contribution does go through and TM also transfers its shareholders' share of 1/9th the contribution amount, or ~ RM 56 million, there would be less than 1% of participating policies’ liabilities made up of the remainder surplus. Nothing much left of the surplus, which is largely maintained to provide security to policy values from poor investment performance, to remain effective.
Not all foreign insurers with an estate view it as ethical, lawful/legal to use the policyholders’ portion in any estate distribution for shareholder purposes. Based on the disclosures within its past financial statements where it clearly states, “At least 90% of the surplus must be attributed to the contract holders as a group”, in relation to participating fund surplus distributions, it would be very hard to fathom TM’s board obliging any other arrangement benefiting the company at the expense of participating policyholders. Reminds me of this quote from an article in The Edge (Most foreign insurers said to be eyeing mySalam route), “The foreign insurers could be exploring the mySalam route but the key issue here is, will the insurers get clearance from their boards and shareholders? Another question to ask when it comes to this is, the money for the ‘CSR’ scheme, which pocket will it come out of? Will it be from the insurer’s policyholders or shareholders? They need to work it out,”(Note: While GELM does have a similar disclosure, “Surpluses in the DPF (discretionary participating features) funds can be distributed on an approximate 90/10 basis in accordance with BNM's guidelines - Management of Insurance Funds”, it didn't stop its board from transgressing policyholder rights. FYI, the ‘can be’ only conveys the insurer’s discretion over the amount and timing of surplus distributions and does not infer any right to deviate from the 90/10 profit sharing rule itself in favour of shareholders.)
Without an estate reattribution, there wouldn't be a deus ex machina for an income tax exemption to be given for any other mySalam contribution. The assumed contribution calculation method, the one used to derive GELM’s contribution amount, is based on an insurer’s net and not gross earnings. Why would an amount derived after deducting income tax, need to be layered with another tax exemption? It wouldn't make any sense to award exemptions under such a calculation method. So why did GEH get a tax exemption via GELM for its contribution? Putting aside the propriety of GELM’s estate reattribution exercise, this is how one BNM senior management personnel explained it, “If some of the savings from not going through a lengthy court process (which involves expensive lawyers which have to paid from the estate funds) can be channelled to the B40 group in a way that helps them meaningfully, I would consider it an improvement on the UK experience, while being no worse off for policyholders”. The quid pro quo would have sounded something like this: You'll get a higher profit sharing ratio but, some of the savings from not having gone through a lengthy court approved reattribution exercise, we expect you to donate it. Since the avoided costs of the exercise would have been tax-deductible, the equivalent 'donation' will be tax-free. In effect, you will be paying the Government of Malaysia a fee for facilitating the exercise, which would be used for public interest initiatives. But we can't call it a ‘facilitation fee’ because that would make it a bribe, so it will have to be a CSR contribution from your side and can be considered as your satisfying the divestment condition. And your group will have first right of refusal, as per your request, to administer this scheme facilitated by the contribution. Win-win. In case anyone thinks I'm joking about this, please check out BNM’s latest Policy Document on Management of Participating Business. It doesn't talk about the tax exemption bit but it does make clear, under Para 14.27, that insurers are allowed to increase their excess estate distribution proportion if it thinks that that would obviate any ‘windfall’ gain to policyholders and/or if it were to be used for public interest initiatives (this option only came into force on 1 July 2024 and wasn't a BNM policy when GELM raided the policyholders’ portion on 3 March 2020. Let's see if BNM will now allow GELM to increase their distribution proportion without the amount being earmarked for public interest initiatives). The real question, aside from the necessity of a reattribution and the appropriateness of the way it was structured sans policyholder knowledge, consent and due consideration, is: What was the formula used in computing the ‘savings’ made by GEH and how did this formula serendipitously encapsulate the “30% profit forgone on 10 times of Great Eastern Malaysia’s 2017 net comprehensive earnings” amount?
What about the other shenanigans plaguing the GELM mySalam contribution making foreign insurers reticent about their compliance stance?
