Professional Documents
Culture Documents
PCE English
PCE English
Overview OVERVIEW
1.1. Introduction
This chapter provides an introduction to the
1.2. Importance of Insurance wide range of topics which the book covers.
Emphasis is placed on the following areas:
1.3. How Insurance Works
• Importance of Insurance
1.4. What is Insurance?
• How Insurance Works
1.5. Functions of Insurance
• What Insurance Is
1.6. Classes of Insurance
• Functions of Insurance
•
1.7. Historical Aspects of Insurance
Classes of Insurance
1.8. The Role of an Insurance Agent
• Historical Aspects of Insurance
1.1. INTRODUCTION
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CHAPTER 1 - INTRODUCTION TO INSURANCE
would have been able to generate if responsibilities. Who will bear these financial
the fire had not occurred. On the losses and where will the funds be obtained from
other hand, those employed by the to offset such losses? Usually, in the absence
factory may face the prospect of of legal remedies, contract arrangements
redundancy and unemployment. or cooperative efforts, losses will fall on the
individual or business unit concerned. To solve
We can give countless examples of events this problem, an arrangement is introduced for
which lead to human grievances and financial coping with some of the risks and possible losses
losses. faced by individuals and business enterprises.
The natural question to ask then is This arrangement works on the law of large
numbers, i.e. by spreading the risk of loss faced
“What arrangement(s) can be made to by a specific person or enterprise to all parties
overcome or at least reduce the consequences who pool their resources to pay for individual
of misfortune that may befall any one person?” losses. This loss sharing arrangement is called
insurance.
In answering the above question, we have to
admit that not all forms of loss can be made The insurer is the intermediary who manages
good or be expressed in pecuniary terms. For this risk pool. The insurer holds and invests the
instance, the emotional trauma arising from the premiums in trust for policyowners, and pays
death of loved one cannot be made good by them in the event that these losses for which
any conceivable compensatory system. insurance protection is taken, occur.
Perhaps, what can be done is to devise a Let us consider for a moment as to what would
compensatory system which will at least seek happen in modern society without insurance
organization.
- to reduce the impact of financial
loss consequent to an unfortunate Living costs money. Money is required to
event; and buy essential needs like food, clothing and
accommodation, as well as to acquire other
- to prepare or free oneself for the comforts of life. If one wants to have a decent
forthcoming and unexpected financial life, one should have a continuous flow of income
burden or losses. as long as one is alive. This continuous flow of
income can be ensured only in two ways.
One such possible arrangement, whereby the
financial loss is in consequence of an unfortunate Sources of Income
incident such as death or a fire, can be through
the purchase of insurance. A person may create his source of income by
either setting up his own business or working
for other people where, upon completion for the
1.2. IMPORTANCE OF INSURANCE jobs done, he will receive payment in the form of
a salary, wages, allowances or commissions.
The Need for Income The other means is through investment income
by way of dividends, bonuses or interest on the
Every moment, individuals, families and capital invested.
business units are exposed to losses arising
from their property, occupations, activities and
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CHAPTER 1 - INTRODUCTION TO INSURANCE
House owners
or term life Premiums
Let us next understand how insurance works to Claims
compensate for the financial losses consequent #1 RM 200
1000
#2 x
to the occurrence of a risk or perils. RM 200
RM200 Expenses
#3 RM 200 and other
=RM200,000 Outgoes
Rather than providing a more formal definition
of the terms “risk” and “peril” now (see Chapter
Profits
2), we shall look at some instances where we # 999 RM 200
# 1000 RM 200
can say that a risk or peril has occurred.
Figure 1.1. Concept of Insurance Illustrated
Some Forms of Risk
• An outbreak of fire resulting in The contribution from the 1000 house owners
material damage; or life assured results in the creation of an
insurance fund of RM200,000. The insurer
• Loss of income due to disability or uses this amount of money to pay for claims,
premature death. management expenses and other outgoes such
as commission, taxes, etc. The balance, if any,
constitutes the insurer’s profit.
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CHAPTER 1 - INTRODUCTION TO INSURANCE
Insurance as a device for spreading the loss An economic institution based on the
of a few among many can only work when principal of mutuality, formed for the purpose of
insurers are able to underwrite a large number establishing a common fund, the need for which
of similar risks. When insurers are able to write arises from chance occurrences of nature,
a large number of similar risks, the law of large whose probability can be fairly estimated.
numbers operates.
The insurance service, therefore, involves
The law of large numbers states that as the payment of contracted benefits or
number of loss exposures increases, the compensation to the insured or a third party
predicted loss tends to approach the actual against unforeseen losses.
loss. Although the law of large numbers is a
simple concept, it can only operate efficiently Essential Features of Insurance
if the following requirements are fulfilled:
•
The essential features of insurance, therefore,
There are a large number of similar are:
loss exposures.
•
i. It is an economic institution.
The loss exposures must be
independent. ii. It is based on the principle of mutuality
or cooperation.
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CHAPTER 1 - INTRODUCTION TO INSURANCE
iii. Its objective is to accumulate funds to if the owners were not able to transfer
pay for claims that arise as a result of their risks through insurance.
the operation of specific risks.
• Provision of Security for
iv. Only certain risks can be insured Expansion of Business
against, namely those whose
occurrence can be confidently Insurance helps to remove the fears
estimated with a certain degree of and worries of losses of individuals
accuracy. and business executives. This removal
of fears and worries helps to establish
confidence and enables the forward-
1.5. FUNCTIONS OF INSURANCE planning of economic activities.
• Reduction of Losses
In this section we will look at the various
functions of insurance. Insurers help to reduce losses (both
in frequency and security) through
their actions and recommendations in
1.5.1. Primary Function rating, survey, inspection services and
salvage.
An endowment insurance is a
1.5.2. Secondary Functions combination of protection plus savings.
The investment part of the contract is a
savings accumulation. By combining the
• Stabilization of Costs two features in a single plan, endowment
assurance provides both protection and
Through the purchase of insurance, savings to the insured.
business enterprises avoid the necessity
of having to freeze capital to provide for • Provision of Sources of Capital for
financial protection against losses. This Investment
provides a means of stabilizing the costs
involved in managing risks. Insurers accumulate large funds which
they hold as custodians and out of which
• Stimulation of Business claims and losses are met. These funds
Enterprise are usually invested (to earn interest)
in the public and private sectors. Such
The risk transfer mechanism provided investments help considerably in the
by insurance has made possible overall development of the economy.
the present-day large-scale commercial
and industrial enterprises. These large-
scale enterprises would not have started
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CHAPTER 1 - INTRODUCTION TO INSURANCE
1.Insurers 20,600
• Loss of a continuous stream of income
during retirement (i.e. during old age)
2.Insurance Brokers 1,162
3.Adjusters
4.Registered Life Agents
1,844
78,587
• Sickness or disability
5.Registered General Agents 39,165
What is General Insurance?
While the nature of jobs for brokers and adjusters
General insurance business can be taken to be
are independent and more of specialized
all other forms of insurance business (including
roles, the various job functions in an insurance
the reinsurance of liabilities under a policy in respect
company such as underwriting, claims handling,
thereof) which is not life insurance business as
accounts, audit/compliance, human resource/
defined in the Insurance Act 1996.
administration, electronic data processing,
marketing and servicing, investment and other
Risks Covered by General Insurance
support functions are inter-dependent.
General insurance contracts, to mention a few,
can be arranged to provide cover against the
1.6. CLASSES OF INSURANCE
following forms of risk to the insured and/or third
parties in respect of
The pooling of risk is the fundamental principle
underlying the insurance business and it is
• loss or damage to property, e.g. to
motor vehicles, ships, buildings,
useful to classify insurance business broadly
stocks-in-trade;
into Life Insurance and General Insurance.
What is Life Insurance?
• legal liability caused by products or
goods sold, or the process carried
out;
Life insurance can be defined as a contract
which pays an agreed sum of money on the
happening of a contingency (event), or of a
• death or injury to a person by an
accident.
variety of contingencies, dependent on a human
life.
More about the basis underlying the conduct of
the Life Insurance and the General Insurance
classes of business is provided in Part B and
Part C of this book.
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CHAPTER 1 - INTRODUCTION TO INSURANCE
1.7. HISTORICAL ASPECTS the dependents of the members who had died
OF INSURANCE during the year.
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CHAPTER 1 - INTRODUCTION TO INSURANCE
• to bring financial relief to aggrieved It is greatly hoped that the reader will persevere
dependents of insured people who through the rest of this book and acquire the
may meet with untimely death; technical and sales-related knowledge to
achieve success in his or her career.
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CHAPTER 1 - INTRODUCTION TO INSURANCE
CHAPTER 1
1. Which of the following statements is NOT true about the law of large numbers?
4. The secondary functions of insurance will include all of the following, EXCEPT
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CHAPTER 1 - INTRODUCTION TO INSURANCE
5. Life insurance contracts can be arranged to provide cover against the following
forms of risk:
I. bank loans.
II. premature death.
III. sickness or disability.
IV. continuous stream of income during retirement (i.e. old age).
a. I and II.
b. I, II and IV.
c. III and IV.
d. All of the above.
6. Amongst many other risks, general insurance contracts will cover the following,
EXCEPT:
a. property.
b. accident.
c. natural death.
d. legal liability.
7. Insurance, as an organization, seeks to provide protection against ___________
caused by fortuitous events.
a. emotional losses.
b. sentimental losses.
c. financial losses.
d. non-financial losses.
8. Which ONE of the following facts is NOT true about both life and general
insurance?
a. Life insurance policies are subject to the principle indemnity whereas general
insurance policies are not.
b. General insurance policies are subject to the principle of indemnity whereas life
insurance policies are not.
c. Life insurance policies and general insurance policies will both pay when a person
suffers permanent disablement due to an accident.
d. Life assurance is a long-term contract whereas general insurance is a yearly
renewable contract.
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CHAPTER 1 - INTRODUCTION TO INSURANCE
9. The operation of the principle of the law of large numbers will ensure
a. better prediction of future losses.
b. better understanding of the market.
c. better understanding of the customers.
d. better cash flow for the insurer.
10. The essential features of insurance are:
I. It is economic institution.
II. It is based on the principle of mutuality or co-operation.
III. Its objective is to accumulate funds to pay for claims that arise as a result of the
operation of specific risks.
IV. Only certain risks can be insured against, namely those, whose occurrence can be
confidently estimated with a certain degree of accuracy.
a. I and II.
b. II and IV.
c. II, III and IV.
d. All of the above.
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CHAPTER 2 - NATURE OF RISK AND RISK MANAGEMENT
Overview OVERVIEW
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CHAPTER 2 - NATURE OF RISK AND RISK MANAGEMENT
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CHAPTER 2 - NATURE OF RISK AND RISK MANAGEMENT
In conclusion, it can be said that risk has 2.3.1. Fundamental and Particular Risks
several meanings and the meaning of risk will
therefore depend on the context in which it is
being used. Fundamental Risks Defined
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CHAPTER 2 - NATURE OF RISK AND RISK MANAGEMENT
Loss
Loss control aims to reduce the total amount of
Speculative Risk Break-even loss. The total amount of loss is influenced by
Gain the frequency and severity of loss.
Figure 2.2. The Main Characteristics of Pure and Frequency of loss is the number of times a loss-
Speculative Risks
producing event will occur over a given period
of time.
2.4. METHODS OF HANDLING RISKS Severity of loss is the cost or amount of loss,
in money terms, arising from loss- producing
events.
In this section we will look at the methods of
handling pure risks. Basically there are four Loss control measures handle risks by:
methods of handling risks:
•
•
Loss Prevention
Risk avoidance
•
Loss prevention refers to reducing the
Loss control frequency of loss, say for example, by
the use of fire resistant material in the
• Risk retention construction of a building to help prevent
fire losses.
• Risk transfer
• Loss Minimization
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CHAPTER 2 - NATURE OF RISK AND RISK MANAGEMENT
Control
2.4.4. Risk Transfer
Figure 2.3. The Risk Management Process
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CHAPTER 2 - NATURE OF RISK AND RISK MANAGEMENT
2.5.2. Evaluating Potential Losses Not all risks are capable of being insured.
Risks that are insurable must fulfil certain
characteristics. The main characteristics are as
After identifying potential losses, the next follows:
step is to evaluate the potential losses of the
firm. Evaluation involves the estimation of
the frequency and severity of loss exposures
2.6.1. Financial Value
and ranking them according to their relative
importance. Loss exposures with high loss
potential will be given priority in the risk
Insurance is concerned with situations where
management programme.
monetary compensation can be given following
a loss. Therefore, insurable risks should involve
2.5.3. Selecting Risk Handling Techniques losses that are capable of being financially
measured. The following are some examples of
such risks:
Risk handling techniques include risk avoidance,
loss control, risk retention and risk transfer. Risks Financial Measurement
The selection of a risk handling technique may i. Damage to Property Cost of Repairs
be based on financial or non-financial criteria. ii. Injury to Others Court Awards
Selection based on financial criteria will consider iii. Death of a Life Assured The ability to pay the premium in
how the choice will affect the organization’s relation to the sum assured and his
financial standing
profitability or rate of return. Non-financial
considerations will include humanitarian aspects
and legal requirements.
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CHAPTER 2 - NATURE OF RISK AND RISK MANAGEMENT
2.6.2. Large Number of Similar Risks cannot function properly and efficiently if losses
are intentionally or fraudulently brought about
by the insured.
There must be a large number of similar risks
before any one of the risks is capable of being
insured. There are two reasons for this: 2.6.6. Insurable Interest
Insurance is concerned only with pure risks 2.6.7. Legal and Not Against Public Policy
because in a pure risk situation, one will suffer a
loss or incur no loss, thus there is no possibility
of profiting from a pure risk. Speculative risks The object of insurance must be legal and
hold out the prospect of loss, break-even or not against public policy. A ship engaged in
profit, and thus are rarely insured. An insured in smuggling or a wager on a life is not an insurable
such a situation would be less inclined to put in risk because such a risk is of an illegal nature.
efforts to bring about a gain because the insurer Fines and penalties imposed by law are not
will indemnify any loss. insurable because it is against public policy to
provide insurance for such events.
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CHAPTER 2 - NATURE OF RISK AND RISK MANAGEMENT
CHAPTER 2
3. Which of the following is NOT a loss prevention and loss reduction technique in fire
insurance?
4. Which of the following is NOT a loss prevention and loss reduction technique in life
and health insurance?
a. Fire.
b. Flood.
c. Theft.
d. Operating a supermarket.
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CHAPTER 2 - NATURE OF RISK AND RISK MANAGEMENT
7. When a person stops playing football because he does not want get hurt, the risk
control method used is known as
a. loss prevention.
b. risk avoidance.
c. risk transfer.
d. risk retention.
9. Which of the following determines the total amount of loss under the loss control
method of handling pure risk?
I. frequency.
II. severity of loss.
III. physical hazard.
IV. moral hazard.
a. I and II.
b. II and III.
c. III and IV.
d. All of the above.
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CHAPTER 2 - NATURE OF RISK AND RISK MANAGEMENT
21
CHAPTER 3 -
THE BASIC PRINCIPLES OF INSURANCE AND AN INTRODUCTION TO TAKAFUL
Overview OVERVIEW
3.1. Principles of Insurance
The following basic principles of insurance are
3.2. Takaful covered in this chapter:-
3.3. Shariah Supervisory Council
• Insurable Interest
•
3.7. Types of Takaful Business Proximate Cause
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CHAPTER 3 -
THE BASIC PRINCIPLES OF INSURANCE AND AN INTRODUCTION TO TAKAFUL
Table 3.1. Subject Matter of Insurance As a general rule, a person who effects a general
insurance contract must have insurable interest
at the time he enters into it and at the time of
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THE BASIC PRINCIPLES OF INSURANCE AND AN INTRODUCTION TO TAKAFUL
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CHAPTER 3 -
THE BASIC PRINCIPLES OF INSURANCE AND AN INTRODUCTION TO TAKAFUL
• Life policies
a. Name,
b. Date of birth,
Life policies are assignable by statutory
provision under the Policies of Assurance c. Identity card number or birth
Act 1867, subject to the conditions certificate number, and
outlined in section 23.3. of Chapter 23.
d. Address.
• Transfer by will or operation of law
Such nomination shall be witnessed by a person
Certain policies, for example fire policies of sound mind who has attained the age of 18
provide for the automatic assignment of years and who is not a nominee named under
a policy if the transfer of interest in the the policy.
subject matter of insurance is made by
a will or operation of law.
3.1.3. The Principle Of Utmost Good Faith
Assignment of Claim Amount.
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THE BASIC PRINCIPLES OF INSURANCE AND AN INTRODUCTION TO TAKAFUL
This duty can be defined as the positive duty to (Read also Chapter 7 Section 7.6.2. concerning
disclose fully and accurately all material facts knowledge of, and statement, by an insurance
relating to the proposed risk that a proposer agent.)
knows or is reasonably expected to know,
whether asked or not.
3.1.3.4. Material Fact
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CHAPTER 3 -
THE BASIC PRINCIPLES OF INSURANCE AND AN INTRODUCTION TO TAKAFUL
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CHAPTER 3 -
THE BASIC PRINCIPLES OF INSURANCE AND AN INTRODUCTION TO TAKAFUL
3.1.4.2. Measure of Indemnity and Methods he would be able to recover a total of RM2,000.
of Indemnity To prevent the insured from making a profit out
of his loss, the insurer who has indemnified
the insured would exercise the insured’s rights
The measure of indemnity depends on the nature under the principle of subrogation and attempt
of insurance. Generally, indemnity in property to recover from the negligent third party the
insurance is based on either replacement amount paid to the insured. Subrogation is
cost less depreciation, or the market value, considered as a corollary of indemnity, that is
while in liability insurance it is measured by it is a natural consequence of indemnity. Since
the amount of court award or negotiated out subrogation arises when indemnity arises, it is
of court settlement plus approved costs and not applicable to non-indemnity contracts.
expenses. Indemnity in pecuniary insurance
is measured by the amount of financial loss
suffered by the insured, for example in a fidelity 3.1.5.1. How does Subrogation Arise?
guarantee insurance, indemnity is measured by
the amount of financial loss suffered as a result
of an employee’s dishonesty. Subrogation may arise in the following ways:
The principle of subrogation provides that an Alternatively, the insured may have
insurer who has indemnified an insured for a loss incurred a loss which is not only covered
may exercise the insured’s rights to claim from under a policy, for example a money
the third party in respect of the loss. The principle policy, but is also covered under a
of subrogation has been developed to prevent contract entered between the insured
the insured from getting more indemnity when and a third party, that is the security
he has two or more avenues to recover his loss. company carrying the money. The
For example, when an insured object valued at insured therefore may be able to recover
RMl,000 has been destroyed by a negligent third his loss from either the insurer or the
party the insured may have two parties, in the security company. If the insured decides
absence of subrogation, to recover his loss, that to recover his loss from the insurer, the
is from the insurer and the negligent third party. insurer may exercise the right of the
If the insured recovers his loss from both parties insured to recover under the contract
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CHAPTER 3 -
THE BASIC PRINCIPLES OF INSURANCE AND AN INTRODUCTION TO TAKAFUL
Insured Claims NO Insured Claims In most classes of general insurance, the principle
from T hird Party from Insurer of subrogation has been modified by a policy
YES
condition which allows the insurer to exercise
Insurer Acquires subrogation before or after indemnity has been
Insured Cannot Claim Subrogation
from Insurer made. In other words, the insurer can exercise
subrogation even before they have indemnified
Matter is Settled Matter is Settled the insured.
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CHAPTER 3 -
THE BASIC PRINCIPLES OF INSURANCE AND AN INTRODUCTION TO TAKAFUL
3.1.6.2. Modifications of the Principle of When a loss occurs, the onus is on the insured
Contribution to prove that the loss in respect of which a claim
is made has been caused by an insured peril. If
the loss is the result of one cause, it will not be
The application of the principle of contribution difficult to decide on the question of liability.
can also be modified by a policy condition. In
most classes of general insurance the policy The insurer is not liable for an uninsured or
condition usually provides that when contribution excluded peril.
exists, the insurer would pay the proportion of
the loss for which he is liable. An insurer is liable for a loss caused by an
insured peril. On the other hand, the insurer
will not be liable for a loss caused by either an
3.1.7. The Principle Of Proximate Cause uninsured peril or excluded peril. A loss may be
the result of two or more causes occurring at
the same time or one after the other. A problem
3.1.7.1. Importance of the Principle of arises when the two or more causes involved
Proximate Cause are both insured perils and excluded perils.
In such a situation, it becomes difficult for an
insured to establish the actual cause of loss.
Onus of proof of loss rests on the insured. To resolve this difficulty, the law developed the
doctrine of proximate cause based on the Latin
Which among the many causes of losses maxim causa proxima non remota spectatur
can be taken to be the dominant cause of which means that the proximate cause and not
loss? This cause is the proximate cause. the remote must be looked at. Thus, when a
loss is the result of many causes the proximate
cause, that is the dominant or effective cause,
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CHAPTER 3 -
THE BASIC PRINCIPLES OF INSURANCE AND AN INTRODUCTION TO TAKAFUL
must be identified and attributed as the cause Let us look at some examples which explain the
of the loss. principles involved.
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THE BASIC PRINCIPLES OF INSURANCE AND AN INTRODUCTION TO TAKAFUL
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CHAPTER 3 -
THE BASIC PRINCIPLES OF INSURANCE AND AN INTRODUCTION TO TAKAFUL
2. compliance to Shariah principles The Takaful Act 1984 is divided into four parts:
whereby business is conducted openly
in accordance with utmost good Part I: This provides for the interpretation,
faith, honesty, full disclosure, classification and references to takaful
truthfulness and fairness in all business. Takaful business is divided into two
dealings as well as avoidance of unlawful broad categories, general takaful and family
elements. takaful. Those who enter the plans are called
takaful participants. Any employee retirement
scheme which pays benefit at retirement, death
3.2.2. The Formation Of Takaful Companies or disability shall not be treated as takaful
In Malaysia business.
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THE BASIC PRINCIPLES OF INSURANCE AND AN INTRODUCTION TO TAKAFUL
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CHAPTER 3 -
THE BASIC PRINCIPLES OF INSURANCE AND AN INTRODUCTION TO TAKAFUL
may fall upon any of them. It is a scheme that 2. Takaful business is not a contractual
upholds the principles of shared responsibility, transfer of risk. The takaful company
mutual help and co-operation. does not assume the risk. It is the
group of members or participants of
takaful plans who agree to jointly
3.5.2. The Concept Of Tabarru’ guarantee against loss or damage
that may fall upon any of them.
Tabarru’ means donation, gift or contribution. By 3. The takaful operator acts as asset
definition, tabarru’ is the agreement (aqad) by a manager and profit distributor on
participant to hand over as donation, a certain behalf of all the participants. In a
proportion of the takaful contribution that he takaful business venture, profit-sharing
agrees or undertakes to pay, thus enabling him follows the principle of mudharabah.
to fulfill his obligation of mutual help and joint The distribution of the profit follows
guarantee should any of his fellow participants a pre-agreed ratio.
suffer a defined loss. The concept of tabarru’
eliminates the element of uncertainty in the 4. Participants of takaful plans make
takaful contract. donations (tabarru’) or installments
that will be accumulated in the
Takaful Fund. This fund may be
3.5.3. The Principle Of Mudharabah invested in areas acceptable to
Shariah. Payments of all takaful
benefits will be paid by the fund.
Mudharabah (trustee profit-sharing) is defined as
a contractual agreement between the provider 5. In order to fulfill the obligations of
of capital and the entrepreneur for the purpose mutual help in the concept of
of business venture whereby both parties agree takaful, participants make an aqad
on a profit-sharing arrangement. (agreement) at the outset to pay part
or the whole of the takaful contributions
The principle of mudharabah when applied to as tabarru’. The agreement shall be
the takaful contract defines the takaful company an aqad of helping and cooperating
as the entrepreneur who undertakes business and not an aqad of buying and selling.
activities. The participants entrust funds to Nevertheless, the tabarru’ proportion
the takaful company by means of takaful defines the participant’s share of the
contributions. The takaful contract specifies risk, computed using the same
the proportion of profit (surplus) to be shared actuarial principles as in conventional
between the participants and the takaful insurance.
company.
The Takaful Act 1984 divides takaful into two
broad business categories, family takaful and
3.6. ASPECTS OF TAKAFUL OPERATION general takaful.
The important aspects of takaful operation are 3.7. TYPES OF TAKAFUL BUSINESS
as follows:
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CHAPTER 3 -
THE BASIC PRINCIPLES OF INSURANCE AND AN INTRODUCTION TO TAKAFUL
1. to save regularly over a fixed period The general takaful scheme is purely for mutual
of time; financial help on a short-term basis, usually 12
months, to compensate its participants for any
2. to earn investment returns in material loss, damage or destruction that any of
accordance with Islamic principles; and them might suffer arising from a misfortune that
might inflict upon their properties or belongings.
3. to obtain coverage in the event of The contribution that a participant pays into the
death prior to maturity of the plan general takaful fund is wholly on the basis of
from a mutual aid scheme. tabarru’.
Each contribution paid by the participant is If at the end of the period of takaful there is a
divided and credited into two separate accounts, net surplus in the general takaful fund, it shall
namely: be shared between the participant and the
• The Participants’ Special Account operator in accordance with the principle of al-
Mudharabah, provided that the participant has
(PSA)
not incurred any claim and/or not received any
A certain proportion of the contribution benefits under the general takaful certificate.
is credited into the PSA on the basis of
tabarru’. The amount depends on the The various types of general takaful schemes
age of the participant and the cover provided by takaful operators include:
period. • Fire Takaful Scheme;
• The Participants’ Account (PA) • Motor Takaful Scheme;
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CHAPTER 3 -
THE BASIC PRINCIPLES OF INSURANCE AND AN INTRODUCTION TO TAKAFUL
CHAPTER 3
37
CHAPTER 3 -
THE BASIC PRINCIPLES OF INSURANCE AND AN INTRODUCTION TO TAKAFUL
6. The contribution condition requires the insured to claim from each underwriter
involved
a. proportionally.
b. in instaments.
c. periodically.
d. annually.
a. insured perils.
b. excluded perils.
c. uninsured perils.
d. exception perils.
8. Which of the following does NOT constitute a breach of Utmost Good Faith?
38
CHAPTER 4 - THE INSURANCE MARKET
Overview OVERVIEW
4.1. The Insurance Market
This chapter will cover:
4.2. Other Market Components
• The Main Components of the
4.3. Organization Structure Insurance Market
4.4. Centralization Versus • Other Components of the Insurance
Decentralization Market
• Market Services
39
CHAPTER 4 - THE INSURANCE MARKET
40
CHAPTER 4 - THE INSURANCE MARKET
1998, there was one co-operative society Section 186 further provides that no person shall
carrying on insurance business in Malaysia. It arrange a group policy for persons in relation
transferred its business to a public company in to whom he has no insurable interest without
1998. disclosing to each person
4.1.1.3. Intermediaries
Section 2 of the Insurance Act 1996 defines an
insurance agent to mean a person who does all
The intermediaries or middlemen in the or any of the following:
insurance market are composed of insurance
agents and brokers. The intermediaries’ main a. solicits or obtains a proposal for
function is to match the needs of buyers with insurance on behalf of an insurer;
the insurance product offered by sellers.
b. offers or assumes to act on behalf of
Section 184 of the Insurance Act 1996 provides an insurer in negotiating a policy; or
that no person shall act on behalf of a person
not licensed under the Act to carry on insurance c. does any other act on behalf of an
business in Malaysia unless approved in writing insurer in relation to the issuance,
by Bank Negara Malaysia. Penalties for such renewal or continuance of a policy.
breach include imprisonment for three years or
a fine of RM3 million or both. Depending on the terms of the agency
agreement, an insurance agent may be
Section 184 of the Act provides that no person authorized to solicit insurance business, collect
shall invite any person to make an offer or premiums, and issue cover notes on behalf
proposal to enter into an insurance contract of the insurer and is remunerated through the
without disclosing payment of commission.
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CHAPTER 4 - THE INSURANCE MARKET
agent, whether individual or person or persons getting them settled. They are remunerated
corporate or incorporate, is required to pass through the payment of brokerage, which
or be exempted from a qualifying examination is usually a percentage of the premium. All
conducted by The Malaysian Insurance Institute insurance brokers operating in Malaysia must
(MII) and be registered and licensed by PIAM be licensed by Bank Negara Malaysia.
before dealing or engaging in any general
insurance business. In addition, a general
insurance agent may not at any time represent 4.1.4. Insurance Professionals
more than two general insurance companies.
Loss Adjuster
4.1.3. Insurance Brokers
The term loss adjuster is interpreted under
section 2 of the Insurance Act 1996 to mean a
The term “insurance broker” is defined under person who carries on the adjusting business
section 2 of the Insurance Act 1996 to mean of investigating the cause and circumstances
a person who, as an independent contractor, of a loss and ascertaining the quantum of the
carries on insurance broking business and the loss either for the insurer or the policyowner or
term includes a reinsurance broker. All insurance both. A loss adjuster is an independent party
brokers must be licensed under the Act by Bank appointed, usually by an insurer, when a loss
Negara Malaysia. In addition, section 14 of the occurs.
Act provides that no person shall apply for a
license to carry on insurance broking business Upon investigating the cause and extent of
unless it is a company. the loss, a loss adjuster makes a report of
his findings and recommendations to the
An insurance broker is an ‘agent’ who normally principal, usually an insurer, who would then
acts on behalf on the insured and is normally decide whether the loss is covered and if so,
not tied to any one insurer. His job is to advise the amount of indemnity or compensation to be
his clients on the most suitable covers at the paid. A loss adjuster is normally paid on a fee
most economic cost. Insurance brokers are or a time basis by the principal who engaged
deemed to be knowledgeable in insurance him. All loss adjusters must be licensed under
and they therefore are expected to possess in- the Insurance Act by Bank Negara Malaysia. In
depth knowledge of the covers available and addition, section 14 of the 1996 Act states that
the rates charged. In addition to advising clients ‘No person shall apply for a license to carry on
and placing business on their behalf, insurance adjusting business unless it is a company’.
brokers may also help in presenting claims and
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CHAPTER 4 - THE INSURANCE MARKET
Loss Assessor
4.2. OTHER MARKET COMPONENTS
43
CHAPTER 4 - THE INSURANCE MARKET
• Accounting Department
In Malaysia, most insurance companies are
organized on the basis of functions performed. The accounting department is
When an insurance company organizes its responsible for billing and collecting
departments by functions performed, the premium once the policy is issued. In
following departments are commonly found: addition, the department is responsible
administration, electronic data processing, for the company’s general accounting
accounting, investing, marketing, underwriting, records, the preparation of financial
claims, and others. statements, the control of receipts and
disbursements, and the maintenance of
• Administration Department budgetary controls over departmental
expenses. This department is also
The administration department provides concerned with compliance with relevant
and handles services commonly used government regulations and tax laws.
by many departments. These include
office services, building services and
personnel administration.
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CHAPTER 4 - THE INSURANCE MARKET
45
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46
CHAPTER 4 - THE INSURANCE MARKET
47
CHAPTER 4 - THE INSURANCE MARKET
results in several disadvantages. One of them Prior to April 1988, insurance regulation was
is the duplication of resources, particularly when under the purview of the Ministry of Finance.
each branch performs all the basic functions. The regulatory and supervisory functions were
More importantly, branches may be overloaded transferred to Bank Negara Malaysia when the
with routine work instead of concentrating on Insurance Act 1963 was subsequently amended
selling, which is the principal and core function and replaced by the Insurance Act 1996.
of branches.
Under section 35 of the Act, the Central Bank
was made responsible for its administration
4.4.3. Best Of Both Worlds and the Governor to be the Director General
of Insurance. The move was made necessary
because of the need to exercise greater control
Many insurers may not adopt either of the two of the industry. In this respect, the objectives
extremes mentioned; instead, they may adopt have been somewhat achieved as evidenced
a ‘halfway’ position. When this happens, some by the healthy growth and a more disciplined
of the basic functions may be carried out by environment. BNM is also responsible for the
branches, while the head office may maintain resolution of complaints against insurers, which
overall control, guide the basic underwriting are administered by Consumer and Market
policy, and perform services such as accounting, Conduct (CMC).
printing and investment.
Reasons for Insurance Regulation
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CHAPTER 4 - THE INSURANCE MARKET
•
contract will also facilitate consumers in making
giving useful tips to consumers when insurance claims and seeking redress through
deciding to obtain insurance or the proper channels in the event of dispute with
takaful products and services; and their insurance company or takaful operator.
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CHAPTER 4 - THE INSURANCE MARKET
while its profit before tax was RM137.7 million. Market Services
The group ventured into takaful business in 2004,
which is known as Takaful Ikhlas Sdn Bhd. The following services are available for the
insurance market:
Objectives
Technical Services
The company’s business objectives are:
Malaysian Re provides Fire Risk Inspection
• to diversify the existing business in services to the local insurance industry for the
order to achieve a better portfolio purpose of special rating, underwriting and also
mix and ensure sustainable growth; Probable Maximum Loss (PML) estimation.
