Duty and trust in insurance

THE insurance industry in Malaysia started exactly 200 years ago in 1826 with the establishment of the insurance and tariff associations that provided services to the British colonial commerce activities.

At the time, most of the insurance activities were primarily foreign owned or managed.

In 1961, the Insurance Association of Federation of Malaya was formed in Kuala Lumpur, marking a move towards localisation.

This was followed by the Insurance Act 1963, introducing regulation to ensure local ownership post-independence.

Today, the insurance industry is matured and established, playing an important role providing necessary safeguards for the welfare of industries, families and individuals.

The peace of mind knowing the risks in life and business will be underwritten by insurance firms have made it an important pillar of any economy in the world.

With rising healthcare costs, natural disasters and geopolitical turmoil, the insurance industry has become even more crucial in ensuring that policyholders’ interests are protected.

In Malaysia, insurance agents’ network plays a key role in securing revenue for insurance firms.

Although there is a growing trend for digitalisation, with Bank Negara Malaysia (BNM) introducing a new Digital Insurers and Takaful Operators framework, it is still a long journey until digital adoption becomes the way forward.

Expansive role of insurance agents

Insurance agencies and their agents often market themselves as financial advisers, legacy protectors and wealth planners.

These terms are used interchangeably, providing an impression that insurance agents are financial experts.

Apart from the pre-contract examination for insurance agents conducted by the Malaysian Insurance Institute, insurance agents also need to be registered with mandatory associations approved by BNM, such as the Life Insurance Association of Malaysia or Persatuan Insuran Am Malaysia.

Insurance or takaful agents are allowed to market private retirement scheme or unit trust scheme products, provided they are registered with the Federation of Investment Managers Malaysia (FIMM).

They will need to meet specific criteria like having at least three years’ experience, passing FIMM’s exams, and complying with “fit and proper” rules.

For investment-linked and capital market products, these would fall under the purview of the Securities Commission (SC).

As a result of this dual role, the public is often confused about the role of an insurance agent.

Many retail investors trust their insurance agents’ sales pitches across a variety of products.

Once established, this trust and relationship tend to be solid.

This is why we see many insurance agency firms move on to become SC-licensed distributors and wealth planners, selling and marketing fund management products like unit trusts and wholesale funds to the masses.

In a way, their relationships with the clients give them access to offer a plethora of financial and capital market products once trust has been established early on.

Greed should not supersede humanity

Unfortunately, quite a number of insurance agents have been embroiled in cash trust and Ponzi scheme scandals.

Instead of focusing on marketing insurance policies and licensed capital market products, many of them have gotten involved in pushing unlicensed capital market products like cash trusts to their existing clients.

This is not something new as it has been ongoing for a good five years now.

Previously, there were also large groups marketing Ace Credit (M) Sdn Bhd products to the public, which have since collapsed and remain entangled in multiple legal suits, including with the SC.

Investors who entrusted their money to Ace Credit have yet to fully recover their capital.

The losses are staggering, yet they have not been borne by any party to date.

Of late, I have sighted internal memos issued by three major insurance firms in Malaysia, explicitly instructing their agents to refrain from marketing or selling cash trust products to the public.

They are also given strict warnings that any breaches would constitute a violation of the firms’ ethics and code of conduct.

In addition, they are not allowed in any way to misrepresent or mislead clients into believing that such cash trust products are endorsed by their insurance firm.

Speaking from personal experience, I was approached by an independent financial adviser and insurance agent in 2023 to discuss the distribution of our wholesale fund.

He made overly ambitious promises in an attempt to persuade me to allow him to market our fund.

When I asked about his track record, he claimed to have sold cash trust products worth millions, describing them as safe and offering “guaranteed” returns of 10% per annum, provided clients locked in their funds for three years.

When I questioned the legality of these products, he candidly admitted that the commissions were highly lucrative and that legality was not his primary concern, citing the presence of well-known board members and the perceived stability of the company.

We parted ways amicably without any business dealings, but deep down I was truly shell shocked by the cavalier attitude displayed.

Fast forward to today, we are seeing many cash trust companies blocking clients’ redemptions for a variety of reasons. Clearly, these cash trust companies are unable to meet withdrawal requests, as reported in the media.

Was this outcome foreseeable? The warning signs were evident.

Yet, some agents continue to promote such products, prioritising their personal gain over humanity to not hurt others.

Fiduciary duty to clients

Like them or hate them, the role of insurance agents remains pertinent, especially when it comes to marketing policies and financial products to clients.

This is not entirely unlike the period leading up to the global financial crisis, when investment banks packaged toxic credit default swaps linked to subprime mortgages and sold them through various channels – including to retail investors, sometimes under the guise of insurance-like products.

When Lehman Brothers Holdings Inc collapsed, governments had to step in to stabilise the system and salvage whatever possible. Many individuals, including ordinary savers who have worked hard their entire lives, lost their retirement funds and life savings.

As financial (BNM) and capital market (SC) professionals, we owe a fiduciary duty to clients who entrust us with their monies.

For some, the sum may not be huge, but they often represent a lifetime of savings.

Negligence in managing other people’s money is unacceptable – wilful negligence is unforgivable.

Beyond professional ethics, there is a fundamental principle we should all uphold: “Do not do unto others what you do not want others to do to you.”