Let's start with Nor Shamsiah
Where is the former BNM Governor presently? BNM was under her stewardship when GELM was allowed to raid policyholder funds for shareholder purposes and the 2023 divest or contribute deadline was set. Well, since 21 September 2023, she’s been firmly ensconced as an ‘Independent’ Non-executive Director of AIA Group Limited in Hong Kong. 2023 has come and gone, but has anyone heard anything about AIA wanting to contribute to the mySalam Trust Fund - she did play a role in setting the deadline? No? If everything with BNM’s handling of the estate resolution & divestment exercise has been hunky dory, peachy keen, shouldn't Nor Shamsiah be perturbed that AIA hasn't publicly committed to the mySalam fund yet? Shouldn't she have tendered her resignation knowing full well that AIA is a bad actor? I guess it only makes sense if there’s more to it than what meets the eye.
What about Jessica Chew (JC), Koh Beng Seng (KBS) and Khor Hock Seng (KHS)?
The current Deputy Governor of BNM, JC, who is in charge of BNM’s regulation and supervision functions, had in 2018 approved the usage of estate within GELM’s closed participating funds for public interest initiatives. This was done prior to the setting up of the Independent Review Panel and the approval only allowed for the direct² charging from the estate for these initiatives. Funny enough, I think this is where the former GEH Chairman, KBS, got the gumption for his proclamation on the mySalam contribution not impacting GEH’s earnings - either that or he was lax on the risk of establishment of a false market. KHS, the current GEH CEO, on the other hand, didn't mind the material impact it would have had on the earnings of GELM and GEH by having the contribution made indirectly from the estate. In fact, it was part of his proposal in late 2018 for the RM 2.37 billion (the actual contribution amount, based on the proposal, could have reached over RM 3 billion) to be transferred to GELM’s shareholders’ fund, for the amount to be tax exempted and for the contribution to be directly made from there. All three didn't get their exact wishes. To summarise: JC wanted the contribution to be made directly from the estate, but maybe didn't want the contribution to be tied with GEH’s divestment condition; KBS wanted the same except he definitely also wanted the contribution to be tied with GEH satisfying the divestment condition; and KHS wanted what KBS wanted except he didn't mind the impact it would've had on GELM and GEH’s earnings provided the financial crime stayed in Malaysian territory. Fortunately or unfortunately for KHS, GELM tai-chied away part of the legal risk, making it a cross-border financial crime, by first paying a dividend to Great Eastern Life Assurance Company Limited (Singapore) (GELS) / GEH, which GELS / GEH then channelled to mySalam Trust Fund. Fun fact: KHS is, and was at the time, simultaneously the CEO of GEH and an Executive Director of GELM.
All three seem to have forgotten something sacrosanct. That all assets of a participating fund can only be used to meet the ‘properly incurred’ liabilities and expenses of that fund. No one, not even BNM, has unfettered discretion in determining its liabilities or expenses. The mySalam contribution is not necessary and relevant to the ongoing operations and management of GELM’s closed participating funds and is purely for shareholder purposes. It is superfluous as all CSR expenses deemed necessary and relevant have already been reserved for as part of the expense provisions within the funds’ actuarial liabilities³.
Any action that could result in a breach of duty or trust cannot be deemed to be properly incurred. It would be a breach of duty of care (good faith and fair dealing) if GELM charges, either directly or indirectly, the participating funds for expenses which are unrelated and unnecessary for its management and operations. Such specifications (mySalam fund contribution) by BNM would not only be a breach of the regulator’s duty of care towards policyholders but is also against BNM’s financial stability mandate per the FSA.
BNM's duty:
6. The principal regulatory objective of this Act is to promote financial stability and in pursuing this objective, the Bank shall-
(a) foster-
(iv) fair, responsible and professional business conduct of financial institutions; and
(b) strive to protect the rights and interests of consumers of financial services and products.