Fire risk assessment and risk management
• to continuously explore innovative services tailored to meet the insured’s needs
ways of doing business by taking are also provided through their insurers when
advantage of the latest trends in requested.
Information Technology;
Central Administrative Bureau
• to increase local retention and
reduce outflow of reinsurance Malaysian Re initiated the establishment of the
premium; Central Administration Bureau (CAB). CAB is
a bureau that centrally administers and settles
• to increase employment and training facultative reinsurance transactions among
opportunities in reinsurance, insurers and reinsurers operating in Malaysia.
particularly for bumiputera who are Its mission is to eliminate administrative and
lacking in this sector of the reconciliation problems and ensure efficient
industry; and settlement of balances and claims recovery.
Central to its operations is a computerized
• to enhance the value of the system linking members via the Internet. The
company through the creation of cost of development and operation of the
favourable earnings prospects which system is funded jointly by its members. The
are sustainable in the long term. bureau, which is managed by Malaysian Re,
commenced online operations on 1 July 1998.
(More information can be obtained from the
website: http//www.malaysian re.com.my) Inspection Task Force
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CHAPTER 4 - THE INSURANCE MARKET
Malaysian Aviation Pool (MAP) basis and Malaysian Re has been appointed
the Administration Manager.
Malaysian Re assumed the role as Manager of
MAP effective 1 October 1996. Currently, its Market Training
membership comprises 14 local insurers and
three reinsurers with a total underwriting capacity Malaysian Re has and will always continue
of RM7.3 million. The underwriting of risks is to conduct various courses and seminars on
by a Committee nominated by participating insurance and reinsurance subjects for the staff
companies. The business written by the pool is of insurance companies to instil a higher degree
primarily Malaysian risks and Malaysian interests of professionalism in the industry.
abroad.
Scheme for Insurance of Large and
Malaysian Energy Risks Consortium Specialized Risks (SILSR)
(MERIC)
The main objective of this scheme, which was
MERIC was established in March 1995 implemented on 1 January 1994, is to develop
with the objective to maximize national technical expertise to enable insurers to be
retention, promote wider interest and develop active underwriters of large and specialized
underwriting skills in the specialized class risks. In turn, it will enable insurance companies
of the energy business. The Consortium to have a better understanding of such risks
comprises 15 local general insurers and two and optimize national retention capacity, thus
reinsurers, with Malaysian Re taking on the reducing the unnecessary outflow of premiums
role of Secretariat. MERIC has a capacity to abroad. Malaysian Re has been appointed by
underwrite up to a combined single limit of the Central Bank of Malaysia to manage the
RM40 million for upstream risks and RM20 scheme.
million for downstream risks, fully retained
by the Consortium. The underwriting of risks Sihat Malaysia
is by a Committee nominated by participating
companies. The primary portfolio of the The Sihat Malaysia Scheme, which was
business written by MERIC is Malaysian risks officially launched on 18 February 2000,
and Malaysian interests abroad. However, was developed by the National Insurance
recognizing the need to develop a broader Association of Malaysia (NIAM). Members
spread of risk and premium base, the portfolio of NIAM subscribing to this scheme provide
has been extended to include risks within the a uniform health insurance programme
Asia-Pacific region, the Middle East, and North covering health care, including cashless
African countries. admission to hospitals, medical treatments,
surgeries as well as emergency assistance to
Malaysian Motor Insurance Pool (MMIP) policyholders. Managed Care Organization has
been appointed under the scheme to provide
The MMIP was established in July 1992 to specialized services to both the policyholders
provide motor insurance to vehicle owners who and NIAM members. Malaysian Re has been
cannot readily find an insurer to provide insurance appointed Account Manager of the Scheme,
protection for their vehicles. Pool members which is currently being subscribed by 11 NIAM
comprise all general insurance companies members.
registered under the Insurance Act 1996. In
accordance with the Collective Agreement
between the members and the Pool, members’
participation in the Pool is on an equal sharing
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CHAPTER 4 - THE INSURANCE MARKET
• to organize and manage arrangements promote greater discipline and sound business
and matters of common interest, practices among member companies.
concern or benefit to members or
any group of members and to LIAM is the formation of Malaysian Life
collect and manage funds for the same; Reinsurance Group Berhad (MLRe), the first
local life reinsurance company. MLRe is a joint
• to make rules, regulations and venture between the members of LIAM and the
bye-laws in accordance with these Reinsurance Group of America Incorporated,
Articles in consultation with Bank making this a rather unique arrangement as the
Negara Malaysia. life insurance companies participate both as
clients and shareholders of MLRe.
In the interest of the general insurance
business and also for the mutual benefits of LIAM has a total of 18 members, of which 16
all its members, i.e. insurance companies, and are life insurance companies and two are
the public, PIAM has drawn up several Inter- life reinsurance companies. It is a statutory
Company Agreements. Insurance companies, requirement under section 22 (1) of the
which are signatories to these agreements, Insurance Act 1996 (or section 3(2) (e) of
have jointly and severally agreed to abide by the the repealed Insurance Act 1963) for all life
terms and conditions stipulated therein. There insurance/life reinsurance companies to be
were three earlier agreements, which have members of LIAM.
now been consolidated into one, i.e. the Inter-
Company Agreement on General Insurance Objectives of LIAM
Business (ICAGIB).
• To promote public understanding
Inter-Company Agreement on General and appreciation of life insurance;
Insurance Business
• To improve the image of the life
The purpose of this agreement is to regulate and insurance industry through self-
control the conduct and activities of every person regulation;
engaged in general insurance business.
• To give support to the regulatory
authorities in developing a strong
4.5.1.4. Life Insurance Association and healthy industry;
Of Malaysia (LIAM)
• To enhance the professionalism
of staff and agents through continuous
The Life Insurance Association of Malaysia training and education;
(LIAM) or Persatuan Insurans Hayat Malaysia
is a trade association registered under the • To liaise and work with local and
Societies Act 1966. It was registered on 26 foreign life insurance organizations
March 1968 as Life Insurance Association. towards achieving common
The name was changed to its current one, Life
Insurance Association of Malaysia, in 1977.
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CHAPTER 4 - THE INSURANCE MARKET
4.5.1.5. Malaysian Insurance And Takaful Introducer Agreement for all members
Brokers Association (MITBA) to observe. All these documents
[Formerly Known As Insurance were drawn up under the guidance
Brokers Association Of Malaysia of Bank Negara Malaysia and
(IBAM)] approved by the Registrar of Societies.
With the implementation of the
above documents, the level of
The Malaysian Insurance and Takaful Brokers professionalism of insurance and
Association (MITBA), previously known as The takaful brokers in Malaysia has been
Insurance Brokers Association of Malaysia further improved;
(IBAM), is the only national body of insurance
and takaful brokers, and was registered with the • to ensure that employees of
Registrar of Societies on 3 December 1974. members are professionally qualified,
conversant with insurance laws and
The initial objective was to provide a means to practices, and acquainted with
discuss members’ problems of common interest current developments as they affect
and negotiate with other insurance associations, the insurance industry in general
regulatory bodies and authorities. and insurance brokers in particular;
To reflect the inclusion of takaful brokers as • to provide a platform for the promotion
members of the Association, IBAM was renamed of discipline, professional conduct
Malaysian Insurance and Takaful Brokers and etiquette of members;
Association or MITBA on 1 August 2006.
• to promote the healthy growth of
MITBA is the collective voice of the industry, the insurance industry in line with
advising members, regulators, consumers, national objectives.
trade associations and other stakeholders on
key insurance issues.
4.5.1.6. Association Of Malaysian Loss
MITBA also provides training, technical advice, Adjusters (AMLA)
guidance on regulation and business support.
Its role is to elevate the status of insurance
The Association of Malaysian Loss Adjusters
and takaful brokers through professional
(established in 1981) is the association of loss
development and by establishing improved
adjusters approved by the Ministry of Finance
standards of qualifications and ethical and is registered as a society under section II
practices. of the Societies Act 1966. Membership of the
association is on a corporate basis, i.e. it is
The main objectives of the Association are: confined to companies carrying on the business
of loss adjusting in Malaysia.
• to elevate the status, safeguard and
advance the interests, procure the Section 10 of the Insurance Act 1996 provides
general efficiency and proper professional that no person shall hold himself out to be a
conduct of members. Towards achieving loss adjuster unless he is licensed under the Act
these objectives the Association has granted by the Central Bank, i.e. Bank Negara
drawn up a Code of Ethics and Conduct, Malaysia. By virtue of section 22 of the Act, a
licensed adjuster must also be a member of
Insurance Brokers’ Accounting Standards,
an association of adjusters approved by the
Brokerage / Fee Sharing Guidelines,
Central Bank.
Client’s Charter, and the Insurance
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CHAPTER 4 - THE INSURANCE MARKET
The following persons are exempted from the • to work in conjunction with any
above ruling: legal body or association for the
amendment or alteration of any law
• advocates, solicitors and members relating to loss adjusting.
of any other professions who act or
assist in adjusting insurance claims
incidental to the practice of their 4.6. INSURANCE MEDIATION BUREAUS
professions;
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1. the motorists did not have in force 4.6.2. Financial Mediation Bureau (FMB)
a policy of insurance as required by
the RTA (absence of insurance); or
The Financial Mediation Bureau was set up by
2. the policy was ineffective for any Bank Negara Malaysia in 2005 to replace the
reason (e.g. it had been cancelled Insurance Mediation Bureau (IMB) established
before the date the liability was in 1991. FMB is an independent body set up
incurred); or to help settle disputes between policyholders
and the financial service providers who
3. the insurer could prove the `Cover are its members. The independence of the
Note/Certificate of Insurance was Mediator is guaranteed by the Council of the
forged.’ Bureau whose membership consists of people
representing public and consumer interests, and
The old agreement was mutually rescinded and representatives of the members of the Bureau.
replaced with a new agreement signed by the
Chairman of MIB and the Minister of Transport FMB provides a free, fast, convenient and
on 30 March 1992. Some of the provisions efficient avenue to refer disputes for resolution
under the new agreement are: as an alternative to the courts. These disputes
•
may be related to banking, insurance, takaful
All claims against MIB will be treated and other financial services.
on an ex gratia basis rather than as
a legal entitlement as was the case All general insurance companies are members
under the old agreement. of PIAM or FMB, and all PIAM members are
•
members of FMB.
This means that compensation
payable to third parties will be FMB deals with all complaints, disputes and
decided by MIB based on the merit claims relating to insurance and takaful. In
of each case. However, the claimant addition, it can help with all disputes between
still retains his legal rights to pursue policyholders, certificate holders or claimants
his case against the tortfeasor(s) to and their own or third party insurers and takaful
its logical conclusion. operators.
The main function of MIB is to provide Actuarial Society of Malaysia (Persatuan Aktuari
compensation to victims of motor accidents Malaysia) was founded on 5 October 1978.
in cases where uninsured drivers are unable ASM is the only representative body for the
to meet their liability from their own personal actuarial profession in Malaysia. On 20 October
resources. 2003, it became a Full Member Association of
the International Actuarial Association.
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CHAPTER 4 - THE INSURANCE MARKET
The objectives of the Society include: The society has also developed a Mortality
Table based on the mortality experience of
insured lives in Malaysia.
a. to promote and maintain high
standards of competence and
conduct within the actuarial 4.7.2. National Insurance Claims Society
profession in Malaysia and to be (NICS)
guided by the Professional Code of
Conduct;
The National Insurance Claims Society or NICS
b. to promote the standing of the was sponsored by NIAM and formally launched
actuarial profession in Malaysia, on 15 December 1999. NICS membership is
and raise public esteem of the open to all life and general insurance companies
profession; as well as independent loss adjusters and loss
assessors.
c. to provide a source of reference on
actuarial matters for the Government of NICS was formed to develop best practices
Malaysia, regulatory authorities, and relating to insurance claims processes
other interested bodies; of member companies and give greater
recognition to the services of claims
d. to take such action as a Society as personnel in the industry. NICS will therefore
may be agreed upon at a General become an effective forum for members to
Meeting of the Society in respect of exchange information and provide a platform
any matters that are relevant to the for networking in the following areas of
actuarial profession; importance:
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CHAPTER 4 - THE INSURANCE MARKET
• being part of a worldwide family of life MFPC also aims to achieve the vision and
insurance and financial practitioners, objectives of the Financial Sector Master Plan
e.g. MDRT, APLIC and LUA; and Capital Market Master Plan in improving
the professionalism, technical ability, financial
• consolidating members from the advice, productivity and quality of the agency
insurance marketing and financial force.
services professions, looking into
their professional standing, improving The governing body of MFPC is the National
and regulating guidelines as set by Council comprising office-bearers who are
Bank Negara; responsible for leadership and direction.
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CHAPTER 4 - THE INSURANCE MARKET
•
Management. The association is managed by
an Executive Committee which is elected by to advance the science of and to
its members. MARIM is dedicated to promoting improve methods for the protection
and raising the awareness and standard of risk of persons and property on land, sea
management in Malaysia. Members of MARIM or air primarily against the risk of
comprise a variety of organizations from fire;
•
multinational corporations and public utilities
bodies, to small and medium industries. to disseminate advice for the
protection against, and the
The objectives of MARIM include: prevention of fire and related risk,
and to publish information relating
• to promote, foster, encourage and to the same subjects;
•
develop concepts and practice of
risk and insurance management in to formulate problems of protection
all aspects; and prevention against fire and
other risks, as subjects of research,
• to promote education in risk and and to cooperate in research and
insurance management; to investigate the causes and spread
of fire;
•
•
to consider and discuss any rules,
regulations or conditions imposed or to undertake propagation to the
sought to be imposed by regulatory public of such knowledge as may be
bodies that have impact on considered desirable in connection
members; with the objectives of the
Association;
•
•
to promote special interaction
amongst members. to exchange information and
cooperate with other bodies or
persons, and to institute or receive
4.7.6. Fire Protection Association Of enquires in connection with the
Malaysia Berhad (FPAM) objectives of the Association.
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CHAPTER 4 - THE INSURANCE MARKET
60
CHAPTER 4 - THE INSURANCE MARKET
MII education and training courses and international seminars conducted by MII to
programmes are thus designed to support the facilitate focused discussion on various current
urgent need of insurance companies to develop issues, subjects of interest and industry
employees with high level competencies development. One of the main advantages of
to enhance their level of preparedness to studying at MII is the exposure that students
meet the challenges of operating in today’s get to these contemporary developments and
globalised environment. the opportunities to meet and network with the
many industry practitioners and experts who
MII’s commitment to providing excellence in come from all over the world to participate in
insurance education has led to tremendous the Institute’s activities.
growth in the number of educational
programmes and activities being offered. MII International Collaboration
now leads in providing training and education
in Insurance, Risk Management, Actuarial MII’s commitment to deliver the best standards
Science, General Management, Investment, in education is reflected in its international
Life Insurance, Marketing and Financial links with renowned insurance institutions,
Services universities and relevant organizations. Among
its collaborations established are with
MII offers a comprehensive range of
programmes covering technical subjects • The Chartered Insurance Institute
such as insurance underwriting and (CII,UK)
claims, risk surveys and assessments, loss
adjusting, broking, business communication, • Life Office Management Association
salesmanship and many others to promote (LOMA, USA)
the professional development of individuals. • Life Insurance Marketing and
Speakers and course leaders comprise Research Association (LIMRA,USA)
practitioners, experts and academicians, local
and from overseas • The Institute of Risk Management
(IRM,UK)
MII requires all its trainers to undergo and
pass the Trainer Certification Programme. • The American College (USA)
This ensures the maintenance of a high
standard in the conduct of its education and • Australasian Institute of Chartered
training programmes. In addition, to ensure Loss Adjusters (AICLA, Australia)
credibility, MII also works with the Malaysian
Examination Council, the national examination • Chartered Institute of Loss Adjusters
authority for examination standards, to certify (CILA,UK)
those involved in question setting and the
marking of MII examinations. • The Australian and New Zealand
Institute of Insurance and Finance
Industry Links (ANZIIF)
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CHAPTER 4 - THE INSURANCE MARKET
• delivering effective human capital MII won the prestigious International Award
development programmes in London from The Review Worldwide
Reinsurance Award as the Professional Service
• promoting insurance related Provider for 2007. This was an honour not only
knowledge and information for MII and the insurance industry, but also for
Malaysia.
• providing a platform for social and
networking opportunities International Recognition
• supporting the national agenda MII has been given recognition by the Federation
in promoting insurance training and of Afro-Asian Insurers and Reinsurers (FAIR) by
education. being appointed as a member of its Education
Board. FAIR is represented by 51 member
countries from Asia and Africa. One of the
objectives of FAIR is to offer quality education,
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CHAPTER 4 - THE INSURANCE MARKET
training, seminars and e-learning to its member • providing training for insurance
companies. MII is offering its programmes to the regulators,
Global Takaful Group through its website link.
• providing training for the insurance
Secretariat for ASEAN Insurance Training industry, and
and Research Institute (AITRI)
• conducting research studies for the
In recognition of its contribution to the ASEAN insurance industry.
insurance industry, MII was appointed the
Secretariat for the formation and operation of To facilitate the growth of a stable, transparent
AITRI. and competitive insurance market, AITRI has
been vigorously pushing for the adoption of
(For more information on AITRI, please refer to the International Association of Insurance
section 4.9.2 of this chapter) Supervisors’ (IAIS) core principles. The adoption
will ensure the implementation of standardized
Membership regulations and practices in the region’s
markets, consequently smoothing cross-border
MII provides its members rights and privileges collaboration and discussion.
based on four categories of membership:
Ordinary, Associate, Fellow and Institutional. As a research body, AITRI undertakes regional
The Associate and Fellow are professional study projects on a collective need basis for
membership categories and these members member countries, in which general assistance
carry the AMII and AFII designations is extended to students who are conducting
respectively. research in insurance. The research carried out
by AITRI so far are “A Comparative Analysis
of Current Insurance Law and Its Supervision
4.9.2. Asean Insurance Training And in the ASEAN Region” and “Study on Human
Research Institute (AITRI) Resource Development Needs for ASEAN
Insurance Regulators and Insurance Industry”.
The ASEAN Insurance Training and Research AITRI continues to strive in assisting ASEAN
Institute (AITRI) was officially incorporated on countries (with special attention paid to its less
1st December 2004 in Malaysia. It consists developed members) improve and enhance
of 10 ASEAN member countries, namely their capabilities and technical knowledge
Brunei, Cambodia, Indonesia, Laos, Malaysia, in insurance so as to build an ASEAN where
Myanmar, Philippines, Singapore, Thailand and the individual insurance industries continue to
Vietnam.
compete with and help each other grow on a
level playing field. This is done through bringing
The head office is located at Wisma IBI and
The Malaysian Insurance Institute (MII) was in experts and funding from donor bodies for
appointed as the Secretariat. training and education programmes for the
regulators, private sector and researchers.
AITRI, a non-profit organization was set up
exclusively to serve and facilitate the human
resource development in the ASEAN region.
AITRI has since been an important player
towards a rapid and equitable development
of intellectual capital in the ASEAN insurance
market through its three-pronged activities:
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CHAPTER 4 - THE INSURANCE MARKET
CHAPTER 4
1. Which of the following association does NOT deal with life insurance?
a. NAMLIFA.
b. LIAM.
c. ASM.
d. PIAM.
2. The department that concentrates its efforts on identification of field officers and
recruiting of the sales force is the.
a. EDP Department.
b. Agency Department.
c. Underwriting Department.
d. Claims Department.
a. a broker.
b. a reinsurer.
c. a life insurance agent.
d. a general insurance agent.
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CHAPTER 4 - THE INSURANCE MARKET
I. They are generally employed by the insured to assess the extent of the
damage or loss settlement.
II. They frequently assists the insured in the preparation and negotiation of
the claim.
III. They carry on the adjusting business of investigating the cause and
circumstances of a loss and ascertaining the quantum of the loss either for
the insurer or the policyowner or both.
IV. They are independent parties appointed usually by an insurer when a loss
occurs.
a. I and II.
b. II and III.
c. III and IV.
d. All of the above.
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10. What is the main purpose of the Inter-Company Agreements on General Insurance
Business (ICAGIB)?
a. to regulate and control the conduct and activities of every person engaged
in general insurance business.
b. to regulate and control the conduct and activities of every insurer engaged in
general insurance business.
c. to regulate and control the conduct and activities of every insurer engaged in
life insurance business.
d. to regulate and control the conduct and activities of all PIAM members.
66
CHAPTER 5 - CONSUMER PROTECTION AND STATUTORY REGULATIONS
Overview OVERVIEW
5.1. Insurance Industry and the
Consumer In this chapter the focus is on:
67
CHAPTER 5 - CONSUMER PROTECTION AND STATUTORY REGULATIONS
68
CHAPTER 5 - CONSUMER PROTECTION AND STATUTORY REGULATIONS
For life insurance business, the main association • life insurance practice.
is:
Details of the codes of ethics and conduct are
• Life Insurance Association of Malaysia provided in Chapters 20 (for general insurance)
(LIAM). and 30 (for life insurance).
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CHAPTER 5 - CONSUMER PROTECTION AND STATUTORY REGULATIONS
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CHAPTER 5 - CONSUMER PROTECTION AND STATUTORY REGULATIONS
‘promise’ will depend on the ability of the insurer The main purposes of regulation include:
to fulfil its obligations. The ability to fulfil such
obligations will in turn depend on the integrity • The protection of public interest
and financial stability of the insurer. It is mainly
because of this reason that insurance has been Public interest is protected by ensuring
placed under strict government regulation. that the insurer is financially solvent
and able to meet its obligations to its
Further, insurance is a complex product which policyowners and claimants.
•
few can understand. This is because the
insurance policy, being the evidence of contract, The promotion of fairness and equity
is usually written in legal terms and phrases,
By ensuring that insurers, insurance
and is difficult to understand. The inability of
brokers and adjusters (collectively
policyholders to interpret and understand the
known as licensees under the Act) are
policy may provide an opportunity for unfair
fair and equitable in their dealings with
trade practices. Such a situation also calls for
their clients and claimants, fairness and
insurers to be placed under strict government
equity is promoted.
regulation.
• The fostering of competence
In addition, the insurance business is considered
to be effected ‘with a public interest’ because Competence is fostered by the
it plays an important role in society. Insurance insistence placed on a high level of
provides financial protection to individuals, professional competence and integrity
families, and business enterprises. If insurers of insurers, insurance brokers and
fail to honour their promises, the well-being adjusters.
of the economy and the welfare of the public
will be adversely affected. This characteristic • The playing of a developmental role
of insurance has also contributed to the strict
regulation imposed on the insurance business. By encouraging the insurance industry
to take an active part in the economic
development of the country, regulation
5.3.2. Purpose Of Regulation plays a developmental role.
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CHAPTER 5 - CONSUMER PROTECTION AND STATUTORY REGULATIONS
• Part II: Licensing of Insurer, submit to BNM a plan to improve its financial
Insurance Broker and Adjuster condition.
Part II provides for the licensing and revocation • Part VI: Management of Licensee
of licensing of persons carrying on insurance,
insurance broking or loss adjusting business. Part VI makes it necessary to secure the
Among the requirements are provisions to approval of the Finance Minister (in the case of
regulate the paid-up capital of a licensee, in an insurer) and BNM (in the case of an insurance
that a licensee for insurance business has to be broker and loss adjuster) before a person can
a public company, while an insurance broking enter into an agreement or arrangement to
or adjusting business has to be conducted by acquire or dispose of any interest in shares
a licensed company. Part II also lays down the of more than 5% in an insurance company,
responsibilities of a licensee in order to protect an insurance broking firm or a loss adjusting
policyowners’ interests during the period of firm incorporated in Malaysia. This part also
winding-down of the business. requires an insurer, an insurance broker or a
loss adjuster to seek and obtain BNM approval
• Part III: Subsidiary and Office of before appointing a director or chief executive
Licensee officer. A director, chief executive officer or
manager to be appointed must be a “fit and
Part III deals with subsidiaries and offices proper person” and also a resident in Malaysia
of insurance companies, insurance brokers during the period of his appointment.
and loss adjusters. It requires these parties
incorporated in Malaysia to obtain the prior The criteria for a “fit and proper person” are
written approval of BNM before they can be prescribed by way of regulations.
established within or outside Malaysia.
• Part VII: Auditor, Actuary and
• Part IV: Insurance Funds and Accounts
Shareholders’ Fund
Part VII deals with matters relating to the auditor,
Part IV requires an insurer to establish separate actuary, and the accounts of a licensee.
insurance funds for its Malaysian and foreign
policies and for its life and general business The 1996 Act also places a responsibility on the
as well as to maintain adequate assets in its licensee, its director, controller or employee to
insurance funds to meet its insurance funds cooperate with the auditor and appointed actuary
liabilities. It also regulates the manner of by furnishing information requested by them
withdrawal from the insurance funds, valuing and by ensuring that the information furnished
assets and determining liabilities, maintenance is complete and not false or misleading.
of solvency margins as well as registering of
policies and claims. • Part VIII: Examination
• Part V: Direction and Control of Part VIII makes provisions with regard to the
Defaulting Insurer examination of insurers, insurance brokers, and
loss adjusters. BNM is accorded the power to
Part V provides for the setting up of an early examine, from time to time without giving prior
warning system. An insurer that is just complying notice, the documents of these companies,
with the minimum solvency margin but having or their agents, in or outside Malaysia. It also
adverse business results or that is deficient in empowers BNM to examine the directors of these
its solvency margin is required to notify and companies or their agents, the policyowners
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CHAPTER 5 - CONSUMER PROTECTION AND STATUTORY REGULATIONS
or any person who has dealings with the b. the control over the sale of new
companies or their agent, the policyowners life products which has been
or any person whom BNM believes to be tightened whereby life insurers
acquainted with the facts and circumstances are now required to lodge with BNM
of the case. particulars of a new life policy before
offering the life policy to the public;
• Part IX: Investigation, Search and
Seizure c. general insurers or an association of
licensed general insurers are
Part IX provides for an employee of BNM prohibited from adopting a tariff
or any other person to be appointed as an of premium rates, policy terms and
investigating officer. The powers accorded conditions for a description of
to the investigating officer include entry, policy, which are obligatorily
search, seizure, detention and examination of applicable to a general insurer,
suspects and their business associates. except with the approval of BNM;
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CHAPTER 5 - CONSUMER PROTECTION AND STATUTORY REGULATIONS
The minimum unimpaired capital requirement • Part VIII: Reserve for Unexpired
for a loss adjuster is RM100, 000 and RM150, Risks (General Business)
000 by end-1997 and end-1998 respectively.
Part VIII sets out the basis for providing reserves
• Part IV: Licence Fees for unexpired risks in respect of general
insurance policies.
Part IV prescribes the amount of fees payable
by an insurance company, an insurance broker
and a loss adjuster upon being licensed as well
as the annual fees payable.
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CHAPTER 5 - CONSUMER PROTECTION AND STATUTORY REGULATIONS
Part XVI provides for a new basis for computing This regulation specifies the subsidiary
the surrender value of a policy, following the legislations which are repealed.
change in the basis for reserving life insurance
liabilities.
5.4. THE COMPANIES ACT 1965
• Part XVII: Election for Paid-up
Policy
The Insurance Act 1996 is the principal piece of
Part XVII sets out the manner of determining legislation which insurance companies have to
the sum insured for a paid-up life policy. abide by.
• Part XVIII: Home Service Life Besides the Insurance Act, one other piece of
Policy legislative control on insurance companies is
the Companies Act 1965.
Part XVIII prescribes the manner in which a
life insurer shall carry on home service life It must be noted that the requirements of the
business. Among others, it requires additional Companies Act 1965 are in addition to those of
information to be incorporated in the premium the Insurance Act 1996 and regulations thereto.
receipt book in order to bring to the attention The principal requirements of the Companies
of the policyowner the grace period for the Act 1965 affecting insurance companies can be
payment of premium due, the consequences summarized under the following headings:
•
of failure to pay the premium within the grace
period, and the procedure for reinstating the Preparation and submission of annual
home service life policy, after the policyowner accounts and accompanying
has defaulted on the payment of premium. This statements
•
requirement serves to educate policyowners on
the importance of paying premium in a timely Method of valuing assets and the
manner in order to reduce the high forfeiture provision for depreciation
•
rate for home service business.
Method of valuing liabilities.
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CHAPTER 5
a. agents.
b. brokers.
c. loss adjusters.
d. insurance companies.
4. If BNM is satisfied that an insurer is not conducting his business in accordance with
the provisions of the Insurance Act, the authority can
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CHAPTER 5 - CONSUMER PROTECTION AND STATUTORY REGULATIONS
a. I, II and III.
b. II, III and IV.
c. I, III and IV.
d. All of the above.
a. RM 50 million.
b. RM 150 million.
c. RM 100 million.
d. RM 200 million.
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CHAPTER 5 - CONSUMER PROTECTION AND STATUTORY REGULATIONS
10. The ruling of 60 days premium warranty is applicable to the following classes of
business, EXCEPT
a. motor insurance.
b. marine insurance.
c. personal accident insurance.
d. miscellaneous accident insurance.
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CHAPTER 6 - THE INSURANCE CONTRACT
Overview OVERVIEW
6.1. Law of Contract
The various legal aspects governing an
insurance contract are covered in this chapter.
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CHAPTER 6 - THE INSURANCE CONTRACT
Essential Legal Requirements of Insurance terms but may offer to provide insurance on
Contracts different terms. This constitutes a counter-offer
from the insurer. In such circumstances the
• Intention to create legal acceptance will be made by the proposer.
relationship
• Offer and acceptance 6.1.2.3. Consent
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CHAPTER 6 - THE INSURANCE CONTRACT
Policies may be In Force before Premiums which he has an insurable interest. In addition,
are Paid in General Insurance Business he may assign the life policy on his own life.
Section 153 further provides that a minor aged
When the consideration of an insured is to 10 to 16 may also effect a life policy on his own
pay or promise to pay, policies may be in force life or on the life of another in which he has an
before premium is paid. insurable interest as well as may assign the life
policy on his own life with the written consent of
However, in cash-before-cover policies, his parent or guardian.
for example motor policies, the insured’s
consideration is to pay premium in accordance
with the laws of Malaysia, which is to pay 6.1.2.6. Legality of a Contract
premium to his motor insurer/agent/broker on
the day he is given insurance cover. A risk is not
assumed unless and until the premium payable Illegal Contracts
is received by the insurer. Once a cover note
or a policy has been issued, the insurer cannot An agreement should be created for a legal
repudiate liability on the grounds that premium purpose. It should not promote things that
has not been paid. are either illegal or against public policy. An
agreement which is illegal or against public policy
With effect from July, 2007, the cash-before- would not be legally binding. Illegal contracts
cover ruling has now included personal accident include, for example, an agreement to commit
and travel insurances and the requirement is robbery and share the loot, or an insurance
applicable to intermediaries, brokers, takaful policy effected on a ship engaged in smuggling,
operators, as well as the direct clients of insurers or a person insuring on the life of another for
and takaful operators. wagering. An example of an agreement against
public policy is an insurance policy providing
Other than the above classes of insurance, indemnity against fines imposed by a statute or
the cash-before-cover ruling does not apply court of law.
in other general insurance and life insurance
businesses.
6.1.3. Defective Contracts
Who has Legal Capacity to Enter into a When contracts are tainted by defects at the
Contract? time they are being made, their validity may be
questioned. A contract tainted by defects may
A party to an insurance contract must have be void, voidable or unenforceable depending
legal capacity to enter into the contract. The on the nature of the defects.
general rule is everyone, except minors and
people of unsound mind, has legal capacity to
enter into contracts. Although minors (persons 6.1.4. Void Contracts
below the age of 18) are not legally competent
to enter into contracts, Part XII section 153 of
the Insurance Act 1996 provides that a minor Void contracts are simply those which the law
who has attained the age of 16 may effect a life holds to be no contracts at all, a nullity from
policy on his own life or on the life of another in the beginning. They are totally invalid and are
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CHAPTER 6 - THE INSURANCE CONTRACT
CHAPTER 6
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CHAPTER 6 - THE INSURANCE CONTRACT
a. The law holds them to be no contracts at all, a nullity from the beginning.
b. They are totally invalid and are nothing more than mere agreements.
c. Void contracts are not enforceable in a court of law.
d. They are contracts which have consideration.
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9. Before a contract can be considered valid, an offer must be matched with ____
a. acknowledgement.
b. consideration.
c. acceptance.
d. conditions.