Why is the Deputy Governor of BNM, in charge of regulation and supervision, sanctioning the use of GELM's estate for public interest initiatives, which is patently part of BNM's developmental agenda? Why is this conflict of interest allowed to fester? The developmental agenda is not even part of BNM's financial stability mandate. It is high time for the regulation and supervision functions within BNM to be separated from it to ensure the orderly functioning of financial institutions, without the undue influence and interference from the Bank arising from this conflict of interest. There must be an open inquiry (open to the public) into this matter, preferably via a parliamentary select committee. JC, you are answerable to the affected policyholders, to all of us. I call on you to address this matter publicly.
GELM's estate is not sui generis. It does not stand alone, unique and untethered to the participating contract or fund. It is very much a product of ongoing operations within GELM's closed participating funds. Granted, there most likely or definitely were underpayments to past participating policyholders⁴, but that does not alter the contractual rights and interests of the current generations of participating policyholders in the estate. Nor does it authorise BNM or any other party from appropriating the assets backing the estate for other purposes. There is also the issue of the reliability/credibility of GELM's estate figures and calculations. Poor historical financial & policy record keeping and inadequate reconciliation of asset share⁵ components with financial statement figures, the lack in these two key measures which are necessary to ensure that the estate could not be attributed to current generations, resulted in a huge part of the funds⁶ being erroneously lumped into it. A significant chunk of it is most likely part of asset share as it developed contemporaneously with the current generations within the pre-2005 block of policies. The RM 10.5 billion estate sum (based on 2018 reporting) is a bold-faced lie. It should be much lower than RM 4 billion (figure based on projecting the RM 1.8 billion estate size as at end 2001 to 2018, accounting for fund investment returns and deductions for estate distributions to policyholders and shareholders during the intervening years) as an estate cannot grow beyond a fund’s investment returns once it is first established. In fact, if the balance of unpaid asset shares of past policyholders and miscellaneous income from other sources were included as part of the 2001 asset share computation, the estate might very well be negligible. The shortcomings of the 2001 asset share computation is not my opinion per se but the opinion of GELM’s then Appointed Actuary. It was he who mentioned, “The projection is based on the current in-force business and projected retrospectively. Any profit / loss from the lapses and surrenders becomes part of the “orphan estate”, together with plans for which no policies remain on the book as at that date. Riders are also excluded from the projection”. Another GELM Appointed Actuary made the following comment in a 2004 report, “The Appointed Actuary intends to further refine the bonus investigation methodology, where necessary, by calculating the Asset Shares and BRV⁷ (Bonus Reserve Valuation) of a product at entry cohort level. The Appointed Actuary also intends to conduct more thorough investigations on past experiences of Participating Funds to further safeguard policyholders’ interest”. I guess, any refinements implemented didn't really pan out as intended. Was it intentional? The way our laws and regulations are applied, it is very conceivable for insurers and takaful operators to conveniently forget parts of itself, parts of its history, if they find doing so gains them a bounty in the end. And then there are the government administrators and regulators also conveniently forgetting parts of itself, parts of its history, and cheering on the corporations in their ‘corporate amnesia’ quest, if they too could partake in the bounty and help society along the way. For the Greater Good, they say.
Oh, and the need for a reattribution exercise is nothing but a high form of mental gymnastics that warrants little attention. What exactly is a reattribution? A reattribution is a process by which policyholders and shareholders agree to redefine their right and interests in the estate in return for payment. It is where policyholders agree to give up their rights and interests in return for a one-off lump sum payment. If they decline the offer, policyholders retain their 90% interest in the estate or more precisely, in any future distribution from the estate. But in this case, there was no one-off lump sum payment or consent sought from policyholders. Affected policyholders had no clue that their funds were being proposed for the mySalam contribution. I'm certain that even now, after 4 years, a significant majority of them still have no idea that they had collectively lost out on bonuses worth RM 2.37 billion. It is why I am calling it an improper reattribution.
What beggars belief in this current scenario is that the regulator and insurer saw to it to unilaterally alter the terms and conditions, i.e. without the consent and knowledge of policyholders, and without due consideration, i.e. a sum to be paid by shareholders from their own pockets and not that of the estate. In the normal ‘scheme of things’, GELM's closed participating funds would have to be distributed in its entirety to policyholders and shareholders by the time the last policyholder exits their respective fund and in line with the 90/10 profit sharing principle. It is not an ‘orphan’ estate, it is not a sui generis ‘estate’, it is an INHERITED ESTATE. And no other party, be it the regulator or insurer, has the power or authority to alter the contract unilaterally to the detriment of policyholders.
What can affected policyholders do?
Affected policyholders should consider lodging complaints with GELM, BNM, OFS or seeking legal recourse. They may also want to refer to the following tables. The tables are a bit dated (end 2013 - end 2015 figures) but they do contain valuable information on the average per policy asset share values by product. I've also augmented those figures to include estate as part of asset share - based on the proportion of asset share by product to total asset share of fund (It is a rough measure to give policyholders a sense of how much is at stake but will differ from how estate is actually apportioned to each product). Pay attention to the potential average level of underpayment had any of the affected policyholders surrendered their policies during the period (end 2013 - end 2015) - see columns highlighted in yellow. There is also another table that shows how the funds present retrospectively and prospectively (refer to the asset share and actuarial liabilities footnotes for an explanation) - based on end 2017 figures.
https://drive.google.com/file/d/1lVFRCCJubAFogEGcojg56TS4s_AQg6Lh/view?usp=drivesdk
Where’s Lim Guan Eng (LGE) and Tony Pua (TP) in all of this?
Let's not forget the former Finance Minister, LGE. If JC wanted to abuse the participating funds for BNM’s developmental agenda, this chap one-upped her and granted GEH exemption from the divestment condition, even before the conclusion of the ‘Independent Review Panel’, just because they had pledged a minimum RM 2 billion contribution amount. And all the while GEH was going around town saying there would be no material impact to their earnings, and no impact to embedded value⁸ as the contribution would be made from the unallocated surplus of participating funds. How can policyholders be assured then that the ‘Independent’ Review Panel was truly independent? There was practically zero chance of GEH coughing up their own funds for the mySalam contribution - aside from what should have been rightfully distributed to policyholders.
Great Eastern exempt from foreign ownership ruling after pledging RM2 bil to B40 health scheme
If BNM saw fit to abuse policyholder funds, MOF then saw fit to grant GELM a tax exemption of RM 569 million on the RM 2.37 billion portion of the one-off transfer on 3 March 2020, and set the amount GEH needed to pay for the exemption at 10 times 30% of the 2017 net profit of GELM. Why grant an income tax exemption for what should have been a separate consideration (divestment condition)? Why muddle the reattribution (estate resolution) exercise with the fulfilment of the divestment condition? Why base the contribution amount on 10 times annual earnings and not 16 or 17 times annual earnings - something more reflective of GELM’s future earnings potential? Why also base it off of 2017’s earnings, these are time sensitive considerations, so why not at least use 2019’s earnings - the contribution was after all only received on 5 March 2020? I've hazarded my guesses - see the reasons for why there is no level playing field when it comes to the divestment condition. What I do know is that the amount paid by GEH bears little semblance to 30% of the fair economic value of GELM, which if calculated based solely on GELM’s long term profitability (present value of future profits from in-force block of business/policies + present value of 10 years worth of new business/policies) as of 2018, would amount to over RM 4 billion. The 30% stake would be above RM 6 billion if valued based on 2023 reported figures. All in, Malaysians lost at least RM 2.2 billion in this deal, on top of the RM 2.37 billion misappropriated from GELM’s participating policyholders, and still, this is the lower end of the estimate.