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CHAPTER 7 - LAW OF AGENCY
Overview OVERVIEW
7.1. Legal Provisions Governing the
Law of Agency In this chapter, we shall focus on :-
• Agent, Principal
• Intermediaries
• Agency
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CHAPTER 7 - LAW OF AGENCY
Thus, it can be seen that the agent’s most 7.1.1. Authority Of An Agent
important function is the making of contracts
on behalf of his principal. After having given the
agent such authority, the principal is responsible An agent can act only within the authority
for all contracts entered into by his agent as if granted to him by the principal. The authority
he had himself entered into the contract. given to an agent may be expressed, implied or
apparent. It is also necessary to understand the
So, the act of the agent affects the principal’s authority of the agent and the related ratification
rights and duties in relation to third parties, i.e. thereof.
the principal is brought into a legal relationship
with the third parties.
•
7.1.1.1. Express Authority
Relationships
The relationships in connection with an agency Express authority may be given to an agent orally
are: or in writing. The most important factor is that
the written authority given has to be expressly
i. the relationship between the stated in writing. The written authority may or
principal and the agent; may not be under seal. Hence, if the writing
is ambiguous, i.e. open to misinterpretation,
ii. the relationship between the no liability can fall on the agent, provided he
principal and a third party; and interprets the ambiguity in a way in which it can
reasonably be construed, even though it was
iii. the relationship between the agent not the way the principal intended.
and a third party.
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authority conferred upon him, for example an • not to take any secret profit or bribe
insurance agent who is authorized to canvass from any party with whom he deals
for new business but who cannot normally grant on behalf of the principal;
policy loans and bind his principal.
• not to delegate his duties to a sub-
• Universal Agent agent without authority, express or
implied;
A universal agent is one who has unlimited
authority. He may do anything for his principal • to comply with his principal’s
which the principal himself was competent to instructions and to notify him when
do. compliance becomes impossible.
The contract of agency between the principal The agent’s most important right is the right to
and the agent is normally in writing, though it
receive payment for his services, usually in the
may also be verbal. It contains the terms and
form of a commission.
conditions relating to the conduct of the agency
and the remuneration payable to the agent.
The agent is also entitled to reimbursement of
Unlike an employee, the agent is an independent moneys that he has expended with the express
businessman who is not required to devote any authority of his principal. However, these
specified time to the amount of business he has expenses have to be reasonable and within
transacted. acceptable limits.
Frequently, a considerable amount of time is The agent has the right to perform his duties
spent on agency business outside the normal in the manner which he considers to be
business hours. appropriate. He may reject any attempt by his
principal to control the manner in which he
An agent is under a duty to perform his work
works.
with care, skill and diligence and also to comply
with the terms of his agency agreement.
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The principal and agent relationship may be The legal maxim applicable to agency generally
terminated by act of the parties or by operation is qui facit per alium facit per se which means “he
of law as follows: who acts through another is himself performing
the act.”
• by notice of revocation given by the
principal to the agent; Thus, a duly appointed insurance agent acting
within the scope of his authority binds his principal
• by notice of renunciation given to by his actions just as though the principal had
the principal by the agent; performed them personally. Because of this, it
is particularly important in respect of any given
• by the completion of the transaction action to decide for whom the insurance agent
where the authority was given for acts at any relevant time. It is therefore quite
that transaction only; possible for an agent of the insurer to be legally
regarded as agent of the insured for a given act,
• by expiration of the period stipulated and vice versa.
in the contract of agency;
The essential characteristic of an insurance Before the passing of the Insurance Act 1963
agent is that he is vested with legal power to (now replaced by the Insurance Act 1996), if the
establish contractual relations between the insurance agent helped the proposer by filling
insurance company and the policyholders. up the proposal form or personal statement,
then at that particular point in time, he was
The fact that the majority of insurance agents acting as the agent of the proposer or the
are recruited by field supervisors or managers policyholder and not the insurance company.
who, in turn, hold agency contracts with Therefore, if the insurance agent committed
insurance companies does not change this basic any mistake whether innocently or wilfully by
characteristic as in the ultimate analysis, such providing misleading information, he was doing
insurance agents hold contracts for services it on behalf of the policyholder. If the policy was
with the insurance companies and not with their voided or repudiated on the grounds of such
recruiters. misrepresentation, the policyholder could not
plead that the insurance agent had filled up
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the form without his knowledge. Because of its 7.6.3. Premium Collections
adverse consequences, the insurance agent
had to be highly responsible when he was
completing the proposal form on behalf of the When payment of premium is made to an
life to be insured or the proposer. authorized insurance agent by the policyholder,
such payment is deemed to be payment to
However, by virtue of section 151 of the the insurer. Even if the insurance agent does
Insurance Act 1996 (which replaced section not remit the said premium to the insurer, the
44A of the 1963 Act), a person who is authorised insured would still be on cover. On the other
by an insurer to be its insurance agent and who hand, if an unauthorized agent receives money
solicits or negotiates a contract of insurance in from the insured or the general public, he does
that capacity shall be deemed, for the purpose of not make the insurer liable for his misdeed. It
the formation of the contract, to be the agent of is important to note that as long as the agent
the insurer and the knowledge of that insurance has not deposited the money with the insurance
agent shall be deemed to be the knowledge of company, he continues to be responsible to the
the insurer. policyholder.
A statement made, or an act done, by the Section 160 of the Insurance Act 1996
insurance agent shall be deemed, for the makes specific provisions for the collection of
purpose of the formation of the contract, premiums at the policyowner’s address, e.g.
to be a statement made or act done by the in the case of a home service life policy. BNM
insurer notwithstanding the insurance agent’s may prescribe the manner in which a life insurer
contravention of subsection 150(4) (which carries on life business in respect of life policies
replaced section 16A of the 1963 Act) or any where premiums are ordinarily collected at the
other provision of the Insurance Act 1996. policyowner’s address by a person whom the
life insurer employs for this purpose. In respect
Section 151 shall not apply: of such a life policy, payment to that person so
•
employed shall be deemed to be payment to
where there is collusion or connivance the life insurer.
between the insurance agent and the
proposer in the formation of the
contract of insurance; 7.6.3.1. Payment of Premiums for General
Insurance Business
or
• where a person has ceased to be Premium Warranty – Sixty (60) Days Premium
an insurance agent of an insurer and Warranty Clause
it has taken reasonable steps to
inform, or bring to the knowledge of Insurers writing the non-life insurance business
potential policyowners and the are required to enforce the Premium Warranty
public in general of the fact of such ruling on most classes of insurance policies
cessation. except for motor insurance, personal accident
insurance, travel insurance, marine insurance
and insurance bonds.
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Where the premium payable pursuant to this • to the insurer or its agent; or
warranty is received by an authorized agent of
the insurer, the payment shall be deemed to • is secured by an irrevocable bank
be received by the insurer for the purposes of guarantee and is paid by the end of
this warranty and the onus of proving that the the month following the month in
premium payable was received by a person which risk is assumed, failing which a
including an insurance agent who was not demand is made on the bank
authorized to receive such premium shall lie on guarantee.
the insurer”.
Regulation 65 also provides that where the
premium in respect of a motor policy covering
a commercial vehicle is more that RM5,000 an
insurer may assume risk upon the payment to
its account or the account of its insurance agent
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In July 2007, the agreement between • by implication of the law, which may
Persatuan Insurans Am Malaysia (PIAM), arise
Malaysian Insurance and Takaful Brokers
Association (MITBA), and Malaysian Takaful 1. from the conduct of the parties, or
Association (MTA) in consultation with Bank
Negara Malaysia agreed to enforce the Cash- 2. from the necessity of the case;
Before-Cover ruling to personal accident and
travel insurances and the requirement is now • by subsequent ratification of an
applicable to intermediaries, brokers, takaful unauthorized act;
operators as well as insurers’ and takaful
operators’ direct clients. • by statute (Section 151, Insurance
Act 1996).
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7.6.5. The Extent Of The Agent’s Although there is no law specifically for the
Authorityty conduct of insurance agents, subsection 150(4),
section 151 and section 160 (both sections
explained in detail earlier) of the Insurance Act
Under the common agency system, an insurance 1996 specify activities of insurance agents in
agent is appointed by the insurer:- the field.
• to incur any forms of liability on It is foreseeable that with the rapid development
behalf of the insurer in respect of of the insurance business in Malaysia, more
any debt whether personal or regulations will come into force, aimed generally
official, accept risks, reinstate at protecting policyholders
lapsed policies, alter the policy
contract, waive any premium
payment, extend the period of
payments or issue official receipts
unless permission has otherwise
been granted by the insurer;
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CHAPTER 7
a. express appointment.
b. implication of the law.
c. subsequent ratification.
d. all of the above.
a. the proposer/policyholder.
b. the insurance company.
c. both a and b .
d. none of the above.
I. let his own interest conflict with his obligation to the principal.
II. take any secret profit or bribe from any party with whom he deals on behalf
of the principal.
III. disclose confidential information obtained in the course of his duties as an
agent to other parties except the principal insurance company.
IV. delegate his duties to a sub-agent without authority, expressed or implied.
a. I and II only.
b. II and IV only.
c. III and IV only.
d. All of the above.
4. Under the Agency Agreement, agents are allowed to do the following, EXCEPT
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a. The insured is required to pay the premiums charged for the insurance
within 60 days from the effective date of insurance cover.
b. If the premium is not paid by the 60th day, the insurance cover will be
cancelled from the 61st day.
c. The insurer shall be entitled to short period premium for the period they have
been on risk.
d. Any payment received by the appointed agent shall be deemed to be
received by the insurer.
6. The relationship of insurer and insurance agent may be created in the following
ways:
I. by express appointment.
II. by implication of the law, which may arise from the conduct of the parties
or from the necessity of the case.
III. by subsequent ratification of an unauthorized act.
IV. by statute (section 151, Insurance Act 1996).
a. I and II.
b. II and III.
c. III and IV.
d. All of the above.
8. An agent who is authorized to assess a risk, and impose terms and conditions for
the acceptance of that risk on behalf of his principal is known as
a. a special agent.
b. a general agent.
c. a universal agent.
d. an underwriting agent.
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9. The relationships which have connection with an agency are as follows, EXCEPT
10. Which of the following statement is NOT true about express authority?
99
CHAPTER - 8 INSURANCE MARKETING AND AFTER-SALES SERVICES
Overview OVERVIEW
8.1. Sales
This chapter covers:
8.2. After-Sales Services
• Marketing
8.3. General Features of General
Insurance Renewal Process • After-Sales Services
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CHAPTER - 8 INSURANCE MARKETING AND AFTER-SALES SERVICES
undertake the functions stated below. This involves the identification and selection
of suitable promotional activities, including
Functions of the Marketing Department
advertising, sales promotion and personal
• Planning and Controlling
selling which will support distribution.
• Market Identification
Insurance agents are frequently involved with
some aspects of marketing. Agents can influence
product design because their views are usually
This involves the selection of segments of the
market which have needs that can be met sought by insurers before they embark on the
by the policies developed by the company. A development of new policies. More significantly,
market segment is a group of customers with agents constitute the most important channel of
similar needs. distribution. While the other marketing factors
(marketing plan, market identification, product
• Product Development development, pricing and promotion) may affect
how much insurance is sold, the agents are the
After the department has identified the market main force behind most insurance sales. The
segments, the company would develop success of an insurance company’s marketing
appropriate policies to meet market segment efforts therefore depends on the extent to which
needs. its agents are market-oriented. In other words,
to ensure success in its marketing efforts, a
market oriented insurance company must be
complemented with a market-oriented agency
force.
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As stated earlier, insurance agents constitute an Objectives are more specific than sales goals.
important channel of distribution. Since an agent They contribute to the achievement of the overall
has been engaged by the insurer to distribute goal. For example, the objectives that have
policies to customers, a market-oriented agent been set to achieve the RM 100,000 premium
is one who distributes policies with the objective income are:
of satisfying customers’ requirements. This
means that a market-oriented agent should aim a. In General Insurance Business
to satisfy the needs of customers and at the
same time make a profit for himself. - RM20,000 premium income from
motor insurance;
Means of Achieving the Aim - RM20,000 premium income from fire
insurance;
Since an agent distributes policies through - RM20,000 premium engineering
personal selling, the objective of satisfying insurance;
customers’ requirements profitably can be - RM20,000 premium income from
achieved through the use of a sales plan, where marine cargo insurance.
sales goals, strategies and objectives are - RM20,000 premium income from
coordinated with market analysis, segmentation business interruption insurance.
and targeting.
b. In Life Insurance Business
The Importance of a Sales Plan, Setting
Objectives, and Measuring Performance - RM70,000 first year premium income
against Objectives from basic life;
- RM10,000 first year premium income
A sales plan is important because it allows from PA riders;
an agent to perform the function of planning - RM10,000 first year premium income
and controlling. When an agent is involved from critical illness riders;
in planning, he is establishing a goal for the - RM10,000 first year premium income
agency and the ways to achieve it. A sales from hospital and surgical riders.
plan is equally useful for controlling, that is for
measuring results against the plan and making These objectives can be further broken into
necessary changes. For example, an agency sub-objectives, which can be in terms of time
may set as its goal the production of enough (monthly or quarterly objectives) or target
business during a year to generate RM 100,000 market (personal or commercial market).
in premium income. A sales plan is subsequently
prepared and it includes the following: • Sales Strategy
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CHAPTER - 8 INSURANCE MARKETING AND AFTER-SALES SERVICES
The sales strategy or strategies adopted to It was mentioned earlier that agents distribute
achieve the sales goal of RM100,000 may be policies through personal selling. An agent who
one or more of the above examples. Sales engages in personal selling requires product
strategies can be more specific than those knowledge, market knowledge, knowledge
mentioned. To sell personal insurance to staff of buying and selling processes, and selling
of corporate clients is an example of a more techniques.
specific sales strategy.
Product Knowledge
Market Analysis and its Uses
Product knowledge is important because
It was emphasized earlier that the sales plan insurance consumers usually depend on agents
has to be coordinated with market analysis, to guide them on the selection of appropriate
segmentation and targeting. Market analysis, policies that meet their needs and in matters
segmentation and targeting are important relating to claims whenever a loss occurs.
marketing efforts that have to be undertaken
by agents. Market analysis assists agents to Market Knowledge
determine the segments of population (market
segments) which they can serve most profitably. Market knowledge is particularly important
A market segment is a group of customers with because an agent’s ability to satisfy his
similar needs. Once the market segments have customers’ needs depends to a large extent on
been selected, the agents may focus on target his knowledge of the market. An agent with in-
marketing to determine the marketing efforts depth knowledge of the market would be able to
that will appeal to a specific segment of the identify the market segments which could best
market. For an agent with limited resources, satisfy the customers’ needs and at the same
target marketing can be a simple process of time earn himself a reasonable profit.
identifying the types of policies and the sales
approach that are appropriate for the selected Selling Techniques
market segments.
Last but not least, a successful agent will
• Implementing and Controlling the need to have knowledge of buying and selling
Sales Plan processes as well as the selling techniques
used in the sales of insurance.
Continuous monitoring of performance against
objectives is important.
8.1.5. Consumer Buying Decision Process
To ensure that the objectives are achieved as
scheduled, the sales plan has to be implemented
promptly. A critical part of any planning is Knowledge of the consumer buying decision
controlling the plan. Controlling involves making process is important to an agent because it
adjustments to objectives and the schedule if helps the agent to adjust to the buyer and as
they are found to be unrealistic. a consequence the sales process will be more
pleasant.
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There are five stages in the consumer buying - agent’s professional capability;
decision process:
- premium and other terms.
• Problem Recognition
• Purchase
At this stage, the consumer becomes aware of
the threat of risk and feels the need for insurance After evaluating the alternative policies based
to protect him from financial difficulties. on criteria and factors set by the consumer
himself, the consumer makes the decision to
Information Search purchase one of the alternative policies.
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CHAPTER - 8 INSURANCE MARKETING AND AFTER-SALES SERVICES
This is mutually beneficial. From the agent’s 8.2.2. Mode and Methods of Payment
point of view the following could be stated:-
• the chance of lapse or business Except when it is a single premium policy, the
flowing elsewhere could be policyholder may pay premiums by yearly, half-
minimized; yearly, quarterly or monthly instalments. These
are known as modes of payment.
• the client’s new needs for insurance
coverage could be recognized and Premiums paid under modes other than yearly
a sale quickly made, thus enhancing are slightly higher per year. There are two
the agent’s business; reasons for this.
and First, there is more administrative work involved
in the collection and consequently more
• the reputation of the insurer as expenses are incurred.
a service-oriented organization is
enhanced. Secondly, since premiums are calculated on the
assumption that they will be paid at the beginning
In this respect, an agent’s service would be of a policy year and invested immediately,
greatly required under the circumstances the insurer suffers a loss of interest earnings
stated below. whenever premiums are paid by modes other
than yearly.
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paid industrial workers - hence the classification importance to the issue of premium notice
Industrial Life Insurance. since it may actively help to realize adequate
premium income for the company. Hence this
The premiums for industrial life insurance has become an established business practice.
are paid weekly, fortnightly or monthly. These
are usually collected at the homes of the
policyholders by authorized collectors who 8.2.4. Grace Period
may be insurance agents, but could also be
employees of the insurer. The insured is
supplied with a premium receipt book (pass Generally, it is a term of the contract that a due
book) in which the collector makes an entry premium shall be paid on the date specified in
on receiving each premium. Part XVIII of the the policy. However, most contracts provide that
Insurance Regulations 1996, among other such payments can be made within a specified
things, requires additional information to be number of days, usually 30 days from the due
incorporated in the premium receipt book in date. This period is known as the grace period
order to bring to the attention of the policyowner or days of grace.
the grace period for the payment of premium
due and the consequences of failure to pay There are two important benefits from this
premium within the grace period. (See also provision.
Chapter 5 Section 5.3.3.2)
Firstly, premiums received late within the
• Payroll Deduction Scheme grace period are accepted without any interest
charge.
Such schemes are based on an agreement
between the insurer and the employer whereby Secondly, and more important, if the insured
the employer deducts the premium from the dies during this period while the due premium
employee’s salary and remits it to the insurer remains unpaid, the death claim will be paid
every month. The employer can make the after deduction of the due premium and any
deductions only with the written consent other outstanding or indebtedness.
(authorization) of the employee.
There are occasions when policyholders pay
premiums after the expiry of the grace period.
8.2.3. Premium Notice Such premiums may still be accepted under
certain conditions (for example, submission
of a Health Warranty form) and a late fee
To ensure that the policyholder pays premiums may be charged. This late fee, however, will
on time the insurer usually sends out a Premium be calculated not from the expiry of the days
Notice three or four weeks before the due date. of grace, but from the due date to the date of
If the premium is still not paid two to three weeks payment.
after the due date, a Premium Notice Reminder
is sent to the policyholder.
8.2.5. Premium Receipt
It should however be understood that the insurer
undertakes to issue a Premium Notice purely as
a matter of courtesy to remind the policyholder, The insurer will issue an official receipt upon
who is actually under a contractual obligation to receiving the premiums. An official receipt
pay the premiums regularly as and when they will often bear the printed reproduction of the
fall due. However, the insurer also attaches signature of the Chief Executive or any other
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authority, and with the counter signature of If the insured wishes to renew the policy, he then
the cashier, etc. The official receipt provides sends the premium to the insurer or arranges
the policyholder with evidence of premium for the premium to be paid and receives a
payment. confirmation of renewal together with any
certificate which may be appropriate to the form
of insurance.
8.3. GENERAL FEATURES OF GENERAL
INSURANCE RENEWAL PROCESS
8.4. POLICY REGISTER
In the normal course of events, the insurer will The policy register must contain the minimum
issue renewal papers to the insured. These information which is required to be entered
renewal papers take the form of a renewal as specified by the Act and the Regulations.
notice which brings to the attention of the The register could be kept in either card form,
insured the fact that the period of insurance is ledger sheet form or even as computer printout
nearly at an end, and that the premium to renew form, since the Insurance Act has not indicated
the policy is as shown. There is no obligation on any specific form for this purpose.
the insurer to issue this notice, but it is clearly in
their interest to do so in order to try and secure
renewal of the policy.
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CHAPTER 8
4. A sales strategy is a way of achieving the sales goal. The following is NOT an
example of such a strategy:
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CHAPTER - 8 INSURANCE MARKETING AND AFTER-SALES SERVICES
a. pricing ability.
b. product knowledge.
c. market knowledge.
d. selling techniques.
7. Among others, the factors which may influence the consumer buying decision will
include the following EXCEPT
8. Under what circumstances would the agent use the creative selling technique?
a. The agent will have a better chance of securing the loyalty of his client at the
time of renewal.
b. The agent will understand the needs of his client better.
c. The agent can recommend the right cover for his clients.
d. None of the above.
a. Instalment premiums are helpful to the insurer’s cash flow and are cost
effective.
b. Instalment premiums tend to improve the retention rate of the insurer.
c. A charge is made by the insurer for offering instalments.
d. Instalment premiums and annual premiums are the same.
Overview OVERVIEW
•
9.3. Legislation and Regulations
Applicable to Medical and Principles and Practices Applicable
Health Insurance to Medical and Health Insurance
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The principles of insurance apply to medical and The Insurance Act 1996 which came into force
health insurance in the same manner in which on 1 January 1997 stipulates in section 12 the
they are applicable to non-medical and health following:
insurance. They are:
1. A licensed insurer, other than a
a. Insurable interest licensed professional reinsurer,
shall not carry on both life business
b. Utmost good faith and general business;
The practice of insurance involves the following 3. Subsection (1) shall not apply to
processes: an insurer lawfully carrying on both
businesses on the effective date.
a. Offer and acceptance
b. Underwriting
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•
Transparency in the Sale of
JPI/GPI 28 - Guidelines on Unfair Medical and Health Isurance
Practices in Insurance Business. Policies
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b. is of common knowledge;
The guidelines are issued pursuant to
Recommendation 4.27 of the Financial c. the licensed insurer knows or in the
Sector Master Plan which provides for the ordinary course of his business ought
to know;
strengthening of market conduct regulations in
order to promote fair treatment to consumers.
d. in respect of which the licensed
insurer has waived any requirement
Among the measures implemented include
for disclosure.
promoting higher standards of transparency,
professionalism and accountability in the
3. Where a proposer fails to answer or
conduct of insurance business. With the
gives an incomplete or irrelevant
framework in place, this will further support a
answer to a question contained
strong foundation for the orderly development
in the proposal form or asked by the
of the insurance industry in the increasingly
licensed insurer and the matter
competitive environment emerging within the
was not pursued further by the
financial sector.
licensed insurer, compliance with
the duty of disclosure in respect
of the matter shall be deemed
9.4. THE DUTY OF DISCLOSURE to have been waived by the licensed
insurer.
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3. Lifetime limit
9.5. CATEGORIES OF MEDICAL AND
HEALTH INSURANCE
The payment of a claim does not result in a
termination of the policy except in the event of
a death claim.
Medical and health insurance policies may be
divided into the following two categories:
9.7. INCREASE OF RISK WITH TIME IN
1. Indemnity policies: An indemnity
MEDICAL AND HEALTH INSURANCE
policy places the insured in the
same financial position as before the
occurrence of the insured risk,
Medical and health insurance involves morbidity
subject to maximum limits of the
(probability of a disability resulting from an
insured amount. An example of an
accident or illness). Generally, risks increase
indemnity policy is hospitalisation
with age. Other external factors such as
and surgical insurance where a
occupation and environmental factor also affect
policyholder will be reimbursed
the risk.
for the costs of medical treatment
and services which he or she has
incurred.
9.8. COST CONTAINMENT MEASURES
2. Benefit policies: A benefit policy
pays a pre-determined sum of
To contain costs and abuses arising from inflated
money if an insured event occurs
claims, various methods are used by insurers,
during the policy period. Examples of
which include the following:
benefit policies are hospitalisation
cash benefit plans, critical illness
1. Inner limits
insurance, and disability income
insurance.
2. Schedule of surgical procedures
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CHAPTER 9
1. Which of the following does NOT come under medical and health insurance?
2. With the _____________ issued on ___________, all matters pertaining to
medical and health insurance policies sold or renewed on or after ___________
must be subject to these revised guidelines.
3. Insurers who launch new medical and health insurance products must lodge the
actuarial certificate for the products with BNM at least _______ days before the
products are offered to the public.
a. 31 days.
b. 30 days.
c. 60 days.
d. 90 days.
4. Medical and health insurance is usually divided into the following two categories:
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a. an indemnity policy.
b. a benefit policy.
c. a hospital and surgical policy.
d. disability income policy.
6. A medical and health insurance policy claims payment limit could be a combination
of the following:
a. I and II.
b. I and III.
c. I, III and IV.
d. All of the above.
7. In medical and health insurance, the payment of a claim does not result in a
termination of the policy except in the event of a
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CHAPTER 9 - INTRODUCTION TO MEDICAL AND HEALTH INSURANCE
9. Methods used by Insurer to contain costs and abuses arising from escalated
medical claims comprise the following:
I. deductibles.
II. file and claim reimbursement.
III. schedule of surgical procedures.
IV. co-payment for upgraded rooms.
a. I and II.
b. I and III.
c. I, III and IV.
d. All of the above.
10. A hospital and surgical policy that places the insured in the same financial position
as before the occurrence of the insured risk, subject to maximum limits of the
insured amount is known as.
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Overview OVERVIEW
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9. Pre-Hospitalisation Specialist
A medical expenses insurance policy is Consultation
designed to pay for the treatment cost of a
disability, subject to the limits and conditions 10. Post-Hospitalisation Treatment
stipulated in the policy. Sometimes, additional
benefits such as Daily Hospital Cash Benefit 11. Emergency Accidental Outpatient
may be provided. Treatment
4. Organ Transplant
Hospitalisation and surgical insurance policies
are designed to pay for treatment costs when 5. Insured Child’s Daily Guardian
an insured person is treated as an inpatient Allowance
(hospitalisation) or is surgically treated. Surgical
treatment in the form of a day surgery may also Government service tax is generally not payable
be covered. unless stipulated as payable in the policy.
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10.2.2. Major Medical Expenses Insurance paid by the insurance policy. This
deductible may be in the following
forms:
Major medical expenses insurance policies
provide broad coverage and substantial a. A fixed amount: For example, a
protection from large and unpredictable deductible of RM300 for each claim
healthcare expenses. They cover a wide range
of medical care charges with few internal limits b. A percentage: For example, 10% of
and a high overall maximum benefit and may all eligible expenses
take the following forms:
c. A combination of percentage and
1. Supplemental Major Medical fixed amount: For example, 10%
Insurance of all eligible expenses, subject to
a maximum (or minimum) of RM500
2. Comprehensive Major Medical
Insurance 2. Co-payments: Co-payment refers
to a sharing of expenses between
3. Excess Major Medical Insurance the policyholder and the insurer.
With co-payment, the insured pays
A supplemental major medical insurance cover a specified percentage of all the
is usually an extension to a basic hospitalisation eligible medical expenses. For
and surgical insurance policy. Generally, the example, co-payment for an
basic policy benefits should be exhausted upgraded room requires the
before this cover makes payment. Payment policyholder to share a percentage
is usually 80% of the incurred expenses, 20% of all eligible expenses if treatment
being borne by the policyholder. is received while staying in a more
expensive room than that provided
Comprehensive major medical insurance cover by the policy.
is similar to a basic hospitalisation and surgical
insurance policy except for the imposition of
a substantial deductible. Incurred expenses 10.2.3. Basis of Insurance Coverage
exceeding the agreed deductible is payable in
the event of a claim.
Comprehensive hospitalisation and surgical
insurance policies are also called “As Charged”
Excess major medical insurance cover is
policies in Malaysia. Other than room and board,
normally sold as a top-up of a major medical the policy generally pays the actual amounts
insurance policy. However, such policies which charged by medical providers. However, such
are readily available in the USA are rarely sold policies may impose Per Disability Limits and
in Malaysia. Overall Annual Limits.
The two common expense participation methods Inner limits hospitalisation and surgical
are: insurance policies are traditional forms of
policies sold in Malaysia since the early years.
1. Deductibles: A policy issued with a The policies generally fix separate limits of
deductible requires the compensation for each benefit. The policies
policyholder to pay a pre-agreed may sometimes be subjected to Per Disability
Limits or Overall Annual Limits. An example of
amount first before the balance of
an Inner Limits Coverage is found below:-
eligible expenses are reimbursed or
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10.3. GROUP MEDICAL AND HEALTH A group medical and health insurance may be
INSURANCE on a contributory or non-contributory basis.
Non-contributory group medical and health
insurance plans must cover all eligible members
Group medical and health insurance is similar in of the group. However, contributory group
cover to individual medical and health insurance. medical and health insurance usually requires
However, a single policy is usually issued to participation of at least seventy-five per cent
cover many different members belonging to a (75%) of the eligible members of the group.
common entity such as an employer.
Unless specifically exempted, government
Unlike individual medical and health insurance service tax is applicable to group policies. In
where each person’s risk potential is evaluated contributory policies, government service tax is
to determine insurability, all eligible members applicable to the employer’s contribution only.
can be covered by a group policy regardless
of age or physical condition. The premium Typically, the benefits, rights and obligations
for group medical and health insurance is of the insured group members are stated in a
calculated based on the characteristics of the master policy issued by the insurer to a single
group as a whole, such as average age and entity, the policyholder.
degree of occupational hazard. Much of this
group medical and health insurance coverage
is issued to employer-employee groups as an
employee benefits scheme.
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CHAPTER 10
3. The four main classes of medical and health insurance policies generally sold by
Insurers would include
4. Some of the supplementary covers insurers may incorporate into their medical
insurance policies are
a. I and II.
b. I, II and IV.
c. II, III and IV.
d. All of the above.
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5. The two most common expense participation methods found in major medical
expenses insurance policies are:
7. The parties to the contract under a group health and medical insurance scheme
are
8. ___________ pay a lump sum assured upon the insured person being diagnosed
as having any one of the specified critical illness stated in the policy schedule.
a. Investment-linked policies.
b. Permanent health insurance policies.
c. Permanent disability insurance policies.
d. Dread disease insurance.
9. Premium for individual medical and health insurance policies are usually
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10. A non-contributory group medical and health insurance scheme must cover
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CHAPTER 11 - UNDERWRITING MEDICAL AND HEALTH INSURANCE
Overview OVERVIEW
• Payment of Premium
• Termination of Policy
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1. guard against anti-selection; be selected against and the rates charged are
equitable for all concerned.
2. charge a premium that is commensurate
with the risk assumed.
11.4. THE RISK SELECTION PROCESS
11.2. ANTI-SELECTION
In medical and health insurance risk,
underwriters consider the following in risk
Anti-selection refers to a situation where more selection:
sub-standard risks are accepted for insurance
resulting in a less favourable underwriting result. 1. Medical factors: Medical
This occurs when an applicant who knows that considerations are important in
he or she has a very high probability of loss underwriting both disability income
submits a proposal for insurance. and medical expense coverage.
Medical history and current
Usually, insurance premiums are based on a physical conditions such as height
sample representing the overall market profile and weight are basic indicators of
of risks. With anti-selection, an insurer that the probability of future problems
lacks good underwriting controls ends up with that may cause disability or result
a portfolio that contains a higher proportion of in medical expenses for
less favourable risks. hospitalisation and treatment.
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Latent complications, or the progression of an Many insurers will not issue any disability
existing impairment to the point of hospitalisation income coverage to people who earn less than
or disability, are possible with many conditions. a specified yearly income or whose salary is
For example, overweight, and elevated blood seasonal or cyclical in nature. This requirement
pressure, while normally not disabling of tends to screen out those risks who may find
themselves, are considered indicators of a higher premium payments unduly burdensome,
future incidence of cardiovascular impairment. resulting in unprofitable early lapses.
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are relatively unimportant in underwriting length of the period required to recuperate from
medical expense coverage. Most insurers will any injury. Hence, premium rates for individual
refuse to issue coverage to people engaged medical and health insurance policies are higher
in extremely hazardous occupations such as for older people than for younger people.
professional boxers or deep-sea divers.
Also, the underwriter reviewing an individual
An insurer might use the following typical application is inclined to investigate medical
occupational classification schedule for health histories of older applicants more thoroughly
insurance: because of the increased possibility of related
problems that may not be disclosed in the
Class 1 - Least hazardous occupations, application.
including persons with primarily executive,
administrative or clerical duties. Frequently, Disability income insurers often reduce their
professional people are taken out from this maximum indemnity limit for applicants aged 50
category and considered as preferred risks, and above because of apparent poor experience
thus qualifying for higher coverage limits. on applicants who buy insurance at older ages.
3. Medical or paramedical
11.5.6. Age and Sex examinations,
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Underwriters assess risks based on the The most drastic underwriting action is to
proposal (application) forms and other relevant decline acceptance of a risk. This decision
sources of information to determine the applies to applicants who may be uninsurable
underwriting decision. The following are three because they engage in extremely dangerous
categories of underwriting decisions: occupations or hobbies or because they have
very poor health.