Not done on the one-upping, LGE decided to tweet the following:
Apart from the lie that mySalam did not cost Malaysian taxpayers or Malaysians in general a dime, LGE does have a point. The Mahathir led Pakatan administration lost power on 1 March 2020, roughly 10 days after Wee Ka Siong’s Facebook post on the mySalam fiasco (Wee Ka Siong - Bila saya membangkitkan persoalan tentang mySalam...). Coincidentally, this was also the day GEH Assistant Company Secretary Ms Jeslin Tan Wan Hoon’s resignation took effect (Resignation of Assistant Company Secretary). The transfer from participating funds happened on 3 March 2020, a day after Latheefa Koya tendered her resignation as MACC Chief Commissioner on 2 March 2020 (The Edge Malaysia theedgemalaysia.com
Latheefa Koya resigns after nine months as MACC chief), and the mySalam trust received the due sum, RM 2.37 billion, on 5 March 2020. Why was the contribution amount not immediately paid out after the conclusion of the Independent Review Panel, but at least two months later - according to parliamentary proceedings (PENYATA RASMI PARLIMEN), the independent assessment should have been finalised before the end of 2019? So, who was the Finance Minister when this transfer actually happened and who was the Finance Minister actually responsible for this decision? Was it LGE or someone else? What was the conclusion of the panel and who were the members? All this needs to be investigated. LGE also had the temerity to state that were they (Pakatan) still in power, they would have gotten RM 4 billion for the mySalam contribution. Where in the world was he going to get the additional RM 1.63 billion from? From GELM’s estate? No, thanks. Now that his sister, Lim Hui Ying, is FM II, is she going to help make this happen - BNM has already paved the way for the excess estate distribution proportion to shareholders to be increased if they wished to use it for public interest initiatives? Is she aware of the following GEH response to the Securities Investors Association of (Singapore) (SIAS), on its contribution to the National B40 Protection Health Trust Fund in satisfaction of the divestment condition (local shareholding requirement)?
How did the board assess the “enforceability” of the undertaking by the Minister of Finance?
We have had a long history of operating in Malaysia and see no cause for concern
with regards to commercial transactions with the Malaysian government.
Are there any other major commitments for the group to fulfil for the mySalam scheme?
The Government of Malaysia has appointed Great Eastern Takaful Berhad (“GETB”)
to administer the mySalam Scheme. As the administrator, part of GETB’s role is to
conduct activities to promote the mySalam Scheme. There are no other major commitments for the Group to fulfil for the mySalam Scheme.
Assuming that the ‘other major commitments’ for the MySalam scheme in the query also refer to other remaining commitments in fulfilling the divestment condition, it seems to me GEH has given a firm ‘no’ answer to their shareholders. Taken together with the ‘no cause for concern’ comment, why would GEH want or need to contribute any further amounts to the B40 Health Protection Fund?
We need to talk about Great Eastern Takaful Berhad (GETB) - Has GETB benefited financially from administering the mySalam scheme?
But first, what did TP say about mySalam and open tenders?
TP (Part 3: Tony Pua responds to Tun M): I would listen and bring the proposals back to the minister for consideration. Many excellent proposals were sourced via these meetings. These would include the setting up of a RM2 billion MySalam critical illness and hospitalisation fund for the B40, contributed by the insurance industry. This fund has benefited more than 120,000 Malaysians to date…..I would however avoid parties who are only interested in securing contracts via direct negotiation with the government. The minister would always tell me to inform them that in the event the government is interested in the project, an open tender would be called, and they would be invited to participate.
There was no open tender for the mySalam scheme, even after two years of being in operation. This was the finding and opinion of the Auditor General in the LAPORAN KETUA AUDIT NEGARA 2019 SIRI 2.
Selepas tamat tempoh dua tahun, tender masih tidak dibuka kepada syarikat insurans lain untuk turut serta dalam pelaksanaan skim mySalam. Perkara ini menyebabkan syarikat insurans tempatan yang lain tidak berpeluang memperoleh manfaat ekonomi daripada pelaksanaan skim mySalam. Selain itu, kos pengurusan takaful yang kompetitif juga tidak dapat dipastikan kerana pelantikan syarikat 916257-H (GETB) sebagai pengendali takaful untuk skim mySalam tidak dilaksanakan melalui proses tender.
MySalam financially benefited GETB
“This premium is set at cost rate and without profit for [the] insurance company,” Lim confirmed at the launch of MySalam on Jan 24.
Despite concerns, MySalam will make a big difference for B40 households
As announced previously, no private insurance company will profit from the mySalam scheme. All premiums paid by the Government, if unutilised in claims from the beneficiaries, will be reimbursed back to the mySalam Trust Fund.
The Government reiterates that there is no profit element for Great Eastern Holdings nor Great Eastern Takaful Berhad (GETB) in mySalam
Contrary to what has been disclosed by the former Finance Minister, LGE, and MOF, GETB did indeed profit from administering the MySalam scheme.
Before diving into this topic, we need to establish some basics. Unlike conventional insurance where all operating and management expenses (including commissions) are met from the insurance funds themselves, for takaful, it happens significantly in the shareholders’ fund. All fees paid by takaful certificate holders, including administration (wakalah) fees, flow to the takaful operator’s shareholders’ fund and the relevant expenses are met from and reserved for there. This should be enough to clue you into the fact that profits can be made from earning wakalah fees - as long as outflows (expenses) are lesser than inflows (fees).
There are two key pieces of evidence for how GETB benefited financially from administering mySalam:
A) The before/during mySalam profit/loss pattern; and
B) The huge mySalam expense liabilities (RM 31.2 million as at FYE 2022) which will be or already have been (as part of MFRS 17 and MFRS 9 accounting changes) released from reserves and reclassified as profit.
The first circumstantial proof of this is in GETB’s financial turn of fortune since administering mySalam. Between 2019 (beginning of mySalam) and 2022 GETB made a cumulative profit of RM 42.6 million which brought down its retained losses to RM 47.3 million as at FYE 2022 (before the adoption of changes in accounting standards). Compared to retained losses of RM 89.9 million as at FYE 2018, one can understand & see why this was truly a positive change in fortune. GETB only managed to make a profit, albeit a small one of RM 1.2 million, in one financial year, FYE 2014, between 2011 and 2018. There were in fact two capital injections, in 2012 and 2017, amounting to RM 55 million in total and average losses⁹ per financial year were around RM 11 million during that period (2011 - 2018) - there was also another capital injection of RM 40 million in 2020. This tells us that GETB didn't yet have a sufficient pool of takaful certificates (policies) to service its expenditures while it was trying to grow its business at the same time. Then came mySalam in 2019 with its annual premium contribution amounts of over RM 400 million - roughly the same size or higher than GETB’s 2018 gross earned premium contribution amount.
Not only did mySalam provide an opportunity for GETB to earn extra income, it also provided a way to defray staff and other fixed costs over a bigger business base - which I believe resulted in lesser reserve amounts, in terms expense liabilities, for its non-mySalam business - this translated to the profit pattern we see between 2019 and 2022.
Between 2019 and 2022, GETB incurred over RM 85 million (average: RM 21 million per annum) in mySalam expenses, while its mySalam wakalah & other fees collection totalled RM 115 million (average: RM 29 million per annum), leaving a residual RM 30 million plus which was reserved for as part of expense liabilities - the mySalam fee residual which was reserved for helped lower the amount that needed to be reserved for the non-mySalam business expenses and was later released as part of MFRS17 and MFRS 9 accounting changes which were adopted in 2023 (GETB’s July 2023 interim report shows that retained earnings for FYE 2022 were restated to RM 44 million, up from the previous retained losses RM 47.3 million - a boost of RM 91.3 million). And this hasn't accounted for the wakalah fees that GETB earned in 2023 and will be earning until end of 2025 - Anwar Ibrahim did extend the scheme for another two years. That would be an additional RM 78 million (RM 26 million per annum) in wakalah fees and with a profit margin of around 25% (based on RM 30 million plus residual for wakalah fees & other income of RM 115 million between 2019 and 2022), translates to potentially RM 20 million in profit between 2023 and 2025.
Another shocking finding - GEH did not bear the retakaful costs (reinsurance) for mySalam
The RM2 billion from Great Eastern Life Malaysia will start the ball rolling for the MySalam Scheme. Meanwhile, Great Eastern Takaful Bhd will be the insurer for the scheme. It is understood that Great Eastern Life will absorb any shortfall, while any profit will be ploughed back into the scheme.