1. standard (issued exactly as applied
for)
11.8. ISSUING MODIFIED COVERAGE
2. sub-substandard/modified (issued
on other-than-applied-for basis)
Medical and health insurers use various
3. declined methods to address substandard risks. They
include the following:
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11.9.1. Optionally Renewable Policies for the particular product portfolio. Such premium
changes cannot be made on an individual basis,
but only on a block of policies within a given
When policies are renewable at the option of the class.
insurer, they can be cancelled during the policy
term by the policyholder with an appropriate
refund of premium. The insurer reserves the 11.9.3. Conditional Renewal (Non-Renewal
right to non-renew a policy on any premium at for Stated Reasons Only Policies)
the due date or the policy anniversary, but not to
cancel between these dates.
Some medical and health policies are non-
The insurer of an optionally renewable policy renewable only for stated reasons, such as:
may choose to modify the policy rather than
non-renew. The modifications may be: 1. when an insured obtains additional
coverage that exceeds the insurer’s
a. an exclusion endorsement or a underwriting limits;
special-class premium because of a
given impairment; 2. change to an unacceptable
occupation;
b. an increase in the basic premium
because of a change to a more 3. discontinuation of employment with
hazardous occupation; a certain employer or membership
in a certain association;
c. an increase in elimination periods
to avoid small, repetitious claims. 4. when an insurer is having adverse
claim experience on a particular
product portfolio.
11.9.2. Guaranteed Renewable Policies
These policies are usually renewable on a yearly
basis, except that the insurer cannot refuse to
The renewal underwriting of a guaranteed renew the policy on its existing coverage for
renewable policy is limited to the rescission reasons other than those stipulated in the policy.
of the policy during the contestable period However, the premium rates can be changed at
or the refusal to accept an application for the time of renewal.
reinstatement.
Insurers usually incorporate the Portfolio
When the insurer discovers a material Withdrawal Condition in conditional renewable
misinterpretation within the contestable period, policies to define clearly the circumstances
the policy may be rescinded if the omission on under which the insurer can non-renew a
the application materially affected the risk and product portfolio.
the insurer would not have issued the policy had
the correct information been known. The insurer
may refuse to reinstate a policy in accordance 11.9.4. Non-Cancellable Policies
with its current underwriting practices.
Guaranteed renewable coverages may be Except for periodic review of the experience
subject to premium rate changes if the insurer of a given block of business for continued
has had to pay out more claims than it expected marketing, the renewal underwriting of non-
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CHAPTER 11
a. more standard risks are accepted for insurance resulting in a less favourable
underwriting result.
b. more sub-standard risks are accepted for insurance resulting in a less
favourable underwriting result.
c. more standard risks are accepted for insurance resulting in a more
favourable underwriting result.
d. more sub-standard risks are accepted for insurance resulting in a more
favourable underwriting result.
2. What are the common factors that medical and health insurance underwriters
usually look into while performing risk selection?
I. medical factors.
II. financial factors.
III. age and sex factors.
IV. occupational factors.
a. I and II.
b. I and III.
c. I, III and IV.
d. All of the above.
a. friends.
b. age.
c. sex.
d. financial status.
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a. the quoting of premium rates and terms, and issuance of the policy.
b. the assessment and selection of risks, and the determination of premium,
terms and conditions.
c. the determination of premium rates only.
d. the assessment of the possibility of recurrence of an illness.
6. The most drastic underwriting action of a medical and health insurance underwriter is
8. Medical and health insurers have long used ___________ as a mean of issuing
coverage to person whom would otherwise have to be declined.
a. exclusion endorsements.
b. premium loadings.
c. modified benefits.
d. waiting period.
a. an optional renewable.
b. a guaranteed renewable.
c. a conditional renewable.
d. a non- cancellable.
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11. Three methods use by medical and health insurance underwriters to address sub-
standard risks are:
a. exclusion endorsement, extra premium and change in benefits.
b. elimination period, change of benefits and standard issuance.
c. qualifying period, change of risk and exclusion endorsement.
d. change of risk, exclusion endorsement and postponement .
a. preferred risks.
b. subjective risks.
c. objective risks.
d. impaired risks.
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CHAPTER 12 - POLICY ADMINISTRATION
Overview OVERVIEW
1. Proposal Form
2. Policy
3. Endorsement
4. Renewal Notice
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Section 149 of the Insurance Act 1996 provides 12.2.3. Contents of a Proposal Form
for control by and the lodgement of proposal
forms, policies and brochures of insurers with
Bank Negara Malaysia. In addition, section A proposal form generally contains the following
149 also provides that Bank Negara Malaysia items:
may specify a code of good practice in relation
to any description of proposal form, policy or 1. Disclosure statement as required
brochure. under the Insurance Act 1996: There
is invariably a statement regarding
sufficient disclosure of facts by the
12.2. THE PROPOSAL FORM proposer pursuant to section 149(4)
of the Insurance Act 1996. The
statement reads as follows: “You are
Like other contracts, an insurance contract to disclose in the proposal form,
becomes effective when the offer made by fully and faithfully all the facts
one party (the proposer) is accepted by the which you know or ought to know,
other party (the insurer). In insurance, the
otherwise the policy issued
offer is typically submitted on a proposal form
hereunder may be invalidated”.
completed and signed by the proposer.
2. Questions of a general nature: The
medical and health insurance
12.2.1. The Usefulness of Proposal
proposal form would contain general
Forms
questions which are common to all
insurance proposal forms and relate
to seeking details on the following:
A proposal form is a document drafted by the
insurer in the form of a questionnaire for each
a. Proposer’s Name - This is required
class of insurance to assist the insurer in
for identification purposes but it
gathering information required to assess a risk
may also indicate an aspect of the
being proposed. The use of a proposal form
risk proposed. For example, the
enables the insurer to consider the application
speedily and accurately because information name of a company may indicate
regarding the risk being proposed for a the nature of their trade. The
particular class of insurance is furnished in a name of a person who is known to
uniform manner. In practice, proposal forms are be disreputable may prompt the
frequently used in relation to simple risks where insurer to decline the risk.
information can be furnished in a structured
format. b. Proposer’s Address - This is required
for correspondence purposes.
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These are conditions which must be fulfilled b. change in any maximum benefit
before the insurance company is liable for period;
a claim. The notification condition and the
subrogation condition in a fire policy are c. extension of insurance to cover
conditions precedent to liability. additional members of the family;
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The notice incorporates all relevant particulars Based on current tax guidelines, the following
of the policy including the insured’s name, concerning medical and health insurance
policy number, expiry date of policy, annual policies qualify for tax allowance:
premium and revision of renewal terms (if any).
It is also the practice to include a note advising a. Medical and health insurance policy
the insured to disclose any material alterations coverage should be for a period of
in the risk since the inception of policy (or last 12 months or more.
renewal date).
b. Expenses should be related to the
Unlike general insurance contracts, life medical treatment resulting from a
insurance contracts are long-term contracts disease or an accident or a disability.
and premiums are usually payable based on
a pre-agreed payment frequency. This may be c. The policy can be a stand-alone
monthly, quarterly, semi-annually or annually. policy or as a rider to a life
Thus, to ensure that the policyholder pays insurance policy. If it is a rider, only
premiums on time the insurer usually sends the rider premium can qualify for
out a premium notice three or four weeks prior deduction.
to the due date. If the premium is still not paid
two to three weeks after the due date, the usual To qualify for the tax allowance, proof of such
business practice is to send a Premium Notice premium payment is required by the Inland
Reminder to the policyholder. Unlike in general Revenue Board. Previously, when making the
insurance, there is usually no requirement to claim for the first time, a copy of the medical
disclose material alterations to the risk insured. and health insurance policy and receipt had
to be submitted with the Tax Return Form.
However, under the current self assessment on
12.6. DOCUMENTS FOR TAX RELIEF tax return, this requirement is no longer needed.
FOR MEDICAL AND HEALTH The policyholder is instead advised to file away
INSURANCE PREMIUM PAYMENTS all these documents for future tax auditing and
verification purposes.
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CHAPTER 12
2. _____________________ requires the lodgement of proposal forms, policies and
brochures of insurers with Bank Negara Malaysia.
4. Which of the following conditions fall under the category of implied conditions?
I. the duty of utmost good faith.
II. the existence of insurable interest.
III. the existence of the subject matter of insurance.
IV. identification of the subject matter of insurance.
a. I and II.
b. I, II and III.
c. II, III and IV.
d. All the above.
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5. The clause that specifies the perils insured under the policy and the circumstances
in which the insurer will become responsible to make payment is known as
6. Which of the following clause introduces or recites the parties in the contract?
9. ___________ are policy conditions which require the insured to inform the insurers
of any changes or alterations in the risk.
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11. Under current tax regulations, an additional tax relief of maximum RM 3000 is
allowed for premium paid for
12. The full name and the registered address of the insurance company are contained
in.
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Overview OVERVIEW
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b. Has premium been paid? When a claim form is issued it does not mean
that the insurer is admitting liability. On the
c. Is the loss caused by an insured contrary, it implies that the insurer after making a
peril? preliminary investigation, has not found anything
to disqualify the claim. To determine whether
d. Is the subject matter affected by an insurer is liable for the loss, a thorough
the loss the same as that insured investigation may be necessary. However, the
under the policy? extent and manner of investigation will vary
according to the size and complexity of the
e. Has notice of loss been given claim. A small claim will usually be paid on the
without undue delay? basis of documents submitted by the claimant.
Claims above a certain level will be investigated
in more detail by a claim official employed by
the insurer.
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In general, claim investigation involves format of the insured’s statement may vary with
ascertaining the following: each insurer.
1. The Validity of a Claim – This The questions on the statement are designed to
involves determining : elicit only the information needed to determine
the insurer’s liability under the policy. On a
a. the existence of loss; typical insured’s statement, the claimant is
asked to furnish identifying information such
b. if loss is caused by a peril insured as the name, age and address of the insured,
under the policy; and the name of the sick or injured person if
the claimant is a family member other than
c. if loss does not fall within the the insured. In addition, the form calls for a
scope of an exclusion of the policy; description of the injury or sickness that caused
the loss and an indication of when, where, and
d. if the person making the claim is how the sickness began or the injury occurred.
the rightful claimant. The names of hospitals where the patient was
confined and the names of the physicians who
2. Claims Documentation - Claim treated the patient are also requested.
forms are documents drafted by
insurers to gather information The claim form also contains an authorization
relevant to assessing claims. In from the insured or other covered person
general all claim forms seek permitting any medical provider, physician,
information on the identity of the or employer to release records or information
insured, the insured’s interest in concerning the insured’s medical history or
the loss, the circumstances of and employment status. This authorization is very
the extent of loss. important to the insurer because with it the
insurer can obtain records for a thorough review
The issuance of a claim form does not of the claim. Without this authorization, the
constitute an admission of liability on the part claim could be delayed.
of the insurers. The insurers make this position
very clear by making a remark on the form to
that effect. All letters that insurers send to the 13.6. SETTLEMENT OF MEDICAL AND
insureds in connection with the claim are also HEALTH INSURANCE CLAIMS
sent without prejudice to their rights. Thus,
claim forms are issued without prejudice, which
means that issuance of the claim form does not Having reviewed the considerations applicable
mean liability is admitted under the policy. to a particular claim and having made the
decision to pay a claim, the remaining major
function is to compute the amount payable and
13.5. MEDICAL AND HEALTH INSURANCE to issue the claim payment.
CLAIM FORMS
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If the rejection is one that may require Compromise settlement usually results where a
detailed knowledge of policy provisions substantial question exists about the degree of
and an interpretation of insurer practices, it disability; a question as to the cause of death
may be advantageous to have a field claim where the accidental death benefit is involved
representative to call on the insured. (for example, a question of suicide); or in the
case of major medical policies, a question about
the appropriateness or reasonableness of a
13.8. DISPUTES particular charge. The compromise settlement
will usually result in the insurer paying something
more than its interpretation of the facts would
Of the many claims settled each year by warrant – and the claimant accepting payment
insurers, only a small proportion usually end for less than that claimed.
up in disputes. Disputes between claimants
and insurers generally may involve one of two b. Litigation: When a claimant is
issues: unhappy with the outcome of his
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CHAPTER 13
2. The reasonable timeframe for notification of loss under a medical and health
insurance claim is usually between
a. 14 days to 60 days.
b. 14 days to 30 days.
c. 14 days to 45 days.
d. 14 days to 90 days.
3. The following conditions have to be met before a medical and health claim can be
paid, EXCEPT
a. policy lapse.
b. no outstanding premium.
c. the loss was caused by the insured peril.
d. notification of loss was given without undue delay.
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7. The issuance of a medical and health insurance claim form by the insurer does not
constitute
8. The validity of a claim under the claim investigation process involves determining
the following, EXCEPT
9. Usually disputes between claimants and insurers generally arise due to the
question of
a. liability of the insurer and the premium method.
b. liability of the insured and the quantum of loss.
c. liability of the insurer and the quantum of loss.
d. stability of the insurer and the premium method.
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10. ______________ requires the insured to furnish written proof of loss within a
stipulated timeframe after the termination of loss of the period for which the
insurer is liable.
a. Proof of documentation.
b. Proof of hosptialisation.
c. Proof age admission.
d. The proof of loss provision.
11. The medical and health insurance claim form usually comprises a claimant’s
statement and
12. _____________ will usually result in the insurer paying something more than its
interpretation of the facts would warrant and the claimant accepting payment for
less than that claimed.
a. Arbitration.
b. Litigation.
c. Mediation.
d. A compromise settlement.
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Overview OVERVIEW
14.1. Introduction
This chapter serves as an Introduction to
14.2. Characteristics of General General Insurance with an emphasis on:
Insurance Products
• The Characteristics of General
14.3. The Basic Principles of Insurance Products
Insurance as Applied to General
Insurance
14.1 INTRODUCTION
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Other implications
Most general insurance contracts are
The short-term nature of the contracts has contracts of indemnity.
other implications for the conduct of this class
of business. In life insurance (especially for non-with-profit
policies) and some general insurance contracts,
a. Premium charged may vary. for example personal accident policies, the claim
amount is determined at the very beginning of
At the end of the period of the contract, the the contract.
insurer reassesses the risk. Based on this
reassessment, a possibly different premium However, in general insurance, the aim is to
rate may be charged. The difference in the rate place the insured in the same financial position
could be due to two basic causes:- (i.e. to indemnify the insured) as that occupied
immediately before the occurrence of the
• there is a change in the nature of insured risk, subject to maximum limits of the
the individual risk to be insured; insured amount.
and Indemnifying losses leads to a wide
dispersion in the claim amounts.
• there is an overall change in the
premium rates for that particular For the majority of general insurance contracts,
class of business owing to, for the process of indemnifying a loss leads to
example, an overall worsening of the claim amount per unit of premium varying
the risk to be insured. considerably even within the same class of
business, which can be considered to be fairly
homogeneous in relation to the insured risk.
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Usually, there will be a large number of In general insurance, the insured risk may not
small claims and a very few extremely large increase with duration and in fact, may decrease
claims. due to better safety measures taken by the
insured (e.g. installation of water sprinklers).
Thus, when we consider a portfolio of general
insurance contracts, the claim amounts would
be found to differ widely and there would usually 14.3. THE BASIC PRINCIPLES OF
be a large number of small claims and a few INSURANCE AS APPLIED
extremely large claims. TO GENERAL INSURANCE
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CHAPTER 14
1. Which of the following facts is true about life and personal accident policies?
a. I and II.
b. II and III.
c. II and IV.
d. I and IV.
4. On the payment of a claim, which of the following type of insurance policies will
terminate automatically?
a. property.
b. liability.
c. marine.
d. life.
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a. the insured.
b. the insurer.
c. the proposer.
d. the insured and the insurer.
7. For life insurance contracts, the mortality risk ________with age and hence with
the duration of the contract.
a. decreases.
b. increases.
c. diminishes.
d. enhances.
8. Which of the following statement is NOT true about general insurance contracts?
a. General insurance contracts are annual/short-term contracts.
b. General insurance contracts usually have varying premiums at renewal.
c. General insurance contracts are renewable by mutual consent.
d. General Insurance contracts must be renewed with the same insurer.
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Overview OVERVIEW
15.1. Marine Insurance
The main classes of General Insurance
15.2. Fire Insurance Business are covered in this chapter as
below:
15.3. Motor Insurance
• Marine Insurance
15.4. Miscellaneous Accident
Insurance • Fire Insurance
• Liability Insurance
• Engineering Insurance
• Aviation Insurance
• Scope of Cover
• Exclusions
• Extensions
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This class of insurance provides cover against 15.1.1.1. Marine Cargo Policy
loss of or damage to property and interest
by maritime perils which include perils of the
sea, heavy weather, stranding or collision, fire The new marine cargo policy has three main
and like perils. The subject matter of marine forms of coverage set forth by three sets of
insurance may include the following: cargo clauses:
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Clauses
Perils
A B C
Sinking, stranding, grounding, capsizing
Fire, explosion
Collision
Overturning, derailment of lan d conveyance
Earthquake, volcanic eruption, lightning X
General Average Sacrifice
Jettison
Discharge of cargo at port of distress
General average and salvage charge
Washing overboard X
Entry of sea, lake, river water into vessel X
Total loss of package during loading or discharge X
Pirates and thieves X X
Deliberate damage or destruction X X
Wilful misconduct of the insured X X X
Ordinary leakage, loss in weight or volume, wear and tear X X X
Insufficiency or unsuitability of packing X X X
Inherent vice or nature of the subject matter X X X
Unseaworthiness and unfitness of vessel(when insured
is privy to it) X X X
Insolvency or financial default of carrier X X X
War, strikes, riots and civil commotions X X X
Atomic and nuclear weapons X X X
Table 15.2. Insured (√) and Excluded Perils (X) under the Various Cargo Clauses
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Summary
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A fire policy provides cover against loss of iii. loss or damage to the following
or damage to buildings (of factories, shops, specified property unless expressly
offices, private dwellings, etc.), and contents stated in the policy:
(for example, furniture, fixtures and fittings,
plants and machinery, office equipment, stocks- • goods held in trust or on commission;
in-trade, personal effects and household goods)
caused by the following perils: • bullion or unset precious stones;
• warlike risks;
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iii. liability of the insured to the public • plate glass exceeding RM500 per
as owner of the premises (this would piece.
include liability arising from defects
in buildings, fixtures and fittings A houseowners policy provides cover on the
or in the walls, gates, fences and building only. As compared to a standard fire
trees around) up to a limit of RM policy that has standard covers restricted to
10,000 plus legal costs subject to fire or lightning, a houseowners policy covers
the consent of the insurer. additional perils that include explosion (caused
by gas for domestic use), aircraft and other
Exclusions aerial devices dropped therefrom, impact
damage by road vehicles, bursting of pipes,
This policy excludes the following: theft, hurricane, cyclone, typhoon, windstorm,
earthquake, volcanic eruption and flood.
i. loss or damage arising from
Under Section 1, this policy will cover loss or
• war, riot and kindred risks; and damage caused by the abovementioned perils
to the insured building. The term “insured
• contamination by radioactivity; building” shall include all domestic offices,
stables, garages and out-buildings, including
ii. loss or damage caused by hurricane, fixtures and fittings, walls, gates and fences.
cyclone, typhoon, or windstorm to
the following: Section 2 of the policy covers loss or damage
to Contents, i.e. household goods and personal
• any building under construction, effects of every description being the property
reconstruction or repair; of the insured or any member of his family
normally residing with him.
• metal smoke stacks, awnings,
blinds, signs and other outdoor A person may opt for a houseowners policy
fixtures and fittings including gates that only covers the building, or a householders
and fences; policy that covers contents, or both.
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• nuclear risks;
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• computer damage and breakdown ii. loss of gross profit arising from
risks. business interruption on other’s
premises (example: customer’s/
supplier’s premises).
Summary:-
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Therefore, the use for hire or reward, for racing, 2. Hirer Driving – Hired out without a
pacemaking, reliability trials and speed testing, driver
for any purpose in connection with the motor
trade, for the carriage of goods other than 3. Chauffeur- Driven – Private hire
samples and for the carriage of passengers for with a driver
hire or reward is excluded.
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i. Private motorcycles;
This form of cover provides Act only cover plus
cover for liability to third party property loss or
ii. Commercial motorcycles;
damage caused by or arising out of the use of
the insured motor vehicle on a road.
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This is normally the lowest policyholder option The general risks or coverage afforded under
and the cover will not be provided for loss or the comprehensive policy may vary according
damage to the insured vehicle and is restricted to the types of policy as follows:
to:
1. Private Car
- damage to property of third party;
a. by accidental collision or overturning;
- legal liability for death and bodily
injury to third party. b. by collision or overturning caused
by mechanical breakdown;
This is often chosen by drivers who cannot
afford the premium of a higher level of cover c. by collision or overturning caused
or because of the very low value of a vehicle or by wear and tear;
the vehicle’s age has exceeded the acceptance
limit for comprehensive cover. d. by impact damage caused by falling
objects, provided no flood,
typhoon, hurricane, storm, tempest,
15.3.3. Third Party, Fire And volcanic eruption, earthquake,
Theft Cover landslide, landslip, subsidence or
sinking of the soil/earth or other
convulsion of nature is involved;
In addition to the cover granted by the third
party only policy, this policy also provides cover e. by fire explosion or lightning;
for loss of or damage to the insured vehicle as
a result of fire or theft. f. by burglary, housebreaking or theft;
- Section A-Loss or Damage to Your The cover for a motorcycle policy is similar to
Vehicle that of a private car policy.
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The following are exclusions to Section A (cover For a commercial vehicle policy, the policy
explained above), which are found in almost all exclusions are similar to those of a private
motor policies: vehicle policy with two additional exclusions as
follows:
Private Car
1. damage caused by overloading or
a. consequential losses of any nature. strain.
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Summary:
Third Party Fire and Theft Third Party Cover plus loss/damage to
insured’s vehicle due to fire and theft
• Engineering Insurance
• Aviation Insurance
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Note: Theft cover for contents in private Uncertainty of losses is restricted neither to
dwellings is provided under a householders events brought about by fire or theft nor are
policy. they limited to events occurring on the insured’s
premises. This realisation led to the development
Exclusions of a wider form of cover known as ‘all risks’.
The common exclusions are: The scope of cover for an all risks policy is very
wide and it covers against all risks, namely fire,
• loss or damage by fire however theft and all accidental causes other than those
caused; excluded from the policy.
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The all risks policy is normally issued to cover • in transit between the insured’s
for valuables such as jewelleries, watches, premises and the bank;
cameras, paintings and works of art. The
amount to be insured should be based on the • on the insured’s premises during
market value or an agreed value. business hours;
The term ‘all risks’ is unfortunate in the sense • in a locked safe or strongroom on
that it does not provide cover against all risks as the insured’s premises out of
there are a number of exceptions/exclusions. business hours;
• loss or damage arising from The term “money” includes cash, bank and
confiscation or detention by customs or currency notes, cheques, postal orders,
other official authorities; and currency, postage and revenue stamps
belonging to the insured or for which he is
• nuclear risks. legally responsible.
Exclusions
15.4.1.3. Money Insurance
The policy is not liable for any loss arising
from :
Basic Cover
a. the dishonesty of an employee;
A money insurance policy provides cover for
loss of money against all risks, subject to certain b. confiscation, nationalization, requisition
specified exclusions, while: or wilful destruction by any government
authorities;
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FWCS was created to protect the interest and 6. Any sum which the insured would
welfare of all foreign workers in Malaysia. have been entitled to recover from
any party but for an agreement
This policy provides for the payment of between the insured and such party
compensation benefits to a foreign worker who
possesses valid employment documents, for 7. Any liability caused by or
personal injury sustained due to accident or contributed to by nuclear weapon
disease contracted which arise out of or in the materials, ionising radiations or
course of employment or if the death results radioactivity contamination
from the accident.
Briefly, the policy provides the following 15.4.2.2. Employers’ Liability Insurance
benefits in respect of:
2. Any employee who is not a “workman” The policy is restricted to damages payable in
within the meaning of the Law(s) respect of injury and does not pay for damage
to an employee’s property.
3. Liability to employees of contractors to
the insured If it can be proved that the employer is liable
at common law for a workman’s injury, the
4. War and kindred risks workman may prefer to take court action to
secure higher damages instead of accepting
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the compensation laid down by the Workmen’s 15.4.2.3. Public Liability Insurance
Compensation Ordinance.
Employers’ liability insurance covers the liability Every business organization is exposed to
of an employer under common law or statutes the risk of incurring legal liability due to its
(other than the Workmen’s Compensation operations. The public may be in contact with
Ordinance and the Employees’ Social Security the firm in its offices, or the firm may be on the
Act) for occupational injury sustained or disease premises of others, in the street, or on various
contracted by any of his employees. sites.
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h. war and warlike risks; and A professional indemnity policy usually excludes
claims:
i. sonic boom.
a. for libel or slander;
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15.4.4. Fidelity Guarantee And Bonds The insurer becomes a guarantor in respect of
the insured person and if the insured person
commits a fraud or acts dishonestly against the
15.4.4.1. Fidelity Guarantee employer, the guarantor, i.e. the insurer, will
make a payment to make good that fraud or
dishonesty.
Basic Cover
The dishonest or fraudulent acts must be
A fidelity guarantee policy provides cover to committed during:
an employer against loss of money or stocks
resulting from dishonest or fraudulent acts of a. the period of insurance;
any of his employees.
b. the employee’s uninterrupted service of
Fidelity guarantees relate to situations where employment; and
employees handle their employer’s money or
other property, for example either by way of
handling cash (for example, cashiers or sales
assistants) or being involved in record-keeping
(for example, accountants, computer operators
or purchase managers).
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The cover applies within the premises specified • war, riot and similar risks; and
in the policy while the insured plant is:
c. nuclear risks.
1. at work or at rest; or
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This section provides cover on an all risks basis f. loss or damage to hired equipment
to any physical loss or damage to the items for which the owner is responsible
insured unless specifically excluded. by law or contract; and
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•
Insurance
loss or damage to property of and
death or bodily injury to third party
Contractors’ all risks insurance is a form of
insurance that has been developed to meet Further, there are two types of maintenance
the specific needs of the construction industry. visits cover:
When new buildings are being constructed or
civil engineering projects such as motorways or 1. Maintenance Visits
bridges are being undertaken, a great deal of
money is invested before the work is finished. The insurer’s liability during the maintenance
period is limited to loss or damage caused
The risk is that the particular building or bridge by the insured in the course of the operations
may sustain severe damage at some point carried out for the purpose of complying with the
during construction, prolonging the construction obligations under the maintenance provisions
time and delaying the eventual completion date. of the contract.
The risk is all the more acute as the completion
date draws near, and there are many examples 2. Extended Maintenance
of buildings and other projects sustaining severe
damage and even total destruction, only days In addition to the first, this coverage includes
before they are due to be handed over to the loss or damage during the construction work.
new owners.
Exclusions
Basic Cover
The common exclusions include the following;
The contractors’ all risks policy provides a
wide coverage for civil and structural projects, a. loss or damage due to faulty design;
usually one-off in nature. It covers the duration
of the project, including the maintenance, and is b. cost of replacement of defective
divided into two sections, namely: material and/or workmanship;
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l. loss due to war, warlike operations, • Expenses incurred for the clearance
strike and civil commotion. of debris following a loss;
Briefly, the EAR insurance policy provides cover Most aviation policies are issued on an all risks
for: basis subject to certain restrictions. The buyers
of these policies are aircraft owners or operators
1. Site erection and testing of all kinds of: for either commercial (e.g. airlines) or private
use (e.g. flying clubs). Other forms of aircraft
• Individual machines, apparatus and that can also be covered under the aviation
assemblies, class are helicopters, hang gliders, micro light
aircraft, hot air balloons.
• Complete power facilities and
production plants where the above- Besides airlines, other groups of persons
said items are used. requiring aviation insurance cover are operators
of corporate aircraft, private operators, airport
2. Civil engineering works necessary for authorities, and manufacturers of aircraft and
the project to be erected may be aircraft equipment.
included in the cover, provided the
nature of the project is predominantly
that of erection work.
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Following are the types of policies and coverage • member of the flight, cabin or other
available connected with aviation insurance: crew while engaged in the operation
of the aircraft:
1. Aircraft Hull and Liability Insurance
• loss or damage to property belonging
Basic Cover to or in the care, custody or control
of the insured:
An aviation hull and liability policy indemnifies
the insured to pay for, replace or make good • noise and pollution and other
accidental loss or damage to aircraft (including perils.
disappearance) and his legal liability to third
parties and passengers. Exclusions applicable to cover in respect of
legal liability to passengers:
Exclusions:
General exclusions
• injury to director, employee and
others while acting in the course of
employment or duties for the insured;
The common exclusions include the following:
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• any aircraft removed from primary • Loss caused by ships, vessels, craft
service for maintenance, routine, or aircraft owned, chartered, used
overhaul, alteration or modification or operated by or on account of the
of the aircraft. insured;
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A major medical insurance policy is designed with During this period the policyowner is not covered
high overall limits to cater for major surgeries. for any illness or sickness that may occur. The
It is usually purchased as a supplement (top- restriction, however, shall not exceed 30 days
up) to the basic hospital and surgical insurance from the policy effective date and will also not
policy, subject to co-insurance and/or deductible apply to any injuries arising from an accident.
to be borne by the policyholder.
b. Specified Illnesses
3. Dread Disease or Critical Illness
Insurance Certain identified illnesses may be excluded
from the policy cover during this waiting period,
In contrast to major medical insurance, the which generally does not exceed 120 days from
cover afforded by dread disease or critical the policy effective date.
illness insurance provides a lump sum benefit
upon the diagnosis of any of the 36 dread c. Co-payments
diseases or specified illnesses. Typical diseases
specified include cancer, heart attack, stroke, This clause means that the policyowner will bear
kidney failure, multiple sclerosis, Alzheimer’s or self-insure a portion of the expenses under
disease, Parkinson’s disease and motor neuron cost-sharing or coinsurance terms, which shall
disease. not exceed 20% of the claimable expenses (i.e.
excluding deductibles) per disability, subject
4. Disability Income Insurance to an absolute maximum limit of RM3,000
(inclusive of deductibles) per disability.
Disability income insurance provides a stream
of income to replace a portion of the insured’s Exclusions
pre-disability income when the insured is unable
to work because of illnesses or injury. Following are some of the common exclusions
found under a medical and health policy where
5. Hospital Income Insurance the costs of treatment or charges will not be
covered:
A hospital income insurance policy pays a
specified sum of money on a daily, weekly or 1. Pre-existing conditions;
monthly basis, subject to an annual limit, if a
policyholder has to stay in a hospital due to any 2. Congenital abnormalities or deformities
covered illness, sickness or injury. including hereditary conditions;
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5. Disabilities arising out of duties of by violent accidental external and visible means
employment or profession that are which directly and independently of any other
covered under workmen’s compensation cause results in his death or disablement.
insurance;
3. Golfing Equipment/Golf Clubs
6. Psychotic, mental or nervous disorders;
The policy covers accidental damage to or
7. Sickness or Injury arising from racing breakage of golf clubs including club bags, ball,
of any kind (except foot racing); caddie cars and umbrellas belonging to the
insured while he is in the course of playing or
8. Expenses incurred for sex changes; practising on any recognized golf course.
Under this section, the policy provides cover for 15.5. TYPES OF GENERAL TAKAFUL
the legal liability of the insured for accidental BUSINESS
bodily injury to any person or damage to property
in respect of accidents caused by him while
playing or practising golf of on any recognised Introduction
golf course.
General takaful business comprises all takaful
2. Personal Accident insurance under the heading of general
insurance business excluding family takaful.
The policy provides cover if the insured while The general takaful scheme is basically a short-
playing or practising golf in a golf course term tabarru’ contract that provides cover to
sustains bodily injury caused solely and directly participants against loss or damages due to a
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a. machinery breakdown,
15.5.1. Types Of General Takaful
Schemes b. erection all risks,
c. boiler,
The main types of general takaful schemes
include the following: d. pressure vessel,
b. houseowners,
15.5.2. Principles And Operation Of
c. householders, and General Takaful
b. personal accident for pilgrims, The general takaful fund would be used to pay
compensation or indemnity to any participant
c. all risks, who suffers a defined loss. If there is a surplus
to the fund after deducting all operational
d. workmen’s compensation, costs, the surplus shall be shared between
the participants and the takaful company in
e. public liability, accordance with the principle of mudharabah.
The sharing of the surplus will be based on
f. money, an agreed ratio such as 60:40 as defined in
the contract. Payments of participants’ share
g. equipment all risks, and are made at the conclusion of the scheme,
provided participants have not made and
h. employers’ liability. received any claims during the period of
participation.
4. Marine takaful scheme for cargo.
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CHAPTER 15
2. Which of the following are the revised new Marine Cargo Clauses?
a. lightning damage.
b. war and its kindred perils.
c. fire caused by negligence of employees.
d. fire as a result of the explosion of a domestic boiler.
4. A personal accident policy does not cover death, disablement and/or medical
expenses caused
a. by suicide.
b. while committing an unlawful act.
c. by childbirth, miscarriage, or pregnancy.
d. all of the above.
5. The houseowners insurance policy can be extended to include the following perils
at additional premiums, EXCEPT
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6. A business interruption policy will pay for all the following losses, EXCEPT
7. The motor third party fire theft policy will provide additional protection against
fire and theft to
8. The standard theft/burglary policy will compensate for the following loss and
damages:
9. The money insurance policy provides cover for loss or money against all risks,
whilst
I. in transit between the insured’s premises and the bank and vice-versa.
II. on the insured’s premises during business hours.
III. in a locked safe or strongroom on the insured’s premises out of business
hours.
IV. in the private residence of any principal or director of the insured.
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PRACTICE OF GENERAL INSURANCE: RISK ASSESSMENT, UNDERWRITING AND RATING
Overview OVERVIEW
16.1. Underwriting
The following aspects of the practice of general
16.2. The Underwriting Process insurance are covered in this chapter:
16.3. Determination of Premium, • Underwriting
Terms and Conditions
• The Underwriting Process
16.4. Confirmation of Acceptance
• Determination of Premiums, Terms
16.5. Reinsurance and Co-insurance and Conditions
16.6. Rating • Confirmation of Acceptance
16.7. Minimum Premium • Reinsurance and Co-Insurance
16.8. Payment of Premiums • Rating
16.9. Refund of Premium • Minimum Premium
16.1. UNDERWRITING
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• type of occupancy,
• situation of risk.
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While physical hazards are tangible elements, However, he is less willing to accept risk with
moral hazards, which are associated with moral poor moral hazards because they are more
character, are subtle and therefore more difficult difficult to deal with. For instance, when fraud
to observe and measure. exists, no increase in premium will be adequate
to cover the risk. Carelessness, on the other
The following are some forms of moral hand, can be handled to some extent by the
hazards: imposition of excess and warranties (these will
be discussed later in the chapter).
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The rates charged can be broadly categorized A class rate can be determined by using a
as individual rates, class rates, and merit rates. simple formula:
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One of the methods for determining the gross • surcharges on special hazards
premium rate is by making such additions associated with each class of risk;
required to provide for the other components (of
the gross premium rate) to the pure premium • discounts for various improvements
rate. The additions required, referred to as the on the risk;
loading, may be expressed as a proportion of the
pure premium rate. For example, if the loading • general rules and regulations
required for the other components is 40%, the governing the practice of insurance;
gross premium rate is determined by increasing and
the pure premium rate by 40%, that is
• wordings for the standard policy
Gross Premium Rate = Pure Premium Rate x 140 forms, endorsements, clauses,
100 warranties, etc.
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16.7. MINIMUM PREMIUM Policies issued for a short period may not
be extended upon payment of the difference
between the premium for the short period and
It is usual for insurers to set a minimum premium that for the extended period.
to be charged under each policy so that the
administrative expenses incurred in issuing the
16.7.2. Government Service Tax
policy are covered.
Fire Insurance
Dwelling RM60
Non-Dwelling RM75
Houseowners/Householders RM60
Motor Insurance
Private Car and Commercial Vehicle RM50
Motorcycle RM20
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Under the ruling, the insured is required to pay The Insurance (Assumption of Risk and
the premiums charged for the insurance within Collection of Premium) Regulations 1980
60 days from the effective date of insurance (incorporated under the Insurance Act 1963,
cover (the insurance policy, cover note and/or now Insurance Act 1996), commonly known
renewal certificate will show the effective date as CBC Regulations, were enforced on 1
of cover). November 1980.
If the premium is not paid by the 60th day, the Previously, the regulations were applicable only
insurance cover will be cancelled from the 61st to the motor insurance business. However, the
day and the insurer shall be entitled to the pro regulations were extended to include personal
rata premium for the period they have been on accident insurance and travel insurance
risk. effective 1 July 2007.
For the purposes of this warranty, any payment In the case of motor insurance, it has been
received by the appointed agent shall be deemed prescribed by law that motor insurance cover
to be received by the insurer and the onus of can only be issued by insurers or their agents
proving that an unauthorised person, including on a ‘cash-before- cover’ basis. This means
its agent, received the premium payable shall that the premiums must be paid before a motor
lie on the insurer. insurance cover note or policy can be issued.
The Premium Warranty states that: The above ruling applies to intermediaries,
brokers, takaful operators as well as insurers’
“It is a fundamental and absolute special and takaful operators’ direct clients for the
condition of this contract of insurance that the classes of business included on 1 July 2007.
premium due must be paid and received by the
insurer within sixty (60) days from the inception By virtue of the Insurance Act 1996, section
date of this policy/endorsement/renewal 141 – Assumption of Risk:
certificate.
“No licensed general insurer shall assume any
If this condition is not complied with then this risk in respect of such description of general
contact is automatically cancelled and the policy as may be prescribed unless and until
insurer shall be entitled to the pro rata premium the premium payable is received by the general
of the period they have been on risk. insurer in such manner and within such time as
may be prescribed”.
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According to common law, once a risk has Premium is refundable if it is provided for under
attached, the insured is presumed to have no the policy condition or warranty/clause when
right to a refund of the premium paid or for any the policy is either cancelled upon request
part of it. This is so, even if the property insured by the insurer or the insured. The basis of
under a policy has been sold or the risk has calculation of the refund will depend mainly on
been in force for a very short time. However, the the situations (reasons) and on who requested
premium is refundable for failure of consideration the cancellation of the policy
or through a provision in the policy.
or
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After determining the class rate, the next step A proposal for fire insurance (fire policy extended
involves the evaluation of physical factors/ to cover special perils - flood, riot, strike and
hazards (other than construction, location malicious damage) is submitted for rating.
and occupation) associated with the risk. This The proposal is of Class lA Construction and
‘discrimination’ process ensures that risks with Occupation - Dry Cleaning, with RM300,000
poor physical factors will be charged a higher sum insured. The survey report reveals that
premium rate while discounts are granted to the proposed risk has poor wiring installation
risks with favourable physical factors. but is equipped with several approved fire
extinguishing appliances.
Premium Calculations:
# Five (5) per cent Service tax is only applicable to insurance effected on business firms.
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CHAPTER 16
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6. Which of the following is NOT a factor in the underwriting of a fire insurance risk?
a. situation of risk.
b. type of construction.
c. nature of goods stored.
d. correspondence address.
7. Which of the following is NOT a desirable physical risk factor for fire insurance?
a. sprinkler system.
b. fireproof doors.
c. fire extinguishers.
d. open fire burning in the vicinity.
a. carelessness.
b. ignorance.
c. unreasonableness.
d. fraud.
9. If policies are issued or renewed for less than one year, the premium payable is to
be calculated based on a
10. The rating of fire and motor insurance is governed by their respective tariffs
formulated by
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a. The underwriter will determine the class rate and adjust it upwards or
downwards depending on merits of rating.
b. When there is a large number of risks to be insured under a class of
insurance it is possible to classify the risks by certain merits into various
classes.
c. The underwriter determines the rate to be charged on each risk separately
without referring to a manual.
d. The rating is governed by respective tariffs formulated by Persatuan Insuran
Am Malaysia.
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CHAPTER 17 - INSURANCE DOCUMENTS
Overview OVERVIEW
17.1. Proposal Form
In this chapter, we shall study in detail the
17.2. The Cover Note following documents used in the conduct of
insurance business:
17.3. The Certificate of Insurance
• The Proposal Form
17.4. The Policy Form
• The Cover Note
17.5. Endorsements
• The Certificate of Insurance
17.6. Renewal Notice
• The Policy Form
17.7. Renewal Certificate
• Endorsement
17.8. Claim Form
• Renewal Notice
17.9. Discharge Form
• Renewal Certificate
• Claim Form
• Discharge Form
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17.1.1. The Structure Of A Proposal Form Risk often depends on the location.
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Life Insurance
17.2. THE COVER NOTE
- warrant that the information is A cover note is a temporary policy and it is the
complete; evidence of the insurance contract between the
insured and the insurer. A cover note provides
- agree that the proposal becomes the usual coverage found in a standard policy
the basis of contract; and for a class of insurance and is subject to the
usual terms and conditions of the policy. In
- accept the usual form of policy for addition, the cover note would provide that the
that class of business. insurance is subject to tariff warranties if the risk
proposed is governed by a tariff. A cover note
The declaration clause in effect changes the can also be subject to special clauses whenever
applicable.
proposer’s common law duty to disclose all
material facts into a contractual obligation. In
Contents of a Cover Note
consequence, all representations made in the
proposal are converted to warranties.
The contents commonly found in a cover note
include:
5. Signature
provision for the signature of the proposer and • Time and date of commencement of
the date. The proposer should always sign the cover;
proposal form since it represents the offer in the
contract. • Period of insurance;
• Sum insured;
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This clause sets out the essence of the contract. • date of issue
It specifies the perils insured under the policy
and the circumstances in which the insurer will • agency
become responsible to make payment or its
equivalent to the insured. • risk covered
• period of insurance
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This clause is called the attestation clause These are conditions that have to be fulfilled if
because it makes provision for the insurer to the contract is to remain valid. A policy condition
attest his undertakings. The policy is signed by which requires the insured to inform the insurers
an authorized official of the insurer. of any changes or alterations in the risk is a
condition subsequent to contract.
• the existence of the subject matter The policy register could be kept in either a card
of insurance, and form or ledger sheet form or even in computer
printout form, since the Insurance Act has not
• identification of the subject matter indicated any specific form for this purpose.
of insurance.
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It should however be understood that the insurer information on the identity of the insured, the
undertakes to issue Premium Notices purely as insured’s interest in the loss, the circumstances
a matter of courtesy to remind the policyholder of and extent of loss.
who is actually under a contractual obligation to
pay the premiums regularly as and when they The issue of a claim form does not constitute an
fall due. However, the insurer also attaches admission of liability on the part of the insurers.
importance to the issue of premium notices, Insurers make this position very clear by making
since this may actively help realize adequate a remark on the form to that effect. All letters that
premium income for the company. Hence, this the insurers send to the insured in connection
has become an established business practice. with the claim are also sent without prejudice
to their rights, and hence they carry the words
Unlike as in the case of general insurance, there ‘Without Prejudice’. These words are intended
is usually no requirement to disclose material to make it clear that although the insurers are
alterations to the risk insured. engaged in correspondence and the processing
of the loss, the question of liability under the
policy is left open. Thus, claim forms are issued
17.7. RENEWAL CERTIFICATE without prejudice, which means that issuance of
the claim form does not mean liability is admitted
under the policy.
Renewal may be effected on altered terms.
Claim forms are invariably used in fire and
Whenever a general insurance policy is accident insurances. They are not used in
renewed for a further period, a new contract marine insurance, except in respect of inland
is formed. If the renewal is on similar terms as transit claims.
the original contract, insurers frequently confirm
the renewal by issuing a document called a Type of Insurance-Specific Information
renewal certificate. On the other hand, if the
renewal is on different terms, a fresh policy is The other questions vary from one class of
usually issued. A renewal certificate contains insurance to another. For instance, motor
information similar to that found in schedule of insurance claim forms provide for a rough
a policy. It also states the changes, if any, to the sketch of the accident whereas burglary
policy. insurance claim forms contain a question on
whether a police report has been made. Where
Life insurance policies are automatically the insurance is subject to pro rata average, a
renewed as long as the insured keeps paying question is asked on the value of the property
the required premiums without any undue at the time of loss. Claim forms drafted for
delay. classes of insurance which provide cover on
an indemnity basis frequently contain questions
pertaining to any other insurance effected on
17.8. CLAIM FORM the subject matter and whether any third party is
responsible for the loss. The information sought
is necessary for the enforcement of contribution
General Information Required in all Claim and subrogation rights of insurers.
Forms
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• the money received is in full • details of the loss (in respect of which a
satisfaction of his claim under the claim is made) including:
policy in relation to that loss.
- date and time of loss,
In the case of settlement with a third party on
- place of loss,
behalf of an insured in respect of the insured’s
liability for loss caused to the third party, the
- parties affected,
discharge form would include a declaration
stating that the third party claimant:
- subject matter of loss,
• has received a sum of money from
- signature of attesting witness, if
the insurer,
required.
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CHAPTER 17
a. amount to be insured.
b. name of the proposer.
c. situation of the risk to be insured.
d. number of family members of the insured.
a. Insurance Act.
b. Malaysian Penal Code.
c. Road Transport Act.
d. Office of the Director General of Insurance.
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CHAPTER 17 - INSURANCE DOCUMENTS
a. arbitration.
b. the duty of utmost good faith.
c. the existence of insurable interest.
d. the existence of subject matter of insurance.
a. Notification condition.
b. Subrogation condition.
c. Contribution condition.
d. Cancellation condition.
9. Which of the following is NOT required when assessing the hazards that are
commonly associated with the life proposed?
10. The majority of the proposal forms used by general insurers contain a declaration
clause which requires the proposer to
a. I, II and III.
b. I III and IV.
c. II,IIIand IV.
d. All of the above.
Overview OVERVIEW
18.1. Claims Procedure
An insurance contract is a document with a
18.2. Claim Documents promise to pay if certain events happen. Since
paying of claims is what insurance is all about,
18.3. Settlement of Claims the ultimate test of a responsible and efficient
insurer is the promptness and fairness with
18.4. Recoveries from Reinsurers, which it compensates the economic loss of
Co-Insurers, Subrogation and insureds, and effectively indemnifies them for
Contribution third party liabilities.
18.5. Repudiation of Liability by This chapter covers the various matters that
Insurers arise in the settling of a claim, namely:-
• Average
• Disputes
• Post-Settlement Action
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•
stipulated period. In addition to the requirement
to notify the insurer immediately, the insured Is the policy in force?
•
is bound by the duty of good faith to act as if
uninsured, including taking steps to minimize a Has premium been paid?
•
loss.
Is the loss caused by an insured peril?
•
Pursuant to the General Insurance Business
Code of Practice for All Intermediaries other Is the subject matter affected by the
than Registered Insurance Brokers under loss the same as that insured under the
the Inter-Company Agreement on General policy?
•
Insurance Business, if a policyholder advises
the intermediary of an incident which might give Has notice of loss been given with
rise to a claim, the intermediary shall inform out undue delay?
the insurance company without delay, and
in any event within three working days. The After the claim official has made the preliminary
intermediary shall also give prompt advice to check and if the information indicates that a valid
the policyholder of the insurance company’s claim exists, the claimant will be given a claim
requirements concerning the claim, including form or accident report form, including clear
the provision as soon as possible of information instructions on the correct procedures to be
required to establish the nature and extent of the taken in making a claim and a list of documents
loss. Information received from the policyholder that need to be submitted with the claim form.
shall be passed to the insurance company However, if the claim official finds that a claim
without delay. (Please refer to Chapter 20 does not exist, the claimant will be informed of
section 20.1.5.) the decision and settlement proceedings will
not continue.
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CHAPTER 18 - PRACTICE OF GENERAL INSURANCE: CLAIMS
• Fire Insurance
Note: All third party claims must be referred to the
insurance company for immediate attention.
- photographs
• Personal Accident Insurance
- technician’s report (where
applicable) i. Bodily Injury Claims
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CHAPTER 18 - PRACTICE OF GENERAL INSURANCE: CLAIMS
Not every claim filed by an insured will result To avoid disputes arising from the application
in payment because insurers may be able to of average, agents should draw their clients’
repudiate liability on several grounds. These attention to the principle of average at the outset
include the following:- and ensure that the sum proposed for insurance
is adequate not only at the commencement of
• there was no loss or damage as the insurance but also throughout the currency
reported; of the policy.
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in Malaysia who is a member of the Motor under section 1 of the said Principal Agreement
Insurers’ Bureau. and incorporated in the Malaysian Motor Tariff.
By virtue of the above, every insurer carrying Most motor insurers subscribe to the KfK claims
on insurance business in Malaysia must be settlement agreement whereby each insurer
authorised and a member of the Motor Insurers’ deals with the damage to their own policyholder’s
Bureau. vehicle, if such damage is comprehensively
insured, irrespective of who was responsible for
It should be noted that MIB has a unique the accident.
position, having been established following
an agreement between the motor insurance The knock-for-knock agreement works on
industry and the Government. the principle of swings and roundabouts with
each motor insurer agreeing not to exercise
By making specified levels of insurance subrogation rights against each other and if this
compulsory and by limiting the ways in which is arranged on a long-term basis, no one insurer
insurers can escape liability to compensate, will gain or lose from participating in such a
the RTA goes a very long way to establishing scheme.
this ideal. It is a general desire to ensure that
innocent victims of road traffic accidents should Further, it is a device which enables motor
not go uncompensated. insurers to speed up the settlement of claims
and reduce legal and administrative expenses.
However, where a motorist ignores the legal
requirement to insure or where the defect in an The agreement applies to damage being caused
existing insurance contract is sufficient for the to vehicles in connection with which indemnity
insurer to escape responsibility under the RTA, is granted against damage and/or third party
then some further safeguards are required. In risks by parties hereto:
addition, the remedies under the RTA rely upon
there being a negligent person to sue, which • as a result of collision or attempt to
would not be the case, for example, in a hit-and- avoid collision, or
run accident.
• by the loading or unloading of a
MIB is a company limited by guarantee; this vehicle, or
means that MIB holds no assets to cover
its potential liabilities, but that its members • by goods falling from a vehicle.
guarantee that they will pay its liabilities as and
when the need arises. Each party shall bear its own loss within the
limits of its policy, in respect of such damage,
irrespective of legal liability.
18.7.2. Revised Knock-for-Knock
Agreement (KfK) The main provisions under the agreement are:
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or reward. Examples: taxis, public policy instead of making a claim against the
buses, stage buses, school buses and Third Party insurer, the insured’s NCD shall not
factory buses for hire, be forfeited.
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Centralized Database for Motor Repairs All claim transactions are electronically
Estimation recorded and duplicate claims will be
highlighted immediately. There is definitely
The repairer will assess the damage to the scope for insurers to further leverage on this
vehicle and pictures of the damaged vehicle industry database for fraud detection and
are taken as supporting documents for the prevention, for example for tell-tale signs of
insurer’s reference. Repairers will then fraud resulting from collusion between vehicle
create the estimates electronically, itemising owners and repairers.
every part to be repaired or replaced and
the labour time needed to complete the job.
The estimate, complete with images of the 18.8. DISPUTES
damaged vehicles and scanned documents
will then be sent to the insurer, through the
Claims Processing Centre (CPC). In the Of the many claims settled each year by
event that the same claim (identified through insurers, only a small proportion usually end
the vehicle registration number) appears up in disputes. Disputes between claimants
more than once, MRC will alert both insurers and insurers may generally involve one of two
on the possibility of fraudulent claims. The issues:
insurer will access the claim electronically
and assign it to an adjuster, if necessary,
before approving the claims electronically.
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• the quantum of loss, if the insurer is In practice, most general insurance policies
liable. have an arbitration clause which may provide
that all disputes or disputes relating to quantum
When a dispute arises, it may be resolved only will have to be referred for arbitration
through the following channels: before court action can be taken by the insured.
Generally, arbitration is preferred to litigation
• negotiation, because it is speedier and less costly than court
action, and hearing is in private rather than in
• litigation, open court.
• arbitration, or
18.8.4. Mediation
• mediation.
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At the mediation, it is not usual to present 18.9.2. Reduction Of Sum Insured And
witnesses and it may be sufficient to produce Reinstatement, If Requested
copies of documents and correspondence.
For complaints, disputes or claims involving a When a claim for partial loss is paid, the amount
financial loss, usually there shall be a limit set. of loss paid will be deducted from the sum
insured. This rule, however, does not apply to
marine policies and policies where there is no
18.9. POST-SETTLEMENT ACTION sum insured, for example glass policies, money
policies and motor policies.
When a claim has been paid, the insurer may When the sum insured under a policy is
take one of the following actions: reduced by the amount of partial loss paid by
•
the insurer, the insured will be underinsured if
terminate the policy; or the sum insured is not reinstated. The insured
•
would therefore be advised to reinstate the sum
reduce the sum insured, and reinstate if insured by payment of pro rata premiums.
requested by the insured, in which
event new terms and conditions may
be imposed. 18.9.3. Imposition Of New Terms And
Conditions
•
to accept the new terms and conditions or to
a total loss arising under the poli ; decline the insurance.
or
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CHAPTER 18
2. Arbitration is concerned with dispute between the claimant and the insurer over
a. a solicitor.
b. the agent.
c. the adjuster.
d. the underwriter.
4. Under a motor policy, the insurer can repudiate liability for a third party property
damage claim if
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10. The Motordata Research Consortium Sdn Bhd has enhanced the way motor claims
are settled in the following ways, EXCEPT
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CHAPTER 19 - PRACTICE OF GENERAL INSURANCE: POLICY FORMS
Overview OVERVIEW
19.1. Fire Policy
It is common knowledge that few policyholders
19.2. Private Motor Car Policy and perhaps even agents, read the policy. This
is not surprising because an insurance policy
is a very complex legal document. This chapter
provides a detailed descripton of the policy
forms of a fire insurance policy and a private
motor car insurance policy.
Heading
Recital Clause
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Operative Clause The insured must ensure that the proposal form
is fully and correctly answered and provide any
This clause states, among others, the other material facts not asked for in the proposal
following: form.
• the company has the option to pay 4. If any fall or displacement of the
cash, repair, reinstate or replace the building (partial or total) occurs,
property damaged or destroyed; and the insurance cover ceases. The fall
or displacement should be such that
• the maximum liability of the company the risk of fire to the building or the
is the policyholder’s estimated value contents is increased. Such fall
of the property stated in the schedule. or displacement should not have
been caused by fire. The burden of
Conditions (Including Exclusions) proof as to the cause of the fall or
displacement rests upon the insured.
This section states the conditions the insured (Conditions 5,6,7 and 8 below state
must observe, the limitations to the cover the exclusions.)
provided, the exclusions and other terms which
affect the contract. 5. The insurance does not cover:
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This insurance does not cover any loss arising amount exceeds RM 500;
directly or indirectly from a nuclear weapon,
nuclear contamination and radiation. - manuscripts, plans, drawings,
design, patterns, models and
6. This insurance does not cover any loss moulds;
directly or indirectly by:
- securities, obligations, documents
a. earthquake, volcanic eruption or other of any kind, stamps, money, cheques,
convulsion of nature; business books including books of ac
counts, and computer systems records;
b. typhoon, hurricane, tornado, cyclone or
other atmospheric disturbance; - explosives;
d. mutiny, riot, military or popular This insurance does not cover loss proximately
rising, insurrection, rebellion, caused by the following perils:
revolution, military or usurped power,
martial law or state of siege, or any a. explosion except explosion of gas
other events or causes which determine used for lighting or domestic
the proclamation, or maintenance purposes provided the building is
of martial law or state of siege. not part of any gas works used for
generating gas; and
If any loss is caused by any of the perils stated
in a to d above, the burden of proof is on the b. the burning of forests, bush, lallang,
insured to prove that such loss occurred prairie, pampas or jungles and the
independently of the existence of such perils. clearing of land by fire.
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- The risks are uninsurable (e.g. war However, if the marine policy is inadequate,
and nuclear risks). then the fire policy will pay the excess amount
not covered by the marine policy.
It is important that the agent draws the
policyholder’s attention to the exclusions so 11. The insured can request for the
that he becomes aware that the policy effected cover to be cancelled and the insurer
by him merely covers certain risks and excludes would then refund the premium for
many others. Some of the excluded risks can be the unexpired period. The insurer
incorporated into the cover upon request and it is would calculate and refund the
the agent’s duty to find out whether the insured premium for the period which is the
needs the additional cover or extension. difference between the premium
paid and the short period premium
9. If any of the following were to occur for the period the cover has been in
on any of the property insured, the force.
cover ceases immediately on the
property so affected unless the The insurer can also cancel the cover, in which
insurer is notified and their approval case the insurer has to:
obtained prior to any loss or damage:
- send 14 days’ notice to the insured
- if the purpose for which the building by registered letter to his last known
is occupied is altered, thereby address; and
increasing the risk of fire;
- refund to the insured a pro rata
- if the building is left unoccupied for premium on demand.
a period exceeding 30 days;
12. On the happening of any loss or
- if the property insured is removed damage, the insured should:
to any other location not stated in
the policy; - notify the company immediately;
- if the insured passes his interest in - within 15 days of the loss, deliver a
the property to anyone else as a detailed claim in writing stating
result of the policyholder’s death all particulars of items damaged or
or the operation of law, then the destroyed, the value of such items,
policy continues to provide cover to and of any other insurance.
the new owner(s);
The insurer may ask for proof of the origin
- if a notice to quit the land on which and cause of fire and value of items lost or
the policyholder’s property is damaged and further particulars. The insured
situated is issued by the local should provide these at his own expense and if
authorities. necessary a declaration of oath on the truth of
the claim.
10. If any of the property insured is also
insured under a marine policy, then If the insured fails to comply with the terms of
the fire policy will not pay for any this condition, no claim will be payable under
loss. the policy.
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The agent must know and understand what insured can hold the insurer liable for the loss
is required of the insured when submitting a or damage, or that the insurer’s right to rely
claim and ensure its compliance. Most of the on any of the policy conditions is diminished.
problems associated with claims arise out of Neither can the insured abandon any property
non-compliance with this condition. No insurer to the insurer even though it is in the insurer’s
can process a claim unless they are told when possession.
the loss occurred, how it occurred, what was lost
or damaged, its value, together with reasonable If the insured, his servants or agents obstruct
proof to substantiate the claim. the insurer in the exercise of their rights or fail
to comply with their requirements, all benefits
13. The insurance under this policy under the policy shall be forfeited.
is extended to cover the wages of
the policyholder’s employees, cost This condition spells out the rights of the insurer
of the replacement of firefighting after a loss has occurred even though liability
appliances and fire brigade charges has not been determined.
incurred in extinguishing fire at or
adjoining the situation of the property. 15. All benefits under the policy will be
forfeited if
14. Once there is a loss or damage to
the property of the insured, the - the claim is fraudulent in any respect;
insurer has the following rights:
- false declarations are made to support
- to enter the building, take and keep a claim;
possession of it;
- any fraudulent means or devices are
- either take possession of any property used to obtain benefit under the
or require such property to be delivered policy;
to them;
- the loss is occasioned by wilful act
- keep such property and examine, or with the connivance of the
sort, arrange, remove or deal with insured; and
it in any other manner; and
- no action or suit is commenced
- sell such property for the account of within three months after the claim
the owner. has been rejected or if arbitration
had taken place, within three
These rights can be exercised by the company months after the arbitrator(s) or
even before the insured lodges a claim and until umpire has made the award.
such time as:
16. The insurer has the option to
- the insured gives written notice that he reinstate or replace the property
makes no claim, or damaged instead of paying cash. If
they elect to reinstate, they are not
- if a claim is made, such claim is bound to reinstate exactly or
finally determined or withdrawn. completely. In any event, they are
not required to expend more than
The mere fact that the insurer has exercised the cost of reinstatement at the
any of the above rights does not mean the
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time of loss or damage nor more the amount of claim, the dispute
than the sum insured. has to be referred for arbitration
before any court action can be taken
If the insurer does elect to reinstate or replace, by the insured. This clause also pro
the insured, at hisown expense, has to provide vides that disputing parties will have
plans, specifications, etc. to the insurer. to appoint a single arbitrator who
will hear and determine the dispute.
Nothing that the insurer does or causes to be When the disputing parties
done with a view to reinstatement or replacement concerned cannot agree on the
can be taken as an election by the insurer to arbitrator to be appointed, each
reinstate or replace. party may have to appoint an
arbitrator and the arbitrators so ap
If after electing to reinstate, the insurer is unable pointed will in turn appoint an
to do so because of local authority regulations, umpire who has a casting vote on
the insurer is only liable to pay a sum computed the decision.
as adequate to reinstate the property to its
former condition. 22. Unless a claim is the subject of pending
action or arbitration, the insurer
17. Where any right of recovery against will not be liable for any loss or
third parties exists, the insurer is damages after 12 months from the
subrogated to it even before happening of the loss.
indemnifying the insured.
23. Any notice or communication to the
18. If at the time of loss there is any company required by the above
other subsisting insurance covering conditions must be written or printed.
the property, the insurer is liable
only to contribute their proportion Schedule
of the loss.
This section contains the following particulars:
19. If at the time of loss the value of
property is higher than the sum a. the name of the insurer;
insured, average will apply. As
adequacy of sum insured is b. the name and address of the insured;
adequacy at the time of loss and not
at the time of effecting cover, agents c. the business / occupation of the
have to explain to clients the effect insured;
of this condition and the importance
of ensuring adequate sum insured d. the location of property insured;
throughout the period of insurance.
e. the period of insurance;
20. In the event of a loss, the insurance
should be reinstated to the full sum f. the amount of premium;
insured and the insured shall be
liable to pay additional premium on g. the details of the property insured
a pro rata basis. and the respective sums insured,
together with the total sum insured;
21. Whenever there is a dispute between and
the insurer and the insured regarding
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Operative Clause
19.2. PRIVATE MOTOR CAR POLICY
The operative clause is divided into several
sections and the cover under each section is
In this section, we will present the generalities subject to the exceptions and conditions stated
in the context of a private motor car policy. in the policy.
Section A
Heading
Loss or Damage to the Insured Vehicle
This provides the insurance company’s name
and registered address at the top of the front
1. Under this section, the insurer
page.
undertakes to indemnify the insured
against loss or damage to the motor
Recital Clause or Preamble
vehicle caused by:
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In providing indemnity to the insured, the insurer The application of betterment shall be at the
has the option to : insurer’s discretion. The scale of betterment
represents the maximum rates of betterment
i. pay cash, that can be applied.
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•
entered by the insured and which
whilst the motor vehicle is driven by would not exist in the absence of
any person other than authorized the agreement.
driver;
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b. In the event that the insured vehicle g. No repairs may be authorized to the
is collided into by a third party vehicle, insured vehicle without prior writ
the insured may refer the claim for ten consent from the insurer.
cost of repairs to the company. The
insured’s NCD entitlement will continue h. In the event of an accident which
unaffected if the insurer decides gives rise to a claim, the vehicle
that the insured is not at fault. Such must be removed to a PIAM
determination of fault shall be at Approved Repairer for repairs. Failure
the company’s entire discretion. to do so would result in breach of
Provided always that such third party the condition and the insurer has
vehicle is insured, identifiable and/ the right to decline liability under
or not a vehicle used for the carriage Section A of the policy.
of passengers for hire or reward (for
example taxis, hire cars, public buses, i. In any event giving rise to a claim or
stage buses, school buses and factory series of claims under Section B1b
buses for hire), not a vehicle insured of the policy, the insurer may pay
by non-Malaysian insurers and there the insured the full amount of the
is no personal injury claim involved. iInsurer’s liability under Section
B1b and relinquish the conduct of
c. All accidents must be reported to any defence, settlement or
the police as required by law. proceeding and the insurer shall not
be responsible for any damage
d. Every letter, claim, writ summons alleged to have been caused to the
and process shall be notified or insured in consequence of any alleged
forwarded to the company immediately action or omission by the insurer in
on receipt. Notice shall also be given connection with such defence,
to the company immediately the settlement or proceeding or by the
insured has knowledge of any im insurer relinquishing such conduct
pending prosecution, inquest or fatal nor shall the insurer be liable for
enquiry in connection with any such any cost or expenses how whatsoever
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incurred by the insurer or any claimant insurer has absolute discretion in the conduct or
or any person after the insurer has settlement of any claim and the insured should
relinquished such conduct. give all information and assistance the insurer
requires.
1. Cancellation
4. Arbitration Clause
a. The insured may cancel the policy
at any time by giving the insurer a This states the arbitration procedure. It also
written notice and is entitled to a spells out that a claim which has been rejected
refund of premium based on the by the insurer will be deemed to be abandoned
company short period rates, provided and not recoverable if it is not referred to
no claim has arisen. arbitration within one year from the date of the
disclaimer.
b. The insurer can cancel the policy by:
5. Other Matters
• giving 14 days’ notice by registered
post to the insured’s last known ad The policy will only be operative if:
dress;
a. Any person claiming protection has
• Refunding the premium at a pro rata complied with all its Terms, Conditions,
rate (provided no claim has arisen Endorsements, Clauses or Warranties.
during the then current period of
insurance). b. The insured has taken all reasonable
precaution to maintain the vehicle
c. The insured shall within 7 days in an efficient roadworthy condition.
from the date of cancellation under
paragraph a or b above, surrender c. The insured has taken all reasonable
the certificate of insurance to the precautions to safeguard the vehicle
company or, if it has been lost or from loss or damage.
destroyed or it is not received by
the company, to provide a statutory d. The insured must grant free access
declaration to that effect. at all reasonable times for the
insurer to examine the vehicle.
2. Other Insurance
Schedule
The insured must give the insurer a written
notice if there is other insurance covering the The following particulars are stated in the
same vehicle. If there is subsisting insurance, Schedule:
the insurer is liable only for his rateable
proportion of any loss, damage, compensation 1. name of insurer;
costs or expenses.