Despite concerns, MySalam will make a big difference for B40 households
Sehingga 31 Disember 2020, iaitu selepas dua tahun Skim mySalam dilaksanakan jumlah perbelanjaan adalah RM300.98 juta iaitu RM110.90 juta (36.8%) bagi perbelanjaan manfaat mySalam dan RM190.08 juta (63.2%) bagi perbelanjaan operasi. Perbelanjaan operasi melibatkan bayaran seperti yuran pengurusan (wakalah) takaful (RM42.88 juta), yuran wakalah takaful semula (RM77.35 juta), cukai perkhidmatan (RM69.28 juta) dan lain-lain (RM0.57 juta). Keseluruhan perbelanjaan ini hanya melibatkan 31.7% penggunaan dana berbanding anggaran perbelanjaan bagi tempoh yang sama. Butiran lanjut adalah seperti dalam Jadual 6 dan Carta 3.
Berdasarkan surat yang dikeluarkan oleh BNM bertarikh 21 Februari 2019 kepada syarikat 916257-H, sebarang kos pengaturan takaful semula (retakaful arrangements) hendaklah ditanggung sepenuhnya oleh syarikat 199903008M dan bukan oleh Dana Amanah mySalam. Perkara ini adalah selari dengan komitmen oleh syarikat 199903008M untuk menanggung sebarang kerugian yang dialami oleh dana amanah tersebut.
Bagaimanapun pada 28 Februari 2019, BNM bersetuju dengan kos pengaturan takaful semula ditanggung oleh Dana Amanah mySalam. Semakan Audit mendapati syarikat 993967-M telah dilantik oleh syarikat 916257-H sebagai pengendali takaful semula (RTO) bagi skim mySalam. Pengaturan RTO ini melibatkan bayaran berjumlah RM25.02 juta.
LAPORAN KETUA AUDIT NEGARA 2019 SIRI 2.
A 2019 Edge article mentioned that GEH was supposed to absorb any shortfall in the takaful scheme. In line with that, BNM had intended (21 February 2019 letter) for all retakaful expenses to be borne by GEH but changed their mind (28 February 2019 letter) a mere 7 days later. Up until end 2020, according to the Auditor General’s report, the mySalam Trust Fund had spent RM 78 million in wakalah fees for retakaful alone. Extrapolated for 5 years (2019 - 2023), that could mean a total of around RM 200 million just in retakaful administration fees alone. All in, mySalam’s total administration fees tally (including for retakaful) could have surpassed RM 320 million for the 5 years until end 2023 or around 14% of the RM 2.37 billion contribution amount. I echo the concerns of the Auditor General.
Pengaturan takaful semula yang melibatkan kos yang tinggi adalah tidak munasabah kerana tidak dijalankan kajian menyeluruh dan trend tuntutan mySalam sehingga akhir tahun kedua masih rendah.
GELM’s Board of Directors - are they worthy?
I'll leave this gem for everyone to ponder on. It was truly remarkable to read in GELM’s 2020 annual report the following:
In the opinion of the Directors, the results of the operations of the Company during the financial year were not substantially affected by any item, transaction or event of a material and unusual nature.
What a strange opinion to have, given that right above that statement was GELM’s net profit for 2020 of RM 3.6 billion. That's over a four fold jump from its 2019 net profit (RM 818 million) and the past 5 year (2015 - 2019) average net profit was less than RM 800 million. And Mr Ou Shian Waei is, and was at the time, not only a GELM board member but also a board member of FIDE Forum and a public interest director of the Private Pension Administrator Malaysia. Interestingly, Kamaruddin Taib, the current FIDE Forum Chairman, was a board member of GELM until 27 February 2019. Another surprising fact I stumbled upon…..he was also member of GELM’s Independent Review Panel.
https://fn.com.my/investors/ar2023/downloads/F&N_AR2023.pdf
FIDE FORUM is a community of board leaders in the financial industry that provides a vibrant platform for networking and collaboration among esteemed industry professionals. At FIDE FORUM, we play a pivotal role in empowering board directors in the financial sector to share invaluable insights, engage in discussions on best practices, and address industry-wide challenges in corporate governance.