2. name, identity card number, address
3. Subrogation and occupation of the insured;
The insurer can take over and conduct in the 3. period of insurance;
insured’s name the defence and settlement of
any claim or prosecute for his own benefit any 4. description of motor vehicle:
claim for indemnity or damages or otherwise. The
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• registration mark,
5. cover granted;
• make,
6. excess applicable;
• type of body,
7. geographical area;
• engine number,
8. legislation;
• chassis number,
9. authorised driver;
• cubic capacity,
10. limitations as to use;
• year of manufacture,
11. premium; and
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CHAPTER 19
1. Exclusions are inserted into policies for the following reasons, EXCEPT
2. A claim notification from the insured under a fire policy must be done
a. immediately.
b. immediately, and in writing.
c. immediately,and followed by a notice in writing within 15 days.
d. immediately, followed by a written notice with all relevant details of the
claim.
3. The following persons are covered under a motor third party policy:
a. any drivers.
b. the insured.
c. the insured and any authorized drivers.
d. none of the above.
4. The wording in the recital clause of a fire policy is not prescribed by the tariff and
may state the following, EXCEPT
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5. Failure to notify the company of any other insurance effected on the same property
before or after effecting the policy will allow the insurer to
a. policy jacket.
b. policy schedule.
c. exclusions.
d. conditions.
7. The item that is not covered under the Preamble of a motor policy is
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10. The fire insurance policy is extended to cover the following, EXCEPT
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PRACTICE OF GENERAL INSURANCE: ETHICS AND CODE OF CONDUCT
Overview OVERVIEW
20.1. The Essentials of the
Inter-Company Agreement In this chapter, we shall look at the self-regulatory
on General Insurance Business aspects of the general insurance industry in
Malaysia. These will be considered under the
20.2. Commission following headings:-
20.3. Cash-Before-Cover • The Essentials of the Inter-Company
Agreement on General Insurance
20.4. Guidelines on Claims Settlement Business
Practices
• Commission
• Cash-Before-Cover
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Malaysian Motor Tariff had a better claims experience owing to the fact
that it has less roads and vehicles compared to
The Malaysian Motor Tariff applies to all classes West Malaysia.
of motor insurance vehicles garaged in Malaysia,
Brunei and the Republic of Singapore. All insurance policies covering motor risks in
Malaysia issued, accepted and endorsed by
The Motor Tariff provides: members of PIAM shall be applied at least
the minimum rates stipulated in the Malaysian
1. the premium rates chargeable for Motor Tariff.
the various classes of motor vehicles
according to the different uses and The Motor Tariff is divided into 11 sections,
covers provided; namely:
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• Strike, Riot and Civil Commotion • Application and interpretation of the Tariff
• Reinsurance
• Commission/brokerage/co-insurance
cost
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• Mortgagees/ Chargees
20.1.4. General Insurance Agents
• Term of insurance Registration Regulations (GIARR)
• Reinstatement
The rules for the registration and regulation of
• Declaration policies general insurance agents are enacted under
the Third Schedule of the ICAGIB. The rules,
• Building in the course of construction known as the General Insurance Agents
Registration Regulations, were formulated in
• Stamp duties consultation with BNM to provide the method
of recruitment and supervision of intermediaries
• Rates and special rating with a view to regulate, monitor and control
the intermediaries’ professional conduct, work
• Electrical plant and installations and activities and thereby create a cadre of
dedicated and disciplined intermediaries with
• Short period insurance high professional standards.
• Long-term insurances and agreements The provisions under the Regulations, among
others, include the following:
• Cancellation
i. The definition of corporate agency;
• Premium - return, minimum and
instalment ii. The appointment of a General
Insurance Agents’ Registrar who shall
• Warranties, clauses and endorsements administer GIARR;
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iii.
The keeping of a Register containing
the names, addresses and such other
• has been convicted of fraud, dishonesty
or misrepresentation against any
subscribed particulars of all persons
member of PIAM or against any person
registered pursuant to GIARR;
having official dealings with any
member of PIAM;
iv. The procedures for application for
registration to be a general insurance
agent;
• has been declared a bankrupt or
insolvent;
v.
The requirement for every applicant
to be registered to have first
• has outstanding premium debts or
other financial obligations with an
obtained the necessary written
other insurer with whom he previously
examination qualification, such as
had an agency agreement;
the Pre-Contract Examination for
Insurance Agents of The Malaysia
Insurance Institute;
• has had his registration terminated
by PIAM;
vi.
The disclosure and restriction of
other interest(s) of the applicant
• is subject to the restriction of other
interest(s) mentioned in vi) above;
for registration, including the
restriction that an insurance agent
or any person employed or engaged
• has obtained registration by a fraudulent
or an incorrect statement;
by a corporate agency shall not be
an employee or a director of or a
shareholder or debenture holder
• has no subsisting agency agreement
with any general insurance
in or have any interest in an insurance
company or companies he purports
company, an insurance broking firm
to represent;
and/or a loss adjusting firm without
the prior written approval of the
viii. The compliance with the
Board appointed under the ICAGIB.
enforcement of the Cash-Before-
The prohibition shall not apply where
Cover (CBC) Regulations) issued by
the shares of the company(ies) are
Bank Negara Malaysia in relation to
listed on the Kuala Lumpur Stock
any agent, including any requirement
Exchange;
by Bank Negara Malaysia for the
suspension or cancellation of a
vii. The cancellation or suspension of
Certificate or Registration issued to
registration or refusal to register
an agent;
by the Board of any person applying
for registration or already registered
ix. The issue of a Certificate of
in the Register who
Registration, valid for a period of two
• is found to be of unsound mind;
years (unless earlier cancelled), to a
person registered in the Register;
• has been convicted of criminal
x. The display at all times by an insurance
misappropriation, criminal breach of
agent of his Certificate of Registration
trust, cheating or forgery or abetment
at his place of business, and at each
of or attempt to commit any such
offence;
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•
professionalism and commitment amongst
proper office premises to transact agents,
general insurance business;
•
Maintenance Requirement;
take into consideration the needs of
the proposers for general insurance d. any agent who fails to meet the
and their capacity to pay premiums; Minimum Maintenance Requirement
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In conserving the business already secured, the c. shall not induce the person effecting
insurance agent shall endeavour to maintain insurance to make a misrepresentation
contact with all persons who have become to the general insurance company in
policyholders through him and shall render regard to material facts;
all reasonable assistance to the claimants in
filing claim forms and generally in complying d. may not at any time represent more
with the requirements laid down in relation to than two general insurance companies;
the settlement of claims. Insurance agents,
however, are not permitted to perform the e. shall not engage any person to solicit
functions pertaining to loss surveys, loss for insurance on his behalf and shall
adjustment or the settling or approving of any not pay to such person any commission
insurance claims; or any other compensation in
respect thereof. This prohibition
xiii. The conduct of a general insurance does not apply to corporate agencies
agent shall be guided by the General engaging full-time employees for
Insurance Business Code of Practice functions other than for soliciting
for All Intermediaries Other than insurance;
Registered Insurance Brokers included
as Appendix III of the ICAGIB. (See f. shall comply in all material respects
20.1.5. of this chapter). A declaration with the terms and conditions of the
of observance of this Code is signed ICAGIB made between and amongst
by every registered general insurance the members of PIAM (as amended
agent. Insurance brokers in Malaysia and as may be amended from time
are exempted from this Code as to time) and all rules and regulations
they are more specifically governed issued thereunder:
by the Code of Ethics and Conduct
issued by the Insurance Brokers • that such agent conduct himself in any
Association of Malaysia. In addition manner as may be required,
to being guided by the General
Insurance Business Code of Practice • that the principal of such agent
for All Intermediaries Other than ensure that such agent conducts
Registered Insurance Brokers, an himself in any manner as may be
insurance agent required.
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b.1. An agent shall ensure that in the case aa. monitor compliance of their respective
of: Agents with the requirements of
cash-before-cover (motor) policies
aa. cash-before-cover motor policies, (“CBC Requirements”);
all premiums must be collected in
full before the commencement of bb. monitor compliance with CBC
the assumption of risk and remitted Requirements by their agents on a
to his principal within seven (7) quarterly basis (“Reporting Quarters”)
working days from the date of in respect of each period of two (2)
collection or inception of the policy, calendar years (“Period”). The first
whichever is earlier; of such two (2) calendar year periods
shall commence from 1 July 2005
bb. cash-before-cover for individual and expire on 31 December 2006.
personal accident and individual The monitoring of compliance with CBC
travel insurance, all premiums Requirements shall start afresh for each
must be collected in full before the Period;
commencement of the assumption
of risk and remitted to his principal cc. submit a report to the Board within
within fifteen (15) calendar days fourteen (14) days of each
from the date of receipt of the Reporting Quarter (“Report”) on
premium or inception of the policy, any non-compliance with CBC
whichever is earlier; Requirements by their agents;
cc. other classes of business with the dd. notify the Board of a Suspension
exception of marine cargo, marine Event in relation to any of their
hull, bonds, contractors’ all risks agents. This notification is to be
and erection all risks policies, the in writing (“Notification of
agent may offer credit to his client Suspension Event”) and is to be
for a maximum period of sixty (60) issued to the Board not later than
days from the date of inception of fourteen (14) days after the expiry
the policy and on such terms as are of the Reporting Quarter when the
approved by his principal in writing. Suspension Event took place;
All premiums collected by the agent
must be remitted to the principal ee. suspend the relevant agent, upon
within fifteen (15) calendar days from a Suspension Event, from conducting
the date of collection. any CBC business for a period of six
(6) months (“the Suspension”) with
b.2. Pursuant to the revised Guide the Suspension to commence fourteen
lines on CBC Requirements issued by (14) days from the date of issue of
Persatuan Insurans Am Malaysia the Notification of Suspension Event;
under Members Circular No 187 of
2008 dated 15 September 2008 ff. immediately shut down computer
(“Guidelines on CBC Requirements”), access to the relevant agent, upon a
each insurer is required to: Suspension Event, to stop the conduct
of any CBC business.
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b.3. A “Suspension Event ” for the business for a period of twelve (12)
purposes of the Guidelines on CBC months.
Requirements and for these
Regulations is: b.7. The Reports and the Notification
of Suspension Event issued pursuant
aa. where the agent has one (1) to the Guidelines on CBC Requirements
principal, when the agent is not in shall be treated as final and conclusive
compliance with CBC Requirements by the Board.
for any three (3) Reporting Quarters
(whether consecutive Reporting b.8. The requirements of Regulations
Quarters or otherwise) within the 9(iii), 19, 20 and 21 of these Regulations
Period; shall not apply in relation to the
matters covered by the Regulations
bb. where the agent has two (2) principals, including the exercise of the powers
when the agent is not in of the Board conferred by this
compliance with CBC Requirements Regulation. The terms as defined
for three (3) Reporting Quarters in the Guidelines on CBC
(whether consecutive Reporting Requirements shall apply for the
Quarters or otherwise) within the purposes of these Regulations.
Period for one or both principals.
xivi. Effective 1 January 2005, all
b.4. The Board shall notify and practitioners in the general insurance
require the principal or all the other agency force must comply with the
principals of the agent who has Guidelines on Continuing Professional
committed the Suspension Event to Development (CPD) Programme.
effect the Suspension within
fourteen (14) days from the date of The objective of the CPD Programme is
issue of the notification by the Board. to raise the standard of competency and
professionalism of the general insurance
b.5. Where an agent has been Suspended, agency force. The CPD will serve as a
the agent concerned is not allowed guide as to what training programme the
to appoint a new principal (if the agency force should pursue in order to
agent has 1 principal only) and/or stay updated and continuously upgraded,
change his principal during the period keeping the agency force abreast of the
the agent is suspended. latest development and demands of the
financial services industry.
b.6. Upon expiry of the suspension
and where based on a Report the There are four (4) Sections in the CPD
relevant agent is again in breach of Programme:
CBC Requirements for any
subsequent Reporting Quarter with Section 1
any one principal, the Board shall
cancel the certificate of registration Minimum CPD Training Hours
issued to the agent. The cancellation
of the certificate of registration shall All registered agents are required to complete
be final and binding upon the agent. the minimum 20 CPD training hours annually.
The agent is also barred from
conducting any general insurance
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Section 3
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The following conditions will apply in awarding 2006) and the agent would also be
the credit points: required to make up the shortfall
of the 20 CPD hours in the following
• Credit points for CPD can be earned year.
only once for the same programme,
i.e. every individual can earn credit Section 4 also covers:
from the same programme only
once per agency contract. The disciplinary and inquiry measures that the
Board may take in cases of contravention of
• Credit points awarded through the GIARR; and
first Principal are transferable to
the second Principal under which The powers of the Board to make rules to carry
the agent is registered with PIAM. out the objectives and purposes of GIARR.
In a situation where the agent has two principals, • The intermediary involved in a
it would be the responsibility of the respective complaint from a policyholder is
principals to ensure that their agent complies to cooperate fully with the
with CPD requirements. insurance company concerned with
a view towards establishing the
Penalties relevant facts. The intermediary is
also required to inform the
The following penalties will be imposed on policyholder of his rights to take
general insurance agents who do not meet the the matter of dispute direct to the
20 CPD training hours requirement: insurance company.
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at an hour likely to be suitable to the iii. make comparisons with other types
prospective policyholder; of policies unless he makes clear
the differing characteristics of each
ii. on contact with the prospective policy;
policyholder:-
iv. prevent the prospective policyholder
- identify himself; from stating material facts to the
insurance company or induce the
- inform the prospective policyholder person not to state them;
that he wishes to discuss insurance;
v. induce the prospective policyholder
- make it known to the prospective to make a misrepresentation to the
policyholder the company/ies for insurance company in regard to
which he is acting as an agent and material facts.
that the company/ies concerned
accept responsibility for his Factors to be Observed when Explaining a
conduct. Contract:
iii. ensure as far as possible that the b. The following factors should be
policy proposed is suitable to the borne in mind when explaining the
needs and resources of the contract :
prospective policyholder;
The intermediary shall :
iv. give advice only on those insurance
matters in which he is i. identify the insurance company;
knowledgeable and seek or
recommend other specialist advice ii. explain all the essential provisions
when necessary; of he cover provided by the policy
or policies which he is
v. treat all information supplied by recommending, so as to ensure as
the prospective policyholder as far as possible that the prospective
completely confidential to himself policyholder understands what he/
and the insurance company. she is buying;
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- take all reasonable steps to ensure - remit any such monies so collected
that the necessary proposal forms in strict conformity with his agency
are fully and accurately completed appointment.
by each prospective policyholder;
e. With regard to documentation:
- avoid influencing the prospective
policyholder and make it clear that The intermediary shall not withhold from
all the answers or statements are the policyholder any written evidence or
the prospective policyholder’s own documentation relating to the contract of
responsibility; insurance (including any endorsements or
discounts or monies due to the policyholder
- ensure that the consequences of thereon that are allowed by the insurance
non disclosure and inaccuracies are company).
pointed out to the prospective
policyholder by drawing his attention to f. With regard to existing
the relevant statement in the policyholders:-
proposal form and by explaining
them himself to the prospective The intermediary shall:
policyholder; and
• abide by the principles set out in
- make all reasonable inquiries in the code of conduct for
regard to the risks and to bring to intermediaries to the extent that
the notice of his Principal any these are relevant to his dealings
circumstances which may adversely with existing policy holders;
affect the risk to be underwritten.
• with a view to conserving the
d. The following are to be observed business already secured render
in relation to accounts and appropriate after-sales service.
financial aspects:-
g. With regard to claims :
The intermediary shall, if authorized to collect
monies in accordance with the terms of his The intermediary shall:
agency appointment,
i. on being informed by a policyholder
- keep proper accounts of all of an incident which may give rise
financial transactions with his to a claim,
prospective policyholders, which
involve transmission of money in - inform the insurance company
respect of insurance; without delay (i.e. within three working
days);
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- thereafter give prompt advice to The maximum limits should apply on a policy
the policyholder of the insurance by policy basis from the date of commencement
company’s requirements concerning of risk. In respect of a package policy, the
the claim, including the provision maximum is that applicable to the cover with the
as soon as possible of information largest proportion of the premium.
required to establish the nature
and extent of the loss; The Inter-Company Agreement on General
Insurance Business further provides that no
- pass the information received discount or rebate whatsoever shall be given to
from the policyholder to the any insured or policyholder on any commission
insurance company without delay. paid or payable under a motor insurance policy.
(See section 20.1.2. of this chapter - No Rebate
ii. take note that the Code specifically or Discounting.)
forbids an intermediary from
performing the function of a loss The limit on commission for the fire classes
adjuster or surveyor or settling or of insurance under the BNM Guidelines
approving any insurance claims. is reiterated under the Revised Fire Tariff
which states that the maximum amount
payable by way of commission to agents,
20.2. COMMISSION underwriting agents and brokers is 15%. It
further provides that where the client deals
with the insurer directly without an agent or
An efficient and responsible insurer is one that broker as intermediary, the insurer may allow
conducts its business in a prudent manner which a discount not exceeding 15% on the premium
includes the exercise of control over collection receivable.
of premiums, expenses and its business
development strategies
20.3. CASH-BEFORE-COVER
The Guidelines to Control Operating Costs
of General Insurance Business issued by
BNM, revised on 31 December 1993, provide Pursuant to section 141 of the Insurance Act
amongst other matters for the maximum 1996 regarding the assumption of risk, Part
gross commissions and agency-related XV Regulation 65 of the Insurance Regulations
expenses for the following classes of insurance 1996 identifies the policies of motor insurance
business written within Malaysia to be limited as that which an insurer or its insurance agent
to the following percentages of gross direct shall not assume unless the premium for the
premiums: policies
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a. I II and III.
b. II, III and IV.
c. I, III and IV.
d. All of the above.
7. Members of PIAM shall NOT permit or authorize their agents to do the following,
EXCEPT-
a. Insurers or their agents shall not resume cover unless premium is collected.
b. Insurers or their agents can resume cover once the promise to pay is made
by proposer.
c. If premium of a commercial vehicle exceeds RM5,000, risk may be assumed
once 30% of premium is paid.
d. Insurance agents receiving payment of premium for a motor policy shall pay
the amount into the insurer’s account within 7 working days from date of
assumption of risk.
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9. Persatuan Insurans Am Malaysia directs the way that insurers do their business by
implementing guidelines, agreements and manuals, which include the following,
EXCEPT the
10. Which of the following statement is NOT true about members of PIAM?
a. They must keep a complete and up-to-date record of all their agents,
including their corporate agents the directors, shareholders and corporate
nominees.
b. They must maintain proper and accurate accounts showing the amounts of
commission paid by them to their agents.
c. They must provide the Board with any information concerning any of their
agents as and when requested.
d. They may conceal information about CBC breaches by agent to PIAM.
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CHAPTER 21 - LIFE INSURANCE PRELIMINARIES
Overview OVERVIEW
21.1. Introduction
This chapter serves as an introduction to Life
21.2. Characteristics of Life Insurance Insurance. We shall familiarise ourselves with
Products the:-
21.1. INTRODUCTION
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• cover was available to anyone who implications for the conduct of this class of
satisfied the initial health requirements business.
and continued to pay the contractual
premiums; The long-term nature of the contract requires
the insurer to adopt a cautious view of the
• once accepted for insurance, many factors which enter into the premium rate
further proof of continuing good calculations. Principal amongst these factors
health was not needed; are:-
ALEATORY CONTRACTS
LONG-TERM CONTRACTS WITH USUALLY
LEVEL PREMIUMS In an aleatory contract, one party provides
something of value to another party in exchange
Life insurance contracts are long-term contracts for a promise that the other party will perform
with usually level premiums. The usual a stated act if a specified, uncertain event
requirements of level premiums have other occurs.
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In life insurance (especially for non-participating It is important to note that for life insurance
policies) and some general insurance contracts, policies, insurable interest needs to exist only
for example personal accident insurance, at the inception of the insurance, i.e. when the
the claim amount is determined at the very policy is being effected. At the time of a claim
beginning of the contract. Thus such contracts arising, the absence of such an interest will not
are aleatory contracts. void the contract.
In distinct contrast, however, in general Section 152 of the Insurance Act, 1996
insurance, the aim is to place the insured in elaborates on the principle of insurable interest.
the same financial position (i.e. indemnify the This section specifically voids any policy
insured), subject to the maximum limits of the effected without an insurable interest. (Read
insured amount, as before the occurrence of also Chapter 3.1.1.- Insurable Interest.)
the insured risk.
TERMINATION OF CONTRACT WITH
INSURABLE INTEREST PAYMENT OF A CLAIM
Existence of insurable interest is a prerequisite In life insurance, with the exception of permanent
for a life insurance contract. To have an insurable health insurance policies, the settlement of a
interest, the purchaser of a life insurance policy claim ceases or terminates the contract.
must stand to suffer a financial loss on the death
of the person on whose life the life insurance However, in the case of a general insurance
policy has been bought. contract, the contract is not terminated by the
payment of a claim, and in fact, further claims
To elaborate the above, we have the following can be made within the period of the contract,
situations where insurable interest exists:- although once the total sum insured in respect
of any part of the cover provided by a contract
• every person is considered to have has been paid, that part of the contract would
an unlimited interest in his or her own terminate.
life; his or her spouse’s life;
CONTRACT CANNOT BE CANCELLED
• a parent has an insurable interest in UNILATERALLY BY THE INSURER
the life of a child below the age of
majority; Both the insurer and the policyholder have certain
rights and obligations. However, it is important to
• a creditor has an insurable interest in note that during the term of the policy or before
the life of a debtor to the extent of the the maturity of the policy, the insurer has no
debt; right to invalidate or cancel the contract except
due to non-payment of premium or if the policy
• an employer has an insurable interest is contested due to the suppression of material
in the lives of key personnel, such facts, and the policyholder is under no obligation
as a managing director or a manager; to continue the payment of premiums. This is
in keeping with the the principle of unilateral
• a partner in a business has an insurable contracts.
interest in his other partner(s), especially
if there is an agreement to buy out the
share of a deceased partner.
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sprinklers).
• Total Permanent Disability
INSURANCE AS APPLIED TO
A discussion of the main features of the above
LIFE INSURANCE
is provided next.
PREMATURE DEATH
We discussed in Chapter 3 the basic principles
governing the conduct of insurance business
Mankind is subject to the risk of premature death
under the following headings:-
at all times. Thus, it becomes essential to protect
• Insurable Interest,
the monetary value of our lives.
• Indemnity,
producing assets. It is only the current earning
power of the breadwinner which represents the
financial foundation of the family.
• Subrogation,
• Contribution, and
Premature death of the breadwinner would result
in financial loss to the family. Life insurance is
• Proximate Cause.
therefore the only effective answer to provide
some measure of financial security in such a
contingency.
It is obvious from what has been said that
the principles of indemnity, subrogation and
TOTAL PERMANENT DISABILITY
contribution have greater relevance to the
conduct of general insurance business than to
This situation is often referred to as economic
life insurance business.
death since the affected life ceases to be a
productive force and the living expenses and
medical attention required may pose increased
demands on the slender resources of the
individual.
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CHAPTER 21
1. Which section of the Insurance Act 1996 elaborates the principle of insurable
interest?
2. The earliest life insurance contract was found in England in 1583 on the life of
a. Edmund Halley.
b. William Gybbon.
c. William Cybban.
d. William Halley.
a. premature death.
b. financial guarantees.
c. permanent disability.
d. uberrima fides (utmost good faith).
5. The basic assumptions that are used in the life insurance premium rate calculations
are
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a. retirement benefit.
b. premature death.
c. financial loss.
d. permanent disability.
9. Life insurance policies which were issued on a short-term basis in the past had
many disadvantages. What was/were they?
10. Which of the following principle(s) of insurance has/have greater relevance to the
conduct of general insurance business than for life insurance business?
a. insurable interest.
b. indemnity.
c. subrogation.
d. b and c.
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Overview OVERVIEW
22.1. Introduction
In this chapter, we will focus on the main forms of
22.2. Types of Life Insurance Policies life assurance products and family takaful plans,
and their characteristics offered by insurers in
22.3. Description of Life Insurance Malaysia under the following headings:
Contracts
• Types of Life Policies
22.4. Types of Family Takaful Business
• Description of Life Insurance Contracts
• Endowment Policies
• Annuities
• Investment-Linked Policies
• Miscellaneous Policies
22.1. INTRODUCTION
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regular sum (known as the premium) periodically Home service insurance brings life insurance
to the life office for a specified term or until the to the lower income class of the population,
death of the life assured; alternatively, he may comprising most of those who would not
pay a lump sum (known as single premium) at normally be interested in ordinary life insurance.
the inception of the contract. Premium payments are made at more frequent
intervals, usually weekly, so that the amount
payable is small.
22.2 TYPES OF LIFE POLICIES
The payment of premium is made convenient
by home service representatives collecting
Events occurring during the span of human life the premium at the homes of policyholders so
are the concern of life insurance. These may that there is less likelihood of the policyholders
be early death, disability or prolonged old age. allowing the policies to lapse. Whole-life and
Each of these situations creates a need. It is endowment insurances with low sum assured
the aim of life insurance to meet these needs. are the most popular forms of contract in the
For this purpose, life insurance companies home service sector.
have devised many types of policies. Each is
designed to meet one or more of the needs Products offered by insurers can be broadly
created by these contingencies. categorized further into the following:-
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Under the attained age basis, the term policy Therefore, the amount needed to settle the
is replaced by a permanent policy of the form outstanding loan in the event of the death of the
current at the date of conversion. The premium borrower would also reduce with the passage
rate for the new policy is equal to that required of time. In such circumstances a level term
or the attained age of the life assured. insurance policy with a fixed sum assured may
not be suitable and it may be worthwhile to have
Under the original age basis, the term policy a policy where the sum assured is reducing to
is replaced by a permanent policy of the form keep in step with the repayments of the loan.
which would have been issued had the life The major advantage of a decreasing term
assured opted for the permanent policy in the insurance over level term insurance for mortgage
first instance. The premium payable is that protection is the lower cost of premium due to
applicable to this policy at the original age. the progressive reduction of the sum assured.
However, the premium charged for a term policy
at the original age will be lower than that of the For decreasing term insurance, it is not possible
permanent policy. Accordingly, most companies to charge a level annual premium over the
require the insured to pay the difference whole term as the insurance cover would be
between the premium which would have been obtained at an uneconomic rate if the contract
paid had the policy been issued at the same was discontinued during the early stages.
time as the original policy. Generally, this type Instead, a single premium at inception or a level
of conversion is allowable only within five years annual premium limited to a somewhat shorter
of the date of issue of the term insurance policy. period than the term of the policy is charged
The purpose of the adjustment in premium is to to discourage policyholders from dropping the
place the life insurance company in the same protection during the last few years when the
financial position it would have held, had the amount of protection is quite low.
permanent policy been issued in the first place.
Uses and Suitability of Term Insurance
This type of policy is designed for young people Policies
with a moderate income but having good
prospects for increased income later. These Term insurance policies are especially designed
policies provide maximum protection at a low to afford protection against contingencies that
cost with guaranteed renewability or conversion either require only the taking out of temporary
options. insurance or call for the largest amount of
insurance protection for the time being at the
Decreasing Term Insurance lowest possible cost.
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The ordinary life insurance policy is a very provided for under the policy may come in handy
flexible contract and the insured is not irrevocably in times of emergency and at retirement for
committed to paying premiums as long as he raising a loan thereunder. In addition, the policy
lives. During the earlier years of the insured’s is eligible for non-forfeiture privileges, surrender
life, this policy provides permanent protection value, paid-up value, settlement options, etc.
for dependents at the lowest possible premium
outlay. In the later years of life, when the need It is also possible to pay a single premium at
for change in the programme is felt necessary the outset. Under this form of payment, the
because of change in family circumstances, this savings element is the predominating feature,
policy provides a degree of flexibility to meet and the protection element is substantially less.
the different situations. Since the policy has Consequently, such contracts are purchased
a systematic saving element, if premiums are primarily for investment purposes. Under an
discontinued after a minimum number of years, annual premium plan, as the number of premium
the policy will be eligible for the benefits of non- payments increases, the annual premium and
consequently the cash value or savings element
forfeiture regulations, cash surrender value,
becomes correspondingly smaller. The choice
loan, paid-up value, etc.
depends upon the circumstances and personal
• Limited Payment Whole Life Policy
preference of the assured.
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•
etc. after a minimum number of years.
Summary: Whole Life Assurance
•
payment of the face value of the policy upon
Premiums might cease at a certain the death of the life assured during a fixed term
age (e.g. 55 or 60) or after a certain of years, but also for the payment of the full-
term. This helps reduce premium face amount at the end of the said term if the
collection costs. This is particularly life assured is living. Whereas policies payable
relevant for small policies. only in the event of death are taken out chiefly
for the benefit of others, endowment policies,
Benefits although affording protection to others against
the death of the life assured during the fixed
• Payment of the sum assured on death. term, usually reverts to the assured if the life
•
assured survives the endowment period. This
Usually a minimum guaranteed additional feature accounts for insurance which
surrender value available, typically after is a convenient means of accumulating a fund
three years. that will become available later for the use of
•
the policyholder.
Minimum guaranteed paid-up values
available. Thus endowment insurance can be viewed as
a decreasing term insurance and an increasing
Guarantees investment component. The investment part
•
of the contract is considered as a gradually
Guaranteed payment of total sum increasing savings accumulation available
assured on death. throughout the term except the initial two years
or so through surrender or loan under the
Options policy.
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In a deferred annuity, the annuitant pays a The simplest type of reversionary annuity is that
lump sum at entry or a periodic premium for in which the annuity commences at the death of
a defined period. In return, it is provided that the assured person, provided that the annuitant
on the attainment of a specified age, or on the (or nominee) is then alive. The annuitant
survival by the annuitant of a defined period, the instalments will continue throughout the lifetime
office will pay an annuity of a specified amount of the annuitant. The most popular use of this
until death. form of annuity is to provide an income for a wife
on the death of her husband. If the annuitant
If death should occur before the annuity should die before the life assured, nothing is
payment commences (i.e. during the period of payable and the premiums are forfeited to the
deferment) the premiums paid are returned with company.
or without interest, according to the terms of
the policy. Surrender values are also allowable In this contract, the health of the life assured
during this period. is of interest to the company and medical
examination is often required. The premium
• Joint Life Annuity can be paid either in a lump sum or by periodic
amounts during the joint lifetime of both the
A joint life annuity is a contract that provides annuitant and the life assured.
a specified amount of income for two or more
persons named in the contract, with the annuity • Annuity Certain
ceasing on the first death among the covered
lives. An annuity certain is not a life annuity. In return
for the payment of a certain sum, known as the
• Last Survivor Annuity purchase money, the office makes a series of
yearly, half-yearly or quarterly payments for
Unlike the joint life annuity explained above, a specified number of years. Each payment
this contract provides that the annuity payments represents a repayment of a portion of the
continue as long as either of two or more purchase money and also an instalment of
persons lives. Since the annuity provides for interest.
payment until the last death among the covered
lives, it will pay to a later date on average and This annuity is not dependent on the death or
hence is naturally more expensive than other survival of the individual but is a contract for a
annuity forms. fixed term.
In its normal form, the joint last survivor annuity It must be noted that Section 7 of the Insurance
continues the same amount of annuity until the Act 1996 provides that no insurer shall carry on
death of the last survivor. However, provision annuity certain business in Malaysia unless it
can be made for the income to be reduced
has the prior written approval of Bank Negara
following the death of the first annuitant to two-
Malaysia and subject to such conditions as the
thirds or one-half (depending upon the contract)
Bank may specify.
of the original income. These contracts are
usually issued to a husband and wife or other
family relationships.
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•
Insurance (PHI)
The benefit is an income during
“sickness” as defined by the policy.
This type of policy provides for an income
during periods of sickness or disability on a
• The income starts some time after
the insured falls ill (the deferred period)
long-term basis. The income provided during
and continues until recovery or reaches
total incapacity terminates at an age chosen
a certain chosen age (e.g. 55).
by the insured when the insurance is effected.
The income provided is limited to a maximum
of two-thirds or three-fourths of the insured’s
• Policies normally do not acquire a
surrender or maturity value.
earnings. An important feature of such policies
is that these cannot be cancelled by the insurer
solely on the grounds of an adverse claims
• The income might be level, or
increasing in payment at a rate
experience. determined at the outset.
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• Underwriting is strict.
• Surgery to aorta
• Coma
A dread disease plan, or commonly known as a
critical illness plan, can be marketed as a rider to
• Terminal illness
a life plan or as a basic life plan. A basic critical
illness plan provides cover against loss of life,
• Motor neurone disease
total permanent disability or upon diagnosis of
suffering from any one of the 36 types of dread
• AIDS due to blood transfusion
diseases when a lump sum payment is payable.