Share & engage away FIDE…….share & engage away
¹ A generation represents policies with a particular policy inception year. At any given time there will be policies of different generations making up a participating fund, and are managed together
² As opposed to indirect charging vis-a-vis increase in allocation/distribution ratio to shareholders' fund and subsequent payment, financed by the higher allocation, from either the shareholders’ fund or from the dividend payments received by the shareholders, to the public interest initiatives fund
³ Amount deemed minimally necessary to meet the funds’ net future outflows, with premiums part of inflows and items such as expenses, policy benefits and shareholders’ allocations part of outflows; in a fair, just and lawful world, the actuarial liabilities’ policy benefits and shareholders’ allocation in closed participating funds would have been calibrated, in line with the 90/10 rule, to make actuarial liabilities at least equivalent to the size of the fund net of other liabilities - there would be no surplus, thus ensuring a proper plan for the full distribution of any estate/surplus by maturity of those funds and expenses would be limited or minimised to only those which are necessary and relevant. The actuarial liabilities and surplus dichotomy of the fund is a prospective presentation - it tells the story of how the fund will develop in future. There is another dichotomy, asset share and estate, that is used to present a fund retrospectively - this tells the story of how the fund developed based on the past.
⁴ GELM’s estate ballooned from RM 1.8 billion to RM 8 billion between 2001 and 2005. Policyholders were definitely underpaid, especially during this period but also beyond. It might have happened 20 years ago and those affected may not still be around, but for those who still are around, including relatives, I would personally urge you all to fight for your rights. At the very least, please try to lodge complaints with GELM, BNM and the OFS.
⁵ The part of the participating funds deemed attributable to the current generations. Asset share is basically the accumulation of premiums less deductions for all outflows such as expenses in managing/operating the fund (including commissions), policy benefit payments/cost-of-insurance charges, investment & policy taxes/duties and transfers to the shareholders' fund and additions for investment and miscellaneous returns. However, what was not often emphasised and this is a crucial point, is that the accumulation includes all cash flows, of previous generations and of policyholders from within current generations, who had left the fund during the period spanning current generations. To illustrate, if currently there are in-force policies from the 90s and aughts, not only would the unpaid asset shares of policyholders from the 90s and aughts who've left the fund have to be rolled over to form part of the remaining policies’ asset shares, the same would also have to be done for the unpaid asset shares of previous generations, e.g. those from the 80s, who've left the fund during the period spanning the current generations. Excluding other liabilities, the remainder within the fund, after deducting asset share amounts, is the estate. The asset share and estate dichotomy of the fund is a retrospective presentation - it tells the story of how the fund developed based on the past. There is another dichotomy, actuarial liabilities and surplus, that is used to present a fund prospectively - this tells the story of how the fund will develop in future
⁶ GELM has two closed participating funds (not including any other participating funds it might have obtained after purchasing Ammetlife) - as in not accepting any new business/policies. Participating Fund 1 consists of GELM policies issued prior to 2005 while Participating Fund 2 consists of Ex-OACM block of policies. Both funds closed in 2005 and 2001 respectively. As at the end of 2017 there were over 1 million in-force policies within both these funds and there were still in-force policies from the 80s during this period
⁷ Same meaning as actuarial liabilities
⁸ Amount representing the present value of the insurer’s future profits based on its in-force block of business/policies
¹⁰ This was on the back of proportionally higher related party charges such as group shared services / outsourcing / secondment / rental charges to Great Eastern / OCBC and KAT (Koperasi Angkatan Tentera), as is common for fledgling financial companies. These related party charges made up a significant chunk of total annual management & operating (M&O) expenses, around 29% of total M&O (excl. commissions) expenses or cumulatively, RM 129 million from 2011 to 2018, eclipsing total losses by at least RM 40 million as at FYE 2018.
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The matter is too complex for any of them to comprehend.