The 36 common types of critical illness insured
• Parkinson’s disease
or covered events are :
• Chronic liver disease
• Heart attack
• Chronic lung disease
• Stroke
• Major head trauma
• Coronary artery disease requiring
• Aplastic anaemia
surgery
• Cancer
• Muscular dystrophy
• Kidney failure
• Benign brain tumour
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Critical illness plans have become increasingly For investment-linked policies, this division of
popular nowadays, especially among the health- premium components is made known to the
conscious group of customers, as it provides policyowner, resulting in a more transparent
a lump sum of ready cash to the policyholder operation of such policies. However, in an effort
for seeking treatments and for health recovery to protect the interest of the policyholder, the
purposes. maximum amount allowed as basic insurance
premium for protection under investment-linked
policies is limited to RM5,000 per annum per
22.3.7. Investment-Linked Policies insured life.
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New employees will be eligible to join the plan Group term life premium may be calculated
on the first day of the month following the according to age if the number of employees
completion of a period called the waiting period. to be covered is small. If the number is large,
The employer will decide on the length of the an average premium depending on age and
waiting period. sex distribution of the group may be worked
out, allowing for occupational rating where
applicable. Such calculations are repeated
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each year and unless there is a change in age Coverage provided under group insurance
and sex distribution of the group, the average includes:
premium may remain unaltered.
• Group term life
Premium is paid annually though other modes
of payment are allowed. Premium must be • Group personal accident
paid within the 60-day premium warranty
period effective from the date of the policy • Group critical illness
commencement date.
• Group hospitalization and surgical
Extension of Insurance on Disability
• Group endowment.
This provision extends the death benefit under
the contract if participating in the group insurance A group insurance policy could be issued to
terminates due to total disability arising from include any one or two or more of the above
accident or sickness. coverage in any combination. The commission
for new group and renewal business
Application, Master Contract and underwritten by a life insurer is 10% of the
Certificates annual gross premium.
•
‘Experience Rating’ is applied for large schemes
of 2000 lives or more. It is defined as the Accidental Death Benefits
general process whereby the premium charged
during the first policy year is adjusted upwards Personal Accident Benefit Cover
and downwards for subsequent policy years, on
This rider provides for the payment of specified
the basis of the actual claim experience of the
sums if the life assured should sustain any
group. The rates of premium are representative
bodily injury solely and directly caused through
of the experience of the group and provide a
external, violent and visible means. In view
better net cost to the employer.
of the importance of the terms mentioned,
the following explanations should be borne in
mind:
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“External”: The cause must operate from Persons either occasionally or generally
outside the body, but internal injury is sufficient engaged in manual work not of a particularly
to give rise to a valid claim if caused by external hazardous nature but involving the use of tools
means. and machinery.
“Visible”: An accident which is seen and can
Common exclusions for personal accident
be confirmed by witnesses if there were any
covers are:
present at the time. The term was probably
introduced to assist proof of accident.
a. War, terrorism, civil war, riot and civil
commotion.
Life insurance companies offer usually cash
payments on a predetermined scale for the
b. Suicide; self-injury; diseases,
various eventualities like death; loss of both eyes
parasitic, bacterial or viral infection;
or two limbs or one eye and one limb; loss of one
pre-existing physical or mental
eye or one limb; permanent total disablement
defect or infirmity; pregnancy;
(other than those stated earlier); and temporary
childbirth; miscarriage or any
total disablement (up to 52 weeks).
complications of pregnancy; HIV
and or related HIV-related illness
The capital sums in this regard are fixed in
including AIDS; provoked murder or
accordance with the sum assured under the
assault; drugs; and alcoholism.
basic life policy and the weekly benefits adjusted
proportionately. The extra premium charged is
c. Professional or semi-professional
determined with reference to the occupation
sports, flying as a pilot or air crew
of the insured and the claim experience. The
member of any aircraft,
benefits are usually not available beyond a
mountaineering, skiing, polo,
specified age (varying from 60 or 65 years).
sledging, racing of any kind or
steeple chasing, boxing, wrestling,
An example of the occupation classification is
parachuting, hang-gliding,
as follows:
skydiving, sea-angling , boating or
yachting, motor sports rallies or
Class 1
competitions, speed testing,
reliability trials or racing of any
Persons whose occupation is generally
kind other than on foot.
sedentary in nature, that is persons engaged
in professional, managerial, administrative and
d. Air travel other than as a fare-paying
clerical positions.
passenger.
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Double Accident Benefit There are other variations too, for example,
advance payment of benefit if claim arises
This benefit provides for the payment of double because of permanent disablement or extended
(or even treble) the sum assured under the basic payment should disablement continue after a
policy in the event of death of the life assured as certain period.
a direct result of bodily injury caused by violent,
accidental, external and visible means. • Waiver of Premium Benefit
As with personal accident benefit, the extra This form of supplementary benefit allows
premium charged will vary with different classes the company to waive the payments of future
of occupation and an age limit also applies. premiums falling due after the insured has
Death arising from suicide, self-inflicted injuries, suffered total permanent disability for a prolonged
alcoholism, drug-taking, illness and disease are period and proof of continued disability has been
normally excluded. given to the company. Many companies grant
this benefit without charging any extra premium
• Disability Benefits on total and permanent disability.
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Surgical and Nursing Fees Benefit more lives covered under the contract. If the
sum assured is payable upon the death of the
Another variation of the sickness benefit is the last of two or more lives, it is known as a last
surgical and nursing fees benefit. This benefit survivor policy.
takes the form of an immediate advance
against the sum assured to pay surgeon’s fees A joint life policy may be issued under any of
for and nursing fees occasioned by any surgical the permanent policies such as whole life or
operation undergone by the life assured during endowment but it is never written on a term
the currency of the policy. basis except for mortgage reducing term
assurance. The premium under a joint life policy
The advance under such benefit is free of for a given sum assured would be smaller than
interest and will be deducted in full from the the total of the separate premiums involved
sum assured on death or maturity of the policy. if individual policies were to be issued on the
The advance will not reduce the premium or
same joint lives concerned. However, following
affect any right to participate in any future
the death of one of the joint lives insured, the
bonus distributions. There are limitations in the
contract ceases and the survivors would have
minimum and maximum amount of the advance,
no further protection under an ordinary joint life
the latter in proportion to the sum assured. In
policy. There are two main uses of this type of
order to guard against abuses of such benefit,
assurance:
certain exclusions are imposed.
a. On the lives of a husband and wife.
Due to the complexity of the medical health The policy moneys are usually
insurance business, Bank Negara Malaysia, on payable to the survivor.
26 August 2005, issued JPI/GPI16, Guidelines
on Medical and Health Insurance Business. It b. On the lives of business partners.
provides for the standardization of medical policy
wording, and guidelines for medical policies. All The object in the second case may be to replace
medical policies sold or renewed on 1 January the capital that may be withdrawn on the death
2006 and thereafter shall be subjected to JPI/ of a partner. Generally upon the death of a
GPI16. partner, the partnership is dissolved and the
surviving partners will be required to wind up
For takaful operators writing medical policies, the business and pay over to the estate of the
JPIT 11 is applicable for medical policies sold deceased partner a fair share of the liquidated
or renewed on 3 January 2008 and thereafter. value of the business. Liquidation of a business
which involves the forced sale of assets most
invariably results in severe shrinkage of the
22.3.10. Miscellaneous Policies value of the assets. From the viewpoint of the
survivors, liquidation not only produces losses
to them through a reduction in the value of the
Joint Life Insurance assets, but more importantly, it destroys the
very means of earning a living. The seriousness
Although the great majority of life insurance of the consequences often leads survivors to
is written on the life of one person (single-life an attempt to continue the business by buying
insurance), it is theoretically possible to issue out the interest of the deceased partner and
life insurance contracts on any number of lives. reorganizing the partnership. A joint life policy
Where a contract is written on two or more will provide for the proceeds to be payable to
lives, it is known as a joint life policy. The joint the survivors on the first death and thus the
life policy promises to pay the sum assured in survivors would be able to use the proceeds to
the event of the first death among the two or purchase the deceased partner’s share.
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premiums from the date of death of the parent Any individual between the age of eighteen
until the specified vesting age. The additional and fifty-five years can participate in the plan.
feature amounts to insuring the life of the However, the plan must mature before the
parent and as such the life office will assess the participant attains the age of sixty-five. In
risk involved independently, even requiring a addition, participants in family takaful plans
medical examination of the parent if necessary. may elect to incorporate any of the following
The premium payable for this additional benefit supplementary benefits:
will vary according to the age, occupational risk
and health condition of the parent. 1. Permanent Total Disability
2. If the insured is the parent, the child must 1. Family Takaful Plans with terms of :
be the nominee;
a. ten years,
3. If the insured is the child, the life of the
payor must be covered; and b. fifteen years,
e. thirty years,
22.4. TYPES OF FAMILY
TAKAFUL BUSINESS f. thirty-five years.
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A person who joins any of the family takaful Each takaful instalment made by the participants
plans and becomes a participant signs a takaful shall be divided and credited by the company
contract with the takaful company based on the into two separate accounts, namely:
principle of mudharabah. The contract shows
clearly the rights and obligations of the parties 1. Participant’s Account (PA)
involved in the contract.
Table 1
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The division of the takaful instalment depends Family takaful benefits are divided into the
on the family takaful plan as suggested by the following:
takaful company. For example, fifty per cent of
the instalment goes to the PA and the rest to the • death benefit
PSA. The amount that is credited into the PSA is
made with the intention of tabarru’ to be pooled • maturity benefit
into a risk fund. The takaful company shall use
the fund to make payment of takaful benefits to • surrender value
the heir of any participant who may die before
reaching the term of the plan. The remaining These benefits depend on an agreed ratio of
proportion of the instalment is credited into the participant’s PSA and the PA. For instance,
PA. The main function of the PA is for saving the participant agrees to contribute 50% of
and investments. his takaful contributions as his tabaru’, i.e. his
PSA, and the rest of the contribution into his
It also important to observe that the amount PA. The participant’s insurance benefit will
credited into the PSA which comprises the then be calculated according to his PSA. The
participant’s tabarru’ reflects the annual cost investment benefits will be the accumulated
of takaful against the covered risk. The factors, value of his PA.
such as age of participant and term of plan, are
similar to those determining the annual cost of Family takaful benefits shall be paid to
a term policy in conventional assurance. Table participant depending on three cases:
1 shows the amount of tabarru’ to be credited
into the PSA. Case 1: The participant dies before the term of
the takaful plan:
Contribution = PA + PSA
= (saving/investment) + tabaru’ This is the death benefit where the amount is
= (saving/investment) + risk premium equal to the amount of death benefit defined by
the plan, together with the accumulated value of
The PA and the PSA are then pooled into the the participant’s PA.
Family Takaful Fund to be managed by the
company. The company will invest the fund in Case 2: The participant survives to the end of
areas acceptable to the Syariah. Investment the full term of the takaful plan:
profits and underwriting surplus are then shared
between the participant and the company As for the maturity benefit, the amount to be paid
according to the mudharabah agreement. out would be the total of the accumulated value
For example, the division would be 20% to of the participant’s PA and the share of surplus
company and 80% to participant. from the risk fund at the time of maturity.
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CHAPTER 22
1. An option that allows the insured of a term assurance to convert the policy into permanent
assurance like whole life or endowment assurance without evidence of insurability but subject
only to proper adjustment in the premium charged is known as
a. Payment of the sum assured is only in the event of death, there is no surrender or maturity
value and it provides cheap guaranteed protection.
b. Payment of the sum assured is at the end of the said term if the life assured is living,
surrender or maturity value is applicable and premiums are reviewable.
c. Payment of the sum assured is only in the event of death, the suicide exclusion is
uncommon and premiums are reviewable.
d. Payment of the sum assured is at the end of the said term if the life assured is living,
paid-up value is applicable and premiums are not normally reviewable.
4. An agreement under which the life office, in return for the payment of a certain sum of
money known as the purchase price, makes a series of payment at regular intervals from a
fixed date until the death of the annuitant or at some other specified time is known as
a. a superannuation scheme.
b. an annuity.
c. a family income benefit.
d. an endowment insurance.
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5. Under the group insurance scheme the parties to the contract are the ______
6. The type of policies that provides for an income during periods of sickness or
disability on a long-term basis are known as __________
8. An education policy must satisfy the following conditions so as to eligible for the tax
relief, EXCEPT
9. The coverage provided by the group insurance department of life insurer does not
include the following;
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10. The maximum amount allowed as basic insurance premium for protection under the
investment-linked policy is limited to _________ a year for each policyholder.
a. RM 4,000.
b. RM 5,000.
c. RM 6,000.
d. RM 7,000.
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Overview OVERVIEW
23.1. Definition of “ Life Policy”
In this chapter we shall look at the various policy
23.2. Privileges and Conditions conditions attaching to a life insurance policy
under the headings:
23.3. Policy Transactions
• Definition of “Policy”
23.4. Policy Alterations
• Privileges and Conditions
• Policy Transactions
• Policy Alterations
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23.2. PRIVILEGES AND CONDITIONS Section 155 of the Insurance Act 1996 regulates
the basis of surrender values as applicable in
Malaysia.
The payment of the sum assured is subject to
fulfilment of certain conditions included in the Accordingly, the Insurance Act provides that at
life policy. The conditions in the policy can be any time after the inception of a single premium
broadly classified under three groups: life insurance policy or in respect of other life
insurance policy after it has been in force for
i. Those adding to the benefits of three years or more, the policyowner on the
the assurance. Such conditions are surrender of the life policy becomes entitled to
also known as privileges; receive the surrender value of the life policy.
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Under endowment and whole life insurances period, by the creation of a loan which, with
with a limited premium-paying term, the paid- interest, becomes a lien upon the insurance
up policy is often that portion of the original until paid.
sum assured which the number of premiums
paid bears to the total number payable. If there Premiums may be thus paid until the cash value
is a policy loan taken, indebtedness should has been entirely utilized, at which time the
be recovered before conversion to a paid-up insurance cover ceases. Insurance companies
policy. make this provision in their contracts.
Where the original policy is a participating policy, The automatic premium loan provides for a
on conversion as a paid-up policy, it may cease continuation of the insurance cover in cases
to participate in future profits, subsequent to where the assured, through either carelessness
conversion. However, the bonus accrued prior or inability, fails to pay a premium, and it also
to conversion may continue to remain attached allows the assured at any time the right to restore
to the sum assured. the original status by repaying the amount owed
to the company.
Non-Forfeiture Conditions
No evidence of insurability is necessary in
The non-forfeiture conditions constitute a very bringing the policy to its original status. In
valuable privilege to the assured who overlooks addition, the use of the automatic premium loan
the payment of the premium or is temporarily allows continuity of supplementary benefits
unable to meet it. such as waiver of premium and accidental
death benefits.
The non-forfeiture provision comes into play
only after the policy has acquired a cash value. This method of using cash values has some
It is the cash value which is used to provide the drawbacks. Policyholders may take advantage
non-forfeiture benefit. of this method of paying premiums even when
they are able to meet their payments, because
Section 156 of the Insurance Act 1996 provides of the feature that it works automatically. The
that where a life policy has been in force for three insurance protection decreases each time the
years or more, it shall not lapse or be forfeited amount of loan increases, as the money thus
by reason of non-payment of premiums but shall advanced is a lien (charge) against the policy.
have effect subject to such modification as to
the period for which the policy is to be in force, The object of the non-forfeiture clause is thus
or of the benefits receivable under it, or both. to protect the interests of the assured who has
Although the three years’ period is imposed by omitted to pay a premium or who is temporarily
law, the Act does give insurers the option to unable to pay under a permanent insurance
reduce the period the policy has to be in force policy. It is not intended to enable an assured to
to less than three years, as this would benefit obtain life insurance cover at minimum cost.
the policyowner more.
• Paid-Up Policy
The following plans are generally in use as non-
forfeiture provisions: The paid-up policy option permits the assured
to elect to exchange the net amount of the
• Automatic Premium Loan cash value for a paid-up insurance of the same
type as the original policy for a reduced face
Under this plan, each premium is paid amount.
automatically as it falls due after the grace
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Once the policy is converted into paid-up policy, Medical and/or other evidence may be required
no further premiums are payable, and all riders and the company usually reserves the right to
and supplementary benefits such as for disability impose its own terms on which reinstatement of
and accidental death are cancelled. Generally, the policy will be considered.
a participating policy will cease to participate in
future profits after such conversion. Besides the days of grace and the period of
non-forfeiture, there is usually a further period
For some assured, this stopping payment during which reinstatement of the policy can
of premium may be particularly attractive, take place. During the period covered by the
especially as the assured approaches non-forfeiture clause, it is normally possible
retirement, when an individual’s income would to continue the policy cover in full by paying
normally be reduced. the overdue premiums with interest, which
is charged by some companies. Policies are
Section 158 of the Insurance Act 1996 provides reinstated subject to evidence of health.
that a paid-up policy shall be treated as having
come into force on the date the earlier life policy Reinstatement is normally not allowed for the
came into force. following situations:
This option would be more appropriate where A lapsed policy is only effectively reinstated
the need for insurance protection continues, but when the reinstatement application has
where the financial capacity to meet payment of been duly approved, all premiums due to the
premiums becomes impaired. company have been received, and notification
has been given by the company. It is vital to
In the case of endowment policies, term point out here that for any reinstated policy, the
insurance is not generally provided beyond the effective date of the (i) incontestability clause
maturity date of the policy. and suicide provision contained in the Privilege
and Conditions of the policy; and (ii) waiting
Reinstatement Condition period stipulated in the policy or riders shall
commence from the date the policy is reinstated
The reinstatement condition enables a person by the company.
to apply for the reinstatement of the contract,
notwithstanding that the days of grace and the
period of non-forfeiture have both expired.
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If the insured commits suicide within a stated The age of the life assured must be admitted
period of time (usually one year to two years) during his or her life, on the production of
from the date of inception or reinstatement of satisfactory documentary evidence acceptable
the policy, the policy becomes void and the to a company.
insurer is not liable to pay the claim except to
refund all premiums paid. The following documents are generally
acceptable as proof of age by life offices in
Foreign Travel and Residence Malaysia:
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• If the age has been understated, the ii. an undertaking to indemnify the
amount of money payable would insurer against any eventual loss
be such sum as the premium paid due to the issuance of a duplicate
would purchase according to the policy.
true age; and
The replacement policy would be stamped
• excess premium paid could be refunded “Duplicate Policy”.
if the age has been overstated.
Alternatively, the sum assured and ASSIGNMENT OF A LIFE POLICY
bonuses could be proportionately
increased to correspond with those for The legal rights vested under a life insurance
the true age. policy may be transferred by an assignment (see
section 3.1.2. of Chapter 3). Assignment can
Section 147 (1) of the Insurance Act 1996 either be absolute or conditional. An absolute
stresses that an insurer shall not dispute liability assignment is one which does not leave any
by reason only of a misstatement of the age of rights with the assignor except the payment of
the life assured. premiums if he chooses to pay. On the other
hand, a conditional assignment provides that
This reverses the position at common law where the assignor can revoke all the rights if the
the age of the life assured is a material fact and assignee dies before the payment of the policy
a misstatement in this regard by the assured money becomes due under the policy or if the
may be used by the insurer as valid grounds to life assured survives until the maturity date of an
avoid liability under the policy. endowment policy. The process of assignment
can be carried out by following the procedures
listed below:
23.3. POLICY TRANSACTIONS
• the assignment shall be in writing.
In the absence of a written notice,
Policy transactions can be considered under the insurer cannot be held liable for
the following headings:- payments made to a person other
than the assignee;
• Duplicate policy, and
• the assignment may be effected by
• Assignment of a life policy. an endorsement or a separate deed;
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• a written notice of the assignment the insurer would be made and the
must be served to the principal policyholder would be duly
office of the insurer; informed;
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CHAPTER 23 - POLICY CONDITONS
the policy. When the office receives the written Measure for Detection of Replacement of
application, it usually checks its records of Policies
notices of assignment to discover whether or
not there is a third party who has an interest in In order to effectively detect and curb internal
the policy, and whose consent to the alteration and external replacement of policies, BNM
is essential. The company then updates its JPI : 2/2005 requires insurers to put in place the
records. following:
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CHAPTER 23
2. The period after the due date, which allows the policyholders of an ordinary life
policy to pay premium without any forfeiture or penalty is known as the
a. days of privileges.
b. days of grace.
c. days of non-forfeiture.
d. days of renewal.
3. A policy under which the surrender value is used as a single premium to provide for
an assurance on the original terms, but for a reduced sum assured is known as
a. an extended policy.
b. a paid-up policy.
c. a term policy.
d. a fees policy.
a. a trust policy.
b. a CLA Section 23 policy.
c. an assignment.
d. a free policy.
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6. Which of the following documents are generally acceptable to the insurer as proof
of age of the life assured?
8. In general, the loans are granted up to _______ of the acquired cash value of a life
policy.
a. 85 %.
b. 90 %.
c. 92 %.
d. 95 %.
9. What is the document most commonly used as an evidence of proof of age and is
acceptable to life insurers?
a. identity card.
b. international passport.
c. school leaving certificate.
d. birth certificate.
10. Which section of the Insurance Act 1996 states that an insurer shall not dispute
liability by reason only of a misstatement of the age of the life assured?
Overview OVERVIEW
24.1. Introduction
In this chapter, we shall concern ourselves with
24.2. Risk Management the following aspects of new business:-
24.3. New Business Premium • Underwriting and Selection of Lives
Accounting
• Premium Accounting
24.4. Life Insurance and Income Tax
• Life Insurance and Income Tax
24.1. INTRODUCTION
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• The selection of lives to be insured; More deaths due to accidents with increased
age
• Quantifying risk;
The rate of mortality increases immediately after
• Costing risk; birth (the infant mortality rate) and thereafter
decreases sharply to a level which remains
• Monitoring the insurance fund. fairly constant over much of the younger age.
This level progression is somewhat disturbed
In this chapter, we shall next explore the first by the hump found around the ages of 18 to
two elements of risk management in some 24. This is attributed to the increased number
detail. The remaining elements form the subject of accidental deaths at these ages. Mortality
matter of the following two chapters. rates increase sharply at the more advanced
ages.
24.2.1. The Risk Factors: Mortality It needs to be appreciated that Fig 24.1.
provides a general feature the mortality
characteristics of many populations, i.e. the
The major factors which influence mortality are:- scales of both the axes vary for different
age, sex, occupation, social status, ethnicity, populations.
geographical location, marital status, personal
habits, avocation, and foreign residence. Insured lives experience lower mortality than
the population mortality
We shall provide a brief discussion of each of
the factors. The mortality rates of insured lives are lower
than the population mortality rates. This is due
• Age to the fact that life insurance companies select
the lives to be insured, and lives that have a
It is a well-known fact that mortality increases slim chance of surviving even for a short period
with age. The progress of mortality rates, q , would be definitely excluded.
with age x is shown below in Figure 24.1.
The well-to-do generally buy insurance
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Population and insured lives mortality statistics Another important factor influencing mortality
reveal that females experience lower rates of rates is occupation. Life insurance companies
mortality than males. This phenomenon is true use broad categories of occupation to arrive at a
for all ages. loading to the normal premium rates due to the
additional risk posed by different occupations.
Lower life insurance premiums for females
It is obvious that an executive and an oil-
The lower level of mortality experienced rig worker are exposed to different levels of
by females is reflected in slightly lower life occupational risk and thus it becomes essential
insurance premiums for females than for males to categorize insured lives according to their
of equal age. The converse, however, is true for occupations. This will enable the office to
annuities. charge a premium commensurate with the risk
undertaken.
Female morbidity is higher than male
morbidity As a simplified example, an office could adopt
the following categories of employment:-
However, in the case of morbidity, females Managerial, Executive, Clerical and Manual,
experience higher rates of diseases and and probably load its premiums for the Manual
sickness than males, and accordingly, females
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If financial underwriting does not reveal any odd In brief, medical underwriting seeks to assess
features in the application, the next stage in the the extent of physical hazard in connection
underwriting process is medical underwriting. with the applicant, when providing insurance
coverage.
The answers provided in the proposal form to
questions concerning the proposer’s height, • Non-Medical Underwriting
weight, personal and family medical history,
and lifestyle form the starting point of the Before the advent of AIDS, the mortality of
underwriting process. assured lives showed continuous improvement.
The improvement was mainly brought about by
If the above reveal any unusual features, medical advances. This, together with the rising
then the proposer may be required to answer costs of obtaining medical evidence and the
supplementary questions, furnish medical need to process increasing volumes of business
reports or go for a further medical examination. quickly, led to the issuance of policies for which
medical evidence was not required. However,
If the answers provided, together with the this was done under some tightly drawn
medical report and examinations, if any, indicate circumstances to protect the offices against any
that the proposer is in good health, the process severe form of anti-selection. The privilege was
of underwriting ends here, and the proposer usually given only to the permanent forms of
would be offered coverage at normal terms. insurance, namely whole life and endowment
insurances, and age-related limits on the sums
If the tests indicate that the proposed life is insured were imposed. The limits varied among
not in good health, it would be considered as individual offices and table 24.2. indicates the
a sub-standard life or as an impaired life. In limits:-
this situation, the underwriter has to decide on
the extent of the extra risk the insurer would be
exposed to in accepting the proposal.
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It is important to note that the proposer still has the time of consideration, though
to complete a proposal form which is carefully lapse of time without further
designed to elicit information on personal and incident may allow for acceptance
family history, weight, height and habits. If the at a later date, i.e. the application
answers provided show any adverse features, is “deferred” for a specific period;
the insurer retains the right to request the or
proposer to go for a medical examination.
d. below average to the extent that the
Prior to the advent of AIDS, there was a trend applicant cannot be accepted under
towards shorter non-medical proposal forms, i.e. any conditions , the life in this case
limiting the number of health-related questions, being “declined” .
which diminished the role of underwriting in the
selection process. However, the real possibility Those risks which fall under (b) or (c) would
of anti-selection due to AIDS has reversed this require further information on build, family or
trend and underwriting has been given its due personal history, race, occupation or residence
recognition. before a final assessment can be made.
a. within normal limits and acceptable An impairment which causes increasing extra
to the office on payment of the mortality is one which, with increasing duration,
standard premium rates for the life becomes an increasingly potent factor in the
insured’s age under the table failure to survive. For example, being overweight
proposed, such a life being referred places strain on the heart and other organs.
to as “first-class”, “select” or “standard”;
b. Level Extra Mortality
b. below average but still acceptable
to the office, subject to some Level extra mortality refers to the type of extra
form of restriction to cover the risk that will remain constant from year to year.
extra risk, the life being referred to Some hazardous or unhealthy occupations (for
as “sub-standard”; example, liquor trade) are generally assumed to
produce this type of extra mortality.
c. below average to the extent that
it is not acceptable to the office at
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Decreasing extra mortality describes the types The adjusting of bonuses in a participating
of risk which are present at the younger ages policy is a method seldom used.
but which will lessen in later life. For example, a
young person who suffered from tuberculosis but iv. Alternative Policy Plan
has been pronounced cured may tend to be less
liable to a recurrence with the passage of time. Suggesting another policy arrangement may
provide an acceptable solution. For example,
The extra risks may be allowed for in several an impairment may be met by restricting the
ways according to the group into which the extra term of the contract to be issued.
mortality falls.
v. Exclusion of a Particular Hazard
i. Increasing Premium
The policy may carry a clause limiting the
This is termed “loading” or “extra premium”. The liability of the life office if death occurs directly or
standard rate of premium may be increased by a indirectly as the result of a particular impairment
stated amount based on the expected increased or participation in a specific form of activity.
rate of mortality, or the loading may be prescribed
by charging a premium appropriate to a life of an A combination of these methods may be used if
age of a number of years greater than the actual necessary to cover the additional risk.
age of the proposed.
COMMENCEMENT OF RISK
A flat rate of extra premium is usually applied to
level extra risks whilst “age loading” is suitable Where a proposal is submitted to the insurance
for some types of increasing extra mortality. A company without the initial premium and the
rapidly decreasing extra risk may be acted upon proposal is approved by the company, a letter of
by charging a temporary extra premium. acceptance is issued to the proposer requesting
him to make the necessary payment of premium
ii. Decreasing Death Benefit within a certain number of days (often 30 days). If
the premium is not paid within the stated period,
In lieu of a cash loading, the additional risk may the acceptance shall have to be reconfirmed by
be covered by a provision to the effect that the company. The company may call for a health
the sum insured shall be reduced by a stated declaration report on continued good health
percentage should death occur during a period before re-confirming the acceptance. The letter
named. This is known as a “contingent debt” or of acceptance must also mention that the offer
“lien”. The premium charged is the standard rate stands cancelled if there is any change in the
and should the life survive beyond the period health, occupation and other circumstances of
during which the debt operates, the policy is the person since the date of proposal. If there is
then treated as though it had been issued on a any adverse change, the proposer is expected
standard life. to notify this to the insurance company and
they may or may not re-confirm acceptance
A contingent debt may be constant or may on getting this information. The insurer will be
decrease with time over a named period. Where on risk immediately upon receipt of the first
the debt is constant, it may be called a “level” instalment premium after the issuance of the
contingent debt and where it is decreasing it may acceptance letter.
be referred to as “decreasing” contingent debt.
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Where a proposal is submitted together with b. current dated valid cheque, bank
the initial premium and a binding premium draft, cashier’s order, electronic
receipt is issued, the applicant is insured for fund transfer or any other mode of
accidental death only and only for a short, payment provided by a licensed
stated period of time. The insurance coverage financial institution, or
begins immediately and remains in effect until
the insurer either rejects the application or c. charge to a valid payment card such
approves it and issues a policy. as credit card, debit card and charge
card.
Within 15 days of receipt of the policy, the
insured can return the policy without giving any Other than the above, the other modes of
reason and the insurer then has to refund the premium payment are:
premium which has been paid, subject only to
the deduction of the expenses incurred for the i. by banker’s order;
medical examination of the life insured. This is
known as the “cooling off” period. ii. by home service payment scheme;
In the case when there is an extra loading on Details of i), ii) and iii) are provided under
the proposal, a letter indicating the loading is Chapter 8.2.2.
issued to the proposer as a counter-offer. If the
proposer agrees to the terms and conditions PREMIUM RECEIPT
imposed on his application, he will be required
to return a copy of the signed letter of consent The insurer will issue an official receipt upon
to the company. receiving the premiums. An official receipt
will often bear the printed reproduction of
BACKDATING OF COMMENCEMENT DATE the signature of the Chief Executive or any
other authority with the counter-signature of
Sometimes, commencement of the policy may the cashier, etc. The official receipt provides
be backdated to an earlier date, usually up to the policyholder with evidence of premium
a maximum of six months. The purpose of this payment.
exercise is to benefit the proposer by paying the
lower premium applicable to a lower age. POLICY REGISTER
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24.4. LIFE INSURANCE AND INCOME TAX relief is provided. Employers, however, must
write to the Director General of Inland Revenue
for prior approval.
24.4.1.Taxation Of Life Insurance
Premiums Some personal income tax basics are provided
below:
In order to encourage national thrift and promote • Income Tax Rates and Relief
individual financial independence, particularly in
old age, the government allows some tax relief The principal legal document regulating income
in respect of premiums paid on life insurance tax in Malaysia is the Income Tax Act 1967.
policies and deferred annuities. This is a valid The rates of tax and relief are usually reviewed
point of sale for life insurance policies. annually when the Finance Minister proposes
the Budget for the year. These rates are then
The premium is allowable when the life insurance incorporated in the Finance Act for that year.
or deferred annuity is:
• The Year of Assessment
a. on the individual’s life;
The year of assessment is the period from 1
b. on the life of the spouse of the January to 31 December. For taxation purposes,
individual; the Income Tax Act states that the income of the
year of assessment shall be the income for the
c. on the joint lives of the individual current year of assessment. As an example,
and his/her spouse. the taxable income for the year 2008 shall be
the actual income earned during the period 1
The total relief allowable for all insurance January 2008 to 31 December 2008.
premiums on the life of the individual or his/her
spouse and on contribution to approved funds, • Taxable/Assessable Income
e.g. to EPF, in the basis year is RM6,000. In
the case of combined assessments for married This is income derived in respect of a business,
couples, the total relief is the same, i.e. RM employment, dividend, interest, pension,
6,000. annuity, etc. and any profit of a capital nature
during a year of assessment.
Effective from the year of assessment 1997, the
sum of relief allowable in respect of the payment For those in employment, taxable/assessable
of life insurance premiums for a life insurance income constitutes such items as:
policy is no longer subject to the limit of 7%
of the capital sum insured of the respective • salary;
•
policy.
leave pay;
•
Premium paid by an employer for purposes of
purchasing life policies which are expressly for commissions;
the benefits of the employees or their dependents
upon the occurrence of some definite events are • bonuses/dividends;
•
usually treated as allowable deductions.
Contributions made by an employer towards gratuity;
•
an approved provident, pension or other funds
are allowed as expenses and the necessary tax fees and allowances.
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- medical expenses for parents; Thus, for an individual, we have the following
broad equation:
- supporting equipment for disabled
dependent person;
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Example:
The following example illustrates the tax benefits of purchasing an approved life insurance policy
for an individual whose personal details are as below:
Age : 30 years
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CHAPTER 24
a. age.
b. sex.
c. friends.
d. avocation.
3. Which of the following methods is not used by insurers when dealing with
sub-standard lives?
5. In respect of income tax for gainfully employed individuals, which are not
allowable deductions?
a. contributions to EPF.
b. life insurance premium.
c. dependent children’s support.
d. personal medical bills.
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7. What is the allowable deduction for savings under the National Education
Saving Scheme (SSPN)?
a. RM 2,000.
b. RM 3,000.
c. RM 4,000.
d. RM 5,000.
a. leave pay.
b. commissions.
c. gratuity.
d. all of the above.
9. For married couples under combined assessment in the basis year, the total
tax relief allowable for life insurance premiums and EPF contribution is
a. RM 5,000.
b. RM 6,000.
c. RM 8,000.
d. RM 12,000.
a. 3 months.
b. 4 months.
c. 6 months.
d. 8 months.
Overview OVERVIEW
25.1. Quantifying the Risk
An insurer has to charge adequate premiums
25.2. Costing the Risk so that the emerging claims and expenses can
be met. In this chapter, we shall look at the
25.3. Calculation of Premium Rates following elements of risk management in the
practice of life insurance:
25.4. Other Considerations
• Quantifying Risk
25.5. The Adjustments to Gross
Premiums in the Rate Book • Costing Risk
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Thus, an insurance company could safely The proportion of lives insured dying in a year
and confidently determine in advance the varies as the age of the life insured increases.
approximate amount of probable death claims For example, consider a group of 100,000
arising, say in respect of a group of life insurance lives insured all aged forty, 562 die during the
policies. In order to conduct the business on a year; and a group of 100,000 lives insured all
sound basis, the experience as to the rate of aged sixty, 2415 die during the year. Hence,
death in the past needs to be studied. we may say that the chance of dying within
one year is 562/100,000 (or 0.00562) at age
The past forms a guide to the future 40, 2415/100,000 (or 0.02415) at age 60. This
explains the chance of dying in a year. In life
The mortality statistics of insured lives give the insurance, this is commonly termed as the rate
results of the experience of the past, and these of mortality.
are used as a guide to chart the mortality trend
for the future. Table 25.1 below shows a typical mortality
table.
In determining a premium rate for life insurance
it is assumed that the deaths among a group
of insured people of the same age will, in the
future, follow a pattern similar to that of an
identical known group in the past.
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• litigation expenses.
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25.3.2. The Level (Uniform) Pure Premium required for the 4th and 5th years (viz. RM28.10
Or Level Risk Premium and RM29.90).
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the interest element and the expense element. However, the net premium does not provide for
Thus, in very general terms, we have the expenses.
following relationship:-
• The Bonus Loading
Gross Premium = Net Premium (see below)
+ Loading for expenses +Loading for profits and What are Bonus Loadings?
contingencies
Participating policies enjoy the right to
share in the profits of the operations of a life
The Interest Rate Factor Revisited insurance company in the form of bonuses.
For this privilege they are charged a slightly
• Initial Excess is Accumulated to higher premium than their non-participating
Meet Subsequent Shortfalls counterparts and this additional premium is
known as the Bonus Loading.
We have seen earlier that if a level annual
premium is charged instead of a varying risk
premium, the amount per year (known as the 25.3.4. The Provision For Profits
annual premium) works out to a figure higher
than what is strictly required to cover the risk
in the earlier years of the contract and less It is customary for insurance companies not to
in the later years. The excess of the annual make any specific provision for profits in working
premium in the earlier years is therefore out tabular premiums. While making provision
utilized to support the shortfall in the later for mortality, interest and expenses, insurance
years. This excess is invested by insurance companies have to make broad estimates of the
companies to earn investment income until likely impact of these factors on future profits
such time when it is required for making good and these estimates tend to be cautious ones.
the shortfall. In computing the level annual
premium, the insurance company makes an What are a Life Office’s Profits?
explicit (and conservative) estimate of these
future investment earnings, thereby reducing In actual practice, the experience in respect of
the premium that has to be paid. these elements would invariably turn out to be
different from what has been provided for and if
As stated earlier, life insurance policies the experience is found to be better than what
nowadays often provide for survival benefits in is allowed for, the difference becomes available
addition to the death benefits. The additional for the benefit of both the policyholders and the
premium payable for the survival benefits is insurance companies. What becomes available
also calculated taking into account the future for the benefit of the insurance company is its
investment income on it. source of profit.
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endowment insurance policy for a particular age With true premiums, the premium payments
at entry and a specific term must be slightly less cease on death and no deduction is made from
than that for a combination of term and pure the claim amount as with instalment premiums.
endowment insurance for the same entry age
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Periodic premium payments place the insurance in relation to the policy, especially those for
company at a disadvantage when compared to items such as issue of contract, remain the
annual premium payments. same irrespective of the size. Insurance
companies therefore pass on the benefit of this
Disadvantages of Regular Premium relief in respect of large sum assured policies
Payments Other Than Annual Premium by allowing some deduction in the tabular
Payments premium. The converse is true for policies with
a lower sum assured than the average policy.
Firstly, there is more administrative work in The practice is generally to lay down a scale
collecting premiums, sending out premium according to the level of sum assured. A typical
notices, etc. and hence an increase in expenses. example would be as in Table 25.3. below.
Secondly, there is a loss of interest to the
company on a portion of the premium for a part
of the year. Finally, in the case of true premiums
only, the company does not collect the periodic
premiums after the date of death. For all these
reasons, insurance companies usually charge
a higher premium for modes of payment of
premium other than yearly.
25.5.2. The Adjustments For Higher/Lower Sometimes, companies deal with this situation
Sum Assured in a different way. They adopt a practice of
charging what is called a Policy Fee. This is a
fixed addition to be made to the tabular premium
Expense Loading Adjustments Made to for the appropriate amount of sum assured.
Reflect Equitable Treatment of Policies As the addition is of a constant amount, it
automatically gives better relief to larger sum
An adjustment is quite often made in the assured policies than to smaller sum assured
tabular premium for the sum assured of a policies.
policy. In determining premium rates, insurance
companies usually calculate rates for the
average size of the policy that they hope to sell 25.5.3. Health And Occupational Extras
and load for expenses pertaining to that size
of policy. The calculated rates are then scaled
down to give the rate per RM1,000 sum assured Premiums are Loaded to Reflect Additional
and tabulated. Health and Occupational Risks
The Sum Assured Differential Method We noted earlier that the risk premium is based
on the principle of averages. The effective
If the sum assured is of a higher amount than working of this principle depends upon the
the average sum assured, the premium of the homogeneity of different members of the group.
policy would be higher but certain expenses It has always been found that if the groups
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a. advertising costs.
b. medical examination expenses.
c. policy issue expenses.
d. expenses of servicing the policy.
a. net premiums.
b. loading for expenses.
c. profit from the share market.
d. expenses for contingencies.
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a. adequate.
b. profitable.
c. competitive.
d. all of the above.
a. advertising costs.
b. medical examination test.
c. renewal commission.
d. litigation expenses.
a. True premium.
b. Instalment premium.
c. One- off premium.
d. Full premium.
a. Arthur H. Hunter .
b. Dr Decar H. Rudger.
c. William Gybbon.
d. a and b.
Overview OVERVIEW
26.1. Introduction
In this chapter, we shall focus our attention
26.2. Valuation of Liabilities on the last element of risk management in the
practice of life insurance, namely:
26.3. Valuation of Assets
• Monitoring the Insurance Fund.
26.4. Surplus
The subject is considered under the following
headings:-
• Valuation of Liabilities
• Valuation of Assets
26.1. INTRODUCTION
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Risk-Based Capital Framework for Insurers • test the adequacy of the existing
premium scales;
The Risk-Based Capital (RBC) Framework is
a capital adequacy framework for all insurers • determine if any changes in the
licensed under the Insurance Act 1996. The company’s operations are necessary;
proposed Framework requires each insurer to
maintain a capital adequacy level commensurate • comply with the statutory requirements.
with its risk profiles.
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• Investments in government and This is the value for which the assets can be
semi-government securities; sold in the open market. Whichever method
is used, the assets of the company have to
• Shares in corporate bodies; be valued on the same valuation date as the
liabilities. The company’s valuation date would
• Loans and debentures in corporate normally coincide with the end of the company’s
bodies; financial year.
• Furniture, fittings, motor cars and Surplus is the difference between the value
other office equipment. placed on the assets and the value of the
liabilities and it will vary according to the bases
The assets may be valued in several ways, chosen for these valuations. It is derived mainly
depending on the purpose of the valuation. as a result of the actual experience in mortality,
Some of the more common methods of valuing interest, expenses and asset values being more
assets are: favourable than the experience assumed in the
valuation.
- Cost Price
SOURCES OF SURPLUS
This is the price at which the asset was
acquired. Under current conditions, the main sources of
surplus are:
- Book Value
• Interest:
This is the value placed on the assets in the
company’s accounts books. When an asset is This represents the excess interest (after tax)
originally acquired its book value will normally earned on the life fund over and above that
be its cost price. However, with time its value assumed in the valuation, and is a major source
may appreciate or depreciate and the original of surplus, particularly when market rates of
book value may be increased or decreased, interest are high.
depending on the company’s accounting
practices. • Mortality:
For example, the company may have invested Mortality surplus arises because of the
in a computer system five years ago at a cost difference between the actual mortality
of RM1 million. It may now be worth only experienced by the office and the mortality
RM100,000. When purchased, the book value basis assumed in the valuation.
of this asset would have been RM1 million and
this value would have been gradually written
down over the years to its present book value of
RM100,000 if the company had been adopting
a prudent accounting practice.
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Example :
Under this method, the bonus allotted is in Under this method, the bonus usually takes
proportion to the sum assured and the bonuses the form of a cash distribution and is usually
accumulated under the policy. Again, the contingent upon the payment of the next
bonus amount would be payable in the same premium. A distribution of surplus by way of
circumstances as the original policy. reduction of premium is essentially the same as
a cash bonus and also when reversionary bonus
is surrendered for immediate cash payment.
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This is a method of passing on to the Bonuses are normally declared at the valuation
policyholders some of the benefits of the date for the policy year preceding that date,
unrealized capital appreciation of ordinary i.e. in arrears. A question therefore arises as to
shares and property holdings of the company. what happens to policies which result in claims
The rate of bonus declared on each valuation is in between valuation dates. In these cases,
valid for the period up to the next valuation only bonuses are paid at an interim rate and are
and does not create any right to bonus beyond called Interim Bonuses.
the next valuation date.
The rate of such bonuses is decided in advance
Terminal bonus is only paid on policies resulting and though in principle, it should be at the rate
into claims either by maturity or death, provided expected to be declared at the next valuation
the policies concerned had been kept fully in date, it usually is equal to the bonus last
force by payment of premiums until such date of declared.
claim. Where premiums had been discontinued
this bonus would not be payable. • Guaranteed Bonus
Also it is normal to prescribe a minimum period Some life insurance policies provide for a
for which the policy should have been in force guaranteed bonus each year. Since the bonus
at the time payment becomes due, say 15 or 20 is guaranteed, such policies are strictly non-
years. Any policy which has not been in force participating policies with the sum assured
for this stipulated period may not be entitled to increasing automatically each year at a
this bonus. predetermined rate.
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CHAPTER 26
2. The investment that a life office has made from the premiums it has received
after meeting its outgoes in the form of claims and expenses is called
a. book value.
b. surplus.
c. assets.
d. liability.
3. What type of bonus is only paid on in-force policies, which result in claims
either by maturity or death?
a. interim bonus.
b. terminal bonus.
c. cash bonus.
d. guaranteed bonus.
a. loans to policyholders.
b. motor cars and office equipment.
c. cash in hand.
d. guaranteed bonus.
5. Identify the main feature(s) of a life insurance policy which provides for a
guaranteed bonus each year.
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a. Jan 1 2008.
b. July 1 2008.
c. Jan 1 2009.
d. July 1 2009.
a. with-profit policy.
b. participating policy.
c. non-participating policy.
d. b and c.
I. Cost price.
II. Book price.
III. Market price.
a. I and II.
b. II and III.
c. I and III.
d. All of the above.
10. The portion of the surplus that may be passed to the shareholders in the
form of dividends is in the region of __________ of the divisible surplus.
a. 10 % - 15 %.
b. 10 % - 20 %.
c. 10 % - 25 %.
d. 15 % - 25 %.
Overview OVERVIEW
27.1. Sources of Information for Risk
Assessment In this chapter, we shall provide a detailed
description of the life insurance documents:-
27.2. The Proposal Form
• Proposal Form
27.3. The Medical Report/Special
Examinations
• Medical Report
• Policy Form
27.4. Policy Form and Its Structure
• Endorsements
27.5. Endorsements
Section 149 of the Insurance Act 1996 provides
for the control by and lodgement of proposal
forms, policies and brochures of insurers with
Bank Negara Malaysia (BNM). In addition,
Section 149 also provides that BNM may
specify a code of good practice in relation to
any description of proposal form, policy or
brochure.
• Agent’s Report
• Previous Records.
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• details of insurance:-
5.
any deaths occurred among the
applicant’s parents, brothers or
sisters. If so, to state age at death
1. type of insurance required;
and cause of death;
2. term of policy;
6. whether the applicant has ever suffered
from :-
3. sum insured;
i. mental or nervous state, debility or
4. participating or non-participating;
breakdown
5. additional benefits/riders;
ii. blackouts, fits or paralysis
6. frequency and method of premium
iii. asthma, bronchitis, tuberculosis or
payment.
diseases of the chest
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The insurance company can make a reference At the head of the policy form there usually
to previous records on the same life, if any, in appears the name of the company and the
the event of adverse features being present. address of its registered office, to which all
notices of assignment of the policy must be
served.
27.4. THE POLICY FORM AND ITS
STRUCTURE THE PREAMBLE
Two main forms of policy are in use, i.e. the The purpose of the operative clause is to state
narrative type and the schedule type. The the event(s) upon which the policy becomes
narrative form, although formerly used, is now operative, i.e. when a claim is initiated.
practically obsolete and the schedule type is
very simple, readily understood and elastic in Thus, it usually mentions that the insurance
adaptability. company agrees to make payment of the sum
stated in the schedule (referred to as the Sum
The Main Sections Assured) upon the happening of the insured
event mentioned in the operative clause, to the
The main sections found in most policies are proper claimant or beneficiaries.
described below:
The insurer will usually require the claimant to
• The Heading furnish proof of death to the insurer’s satisfaction
before they meet the claim.
• The Preamble
THE PROVISO
• The Operative Clause
This section includes a declaration that answers
• The Proviso given in the proposal and medical report forms
shall form the basis of the contract. Further, the
• The Schedule conditions endorsed on the policy are deemed
to be incorporated in the contract, and the
• Attestation contract is subject to those conditions.
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• Name and address of the assured/ Details on Conditions and Privileges can be
life assured; found in Chapter 23.2.
• Sum assured – amount, to whom and The standard policy documents are often
when payable, whether participating endorsed to take into account the differing
or non-participating, the event on aspects of individual circumstances and needs.
which payable;
• Types of insurance;
Endorsements can be done either at :
• Special conditions (if any). In general, the following four special conditions
need endorsement: -
ATTESTATION
• those affecting the premium, or its
This refers to the final portion of the policy. frequency of payment. As an
The policy is signed by certain officers of the example, if instalment premiums
company authorized to do so. are involved, then a suitable
condition is necessary to provide for
CONDITIONS AND PRIVILEGES the deduction of any unpaid balance
in the year of death;
The conditions and privileges of a life policy can
be divided into the following categories: • those affecting the sum insured, or
its mode of payment. As an example,
a. Conditions limiting the scope of if a settlement option to leave
contract, e.g. suicide or incontestability the policy proceeds as a deposit
clause. with the office is requested , then a
special condition is necessary to
b. Conditions enlarging the scope of provide for this;
the contract, e.g. days of grace,
non-forfeiture conditions, etc. • those incorporating special benefits,
e.g. options to convert to contracts
c. Conditions explaining the scope of of a different type;
the contract, e.g. conditions which
avoid the contract if the premiums
are not paid in time or there is any
• those incorporating special restrictions.
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27.5.2. Endorsements After The above may broadly be classified into the
Issue Of Policy following groups relating to changes in the:
•
These give effect mainly to changes in the
premiums to be paid - mode and
• mode of premium payment; date(s) of payment;
•
premiums; or
attaching bonuses which can be
• surrender of bonus. either surrendered or used to reduce
future premiums.
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CHAPTER 27
3. ‘No life policy after the expiry of two years from the date on which it was effected be
called in question by an insurer on the ground that there is a misrepresentation
made in the proposal for insurance, or in a medical report or in a document which
led to the issue of the policy. The above description is recited under the
a. operative clause.
b. suicide clause.
c. incontestability clause.
d. provisos.
4. Name, age, sex, occupation and address of the life assured are contained in
a. the preamble.
b. the schedule.
c. the heading.
d. attestation.
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5. This embodies the answers to the questions in the proposal form and the personal
statements as the basis of contract. It also subjects the policy to the conditions and
privileges printed in the policy document. What does this refer to?
a. the preamble.
b. the proviso.
c. the operative clause.
d. conditions and privileges.
a. suicide.
b. days of grace.
c. cash surrender.
d. revival of lapsed policies.
a. agent’s report.
b. proposal form.
c. medical report.
d. police report.
9. The agent’s report furnishes the agent’s impression about the life proposer’s
a. character.
b. financial status.
c. habits and appearance .
d. all of the above.
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10. Which Section of the Insurance Act 1996 provides for the control by and
lodgement of proposal forms, policies and brochures of insurers with BNM?
a. Section 147.
b. Section 148.
c. Section 149.
d. Section 150.
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Overview OVERVIEW
28.1. Introduction
In this chapter, the focus is on claim settlement
28.2. Death Claims procedures. The following claim procedures are
described:
28.3. Maturity Claims
• Death Claims
28.4. Total Permanent Disability
Claims • Maturity Claims
28.5. Claims Arising Under Personal • Claims Arising under Personal
Accident, Sickness and Accident, Sickness and Permanent
Permanent Health Insurance Health Insurance Policies
Policies
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The claimant has to provide the insurer with • a probate of the will obtained from
documentary evidence which establishes the a court of law;
•
death of the policyholder beyond any doubt.
a letter of administration issued by
For the above purpose, the insurer would accept a court of law;
•
any one of the following documents as proof of
death: for a policy effected under section
23 of the Civil Law Act, the money
• a death certificate; would be paid to the trustees.
• a coroner’s report;
28.2.5. Concessions Under The Insurance
• an order pronouncing a statutory Act 1996
presumption of death, say in the
case of a person who has gone missing
for more than 7 years; Section 169 of the Insurance Act 1996 provides
for the payment of claim proceeds to the
proper claimant without letters of probate or
administration.
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Specifically, it provides that the insurer may The insurer would forward an identify form,
pay: the survival form and a discharge form for
completion to be returned with the policy.
• the full amount if the policy proceeds
do not exceed RM100,000;
28.3.2. Proof Of Claim
• RM100,000 if the policy proceeds
exceed RM100,000;
The following are usually required in settling
without a letter of probate or administration. maturity claims:-
1. proof of age;
In respect of a life policy, including a life policy
under Section 23 of the Civil Law Act 1956 2. proof of survival;
and a personal accident policy, effected by
a policyowner upon his own life providing for 3. discharge voucher completed by the
payment of policy monies on the policyowner’s policyholder; and
death, Section 161 of the Insurance Act 1996
provides that where a claim upon the death of 4. the policy document.
the policyowner is not paid within sixty (60) days
of receipt of intimation of the claim, the insurer • when the policyholder is not the
shall pay a minimum compound of 4% per life insured
annum or such other rate as may be prescribed
on the amount of policy monies upon the expiry 1. a deed of assignment or any other
of the 60 days until the date of payment. title document; and
The insurer would usually inform the policyholder 1. cash maturity proceeds;
of the impending maturity of the policy and
would request the policyholder to comply with 2. conversion of the maturity proceeds
the procedures to be followed. into an annuity - an annuity certain
or a life annuity;
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CHAPTER 28 - PRACTICE OF LIFE INSURANCE: CLAIMS
There are two types of total permanent disability The insured must prove his claim to the
claims; one is due to natural causes or illness satisfaction of the insurer, and comply with all
and the other is due to accidental causes. the other conditions of the contract.
1. Documents required for total For personal accident policies, the doctrine of
permanent disability claim due to proximate cause is important as more than one
natural causes or illness are: condition can operate leading to a claim. It is
important to note that if the insurer considers
• medical certification to be completed that the claim is brought about by an excluded
by the attending doctor after the peril, then the onus is on the insurer to establish
life assured’s disability; this.
• certified true copy of the life It is customary for insurers to issue printed forms
assured’s identification card; and which, if properly filled, usually supply all the
immediately needed information. These forms,
• completed claim form. in addition to requiring details of the accident or
illness, also contain other questions which aim
2. Documents required for total permanent to establish whether or not the original basis of
disability claim due to accident insurance has changed.
are:
If the insurer is satisfied as to the validity of all
• medical certification to be completed the documents furnished and any other inquiries
by the attending doctor after the which he may have conducted and there is no
life assured’s disability; breach of the various policy conditions, the
insurer will then pay the claim amount. However,
where anything is in doubt or is subject to
special consideration, the insurer may carry out
an investigation.
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CHAPTER 28 - PRACTICE OF LIFE INSURANCE: CLAIMS
28.6. CLAIMS REGISTER The claims register could be kept in either a card
form or ledger sheet form or even in computer
printout form, since the Insurance Act has not
It is a legal requirement in terms of Section 47 of indicated any specific form for this purpose.
the Insurance Act 1996 that every insurer shall
maintain an up-to-date register of all insurance
claims immediately upon the insurer becoming
aware of it. None of these claims shall be
removed from this register as long as the insurer
is still liable for the claims. The claims register
serves as an official record of claims notified to
the insurer.
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CHAPTER 28 - PRACTICE OF LIFE INSURANCE: CLAIMS
CHAPTER 28
3. Where a person has disappeared without trace for more than seven years,
the Courts may presume death in the light of inquiries made in likely
places of interested people who could be expected to have heard of him.
This refers to
a. presumption of death from circumstantial evidence.
b. statutory presumption of death.
c. unregistered death.
d. false death.
a. medical certificate.
b. certificate of death.
c. coroner’s inquest.
d. Commissioner of Oaths.
5. Before paying the maturity claim under an endowment insurance, the life
office requires the following basic proofs, EXCEPT
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CHAPTER 28 - PRACTICE OF LIFE INSURANCE: CLAIMS
a. birth certificate.
b. baptism certificate.
c. passport.
d. all of the above.
7. A claim can arise under any one of the following situations, EXCEPT
8. What is the interest rate payable by the insurer on the claim amount if a claim upon
the death of the policyholder is not paid within 60 days of receipt of intimation of the
claim?
a. 4 % per annum.
b. 5 % per annum.
c. 6 % per annum.
d. 8% per annum.
9. The following documents are required for a total permanent disability claim due
to accidents, EXCEPT
10. Which of the following is not required for settling maturity claim when
the policyholder is the life insured?
a. proof of age.
b. proof of survival.
c. death certificate.
d. policy document.
Overview OVERVIEW
29.1. Calculation of Age
As a Life Insurance Agent, you may be asked to
29.2. Using the Rate Book for Premium provide advice on various matters. One of them
Calculations may be on the sums of money involved when
a certain course of action is pursued. In this
29.3. Interest Charges chapter, we shall pay attention to the following
aspects:-
29.4. Guaranteed Surrender Value
Calculations • Calculation of Age According to
Various Definitions
• Interest Charges
385
CHAPTER 29 - LIFE INSURANCE: SOME MATHEMATICS
Reference Date
(Date of submission of the Last Birthday Age Last Birthday
proposal)
The technique here is to obtain the date of the next birthday and perform the necessary subtraction
as shown in the table below.
The technique here is to obtain the date of the nearest birthday and perform the necessary subtraction
as shown in the table below.
Reference Date
(Date of submission of the Nearest Birthday Nearest Age Birthday
proposal)
386
CHAPTER 29 - LIFE INSURANCE: SOME MATHEMATICS
387
CHAPTER 29 - LIFE INSURANCE: SOME MATHEMATICS
Example 1:
388
CHAPTER 29 - LIFE INSURANCE: SOME MATHEMATICS
Example 2:
389
CHAPTER 29 - LIFE INSURANCE: SOME MATHEMATICS
Example 3:
390
CHAPTER 29 - LIFE INSURANCE: SOME MATHEMATICS
391
CHAPTER 29 - LIFE INSURANCE: SOME MATHEMATICS
CHAPTER 29
1. Among other factors, the premiums charged for life insurance policies usually
vary in relation to
2. What is the age last birthday, if the life assured was born on 21 March 1965 and
the date of the proposal submitted was 1 January 1998?
a. 31 years old.
b. 32 years old.
c. 33 years old.
d. 30 years old.
3. What are the outstanding premium charges for the following situation?
a. RM1,882.58.
b. RM1,889.86.
c. RM1,890.40.
d. RM1,908.93.
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CHAPTER 29 - LIFE INSURANCE: SOME MATHEMATICS
a. RM1,035.00.
b. RM1,095.00.
c. RM1,140.00.
d. RM1,200.00.
a. RM192.50.
b. RM197.50.
c. RM206.25.
d. RM218.00.
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CHAPTER 29 - LIFE INSURANCE: SOME MATHEMATICS
Sex : Male
Date of Birth : 3 November 1969
Cover to commence : 31 December 1995
Policy Details :
Term : 25-Year Endowment
Sum Assured : RM50,000
a. RM1,850.00.
b. RM1,875.00.
c. RM2,000.00.
d. RM2,025.00.
7. Life insurance companies adopt the following bases for arriving at the age
of the proposer:,
a. sub-standard lives.
b. standard lives.
c. outstanding lives.
d. a and b.
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CHAPTER 29 - LIFE INSURANCE: SOME MATHEMATICS
10. Life insurance companies will impose interest charges in the following
circumstance(s):
a. outstanding premium.
b. policy loan.
c. service fees.
d. a and b.
395
CHAPTER 30 - PRACTICE OF LIFE INSURANCE: ETHICS AND CODE OF CONDUCT
Overview OVERVIEW
30.1. Part I: Guidelines on the Code of
Conduct We acquainted ourselves with the need for self-
regulation in Chapter 5: Consumer Protection
30.2. Part II: Life Insurance Selling and Statutory Regulations. In this chapter, we
shall look at the self-regulatory aspects of the life
30.3. Part III: Statement of Life insurance industry in Malaysia. The guidelines
Insurance Practice on this subject matter are formulated by the Life
Insurance Association of Malaysia (LIAM) under
30.4. Sales Materials/Advertisements the following headings:
• Coverage
• Monitoring Devices
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CHAPTER 30 - PRACTICE OF LIFE INSURANCE: ETHICS AND CODE OF CONDUCT
3. The confidence of policyowners and The guidelines cover all employees of an insurer
members of the public in the integrity operating in Malaysia. The guidelines set out
and honesty of life insurers shall be the minimum standards of conduct expected
safeguarded and enhanced. of all employees of an insurer. Insurers, if
they so desire, are free to formulate more
4. Life insurers shall at all times see comprehensive sets of rules for maintaining
that their business is soundly managed ethical standards amongst their employees.
to ensure the safety of policyowners’
savings and the credibility of their
companies. 30.1.3. Monitoring Devices
In pursuance of the above objectives and i. require all employees (existing and
philosophy, the life insurance industry has upon appointment in the case of
endeavoured to codify the ethics to provide new employees) to sign a declaration
guidance to those employed in the industry to observe the guidelines;
to promote and maintain uniform ethical
standards, and to uphold the trust and welfare ii. require all intermediaries (existing
of policyowners at all times. and upon appointment in the case of
new intermediaries) to sign a
It is evident from the above statement of declaration to observe the guidelines;
philosophy that the life insurance business
should be conducted in a responsible and iii. assign responsibility to the heads of
professional manner with a high degree of department to ensure compliance
integrity. This then will enable the commitments with the guidelines on a day-to-
to the policy- owners, in the various forms of day basis and to handle enquiries
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CHAPTER 30 - PRACTICE OF LIFE INSURANCE: ETHICS AND CODE OF CONDUCT
from employees on matters relating vii. To conduct business with the utmost
to the code of conduct; good faith and integrity.
•
of all policyowners and others who rely
on or who are associated with the life Disclosure of Underwriting Information
insurance company;
• Accounts and Financial Aspects
398
CHAPTER 30 - PRACTICE OF LIFE INSURANCE: ETHICS AND CODE OF CONDUCT
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CHAPTER 30 - PRACTICE OF LIFE INSURANCE: ETHICS AND CODE OF CONDUCT
2. The intermediary shall not: c. Since the initial costs of life insurance
policies are charged against the cash
i. make inaccurate or unfair criticisms of value in the earlier policy years, the
any insurers; replacement of an old policy by a new
one results in the policyholder
ii. attempt to persuade a prospective sustaining the burden of these costs
policyowner to cancel any existing twice.
policies unless these are clearly
unsuited to the policyowner’s needs. d. The suicide clause and the
incontestible clause (if any) begin
It has been agreed by all member companies anew in a new policy being denied
of the Life Insurance Association of Malaysia by the company which would have
(LIAM) that all agents are made fully aware that been paid under the policy which
it is against the interests of a policy owner and was replaced.
the life insurance industry to practise twisting.
The member companies have also agreed to
cooperate to eliminate twisting. Appropriate 30.2.3. Explanation Of The Contract
action will be taken if twisting is proved.
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CHAPTER 30 - PRACTICE OF LIFE INSURANCE: ETHICS AND CODE OF CONDUCT
401
CHAPTER 30 - PRACTICE OF LIFE INSURANCE: ETHICS AND CODE OF CONDUCT
402
CHAPTER 30 - PRACTICE OF LIFE INSURANCE: ETHICS AND CODE OF CONDUCT
403
CHAPTER 30 - PRACTICE OF LIFE INSURANCE: ETHICS AND CODE OF CONDUCT
SELF - ASSESSMENT
CHAPTER 30
1. The following are the principles underlying the guidelines on the Code of Ethics
and Conduct, EXCEPT
2. The following statements are true pertaining to the Code of Conduct, EXCEPT
404
CHAPTER 30 - PRACTICE OF LIFE INSURANCE: ETHICS AND CODE OF CONDUCT
5. Who are the parties involved in the case of a complaint from a policyholder
that an intermediary has acted in breach of the Code of Conduct?
I. the policyholder.
II. the intermediary.
III. the life insurance company.
a. I and II only.
b. I and III only.
c. II and III only.
d. I, II and III only.
a. make it clear that the projected benefits shown in the sales illustrations are
not guaranteed.
b. make clear the different characteristics of each policy in making
comparisons.
c. treat all information supplied by the prospective policyholder as completely
confidential to himself and the life office which he represents.
d. all of the above.
405
ANSWERS TO SELF-ASSESSMENT QUESTIONS
CHAPTER 1
Answers : 1-D, 2-A, 3-D, 4-A, 5-D, 6-C, 7-C, 8-A, 9-A, 10-D
CHAPTER 2
Answers : 1-C, 2-D, 3-D, 4-D, 5-D, 6-D, 7-B, 8-B, 9-A, 10-D
CHAPTER 3
Answers : 1-A, 2-A, 3-C, 4-A, 5-D, 6-A, 7-A, 8-D, 9-C, 10-A
CHAPTER 4
Answers : 1-D, 2-B, 3-B, 4-D, 5-D, 6-D, 7-C, 8-B, 9-C, 10-D
CHAPTER 5
Answers : 1-B, 2-B, 3-A, 4-D, 5-D, 6-D, 7-B, 8-B, 9-C, 10-A
CHAPTER 6
Answers : 1-D, 2-D, 3-C, 4-D, 5-A, 6-A, 7-A, 8-B, 9-B, 10-D
CHAPTER 7
Answers : 1-D, 2-C, 3-D, 4-B, 5-C, 6-D, 7-B, 8-C, 9-D, 10-C
CHAPTER 8
Answers : 1-A, 2-D, 3-D, 4-D, 5-D, 6-A, 7-D, 8-A, 9-A, 10-D
CHAPTER 9
Answers : 1-B, 2-B, 3-B, 4-D, 5-B, 6-C, 7-C, 8-B, 9-C, 10-B
CHAPTER 10
Answers : 1-A, 2-D, 3-B, 4-C, 5-C, 6-D, 7-C, 8-D, 9-A, 10-A
CHAPTER 11
Answers : 1-B, 2-D, 3-A, 4-D, 5-B, 6-B, 7-C, 8-A, 9-B, 10-C, 11-A, 12-D
CHAPTER 12
Answers : 1-B, 2-A, 3-B, 4-D, 5-A, 6-B, 7-B, 8-B, 9-C, 10-D, 11-A, 12-C
CHAPTER 13
Answers : 1-C, 2-B, 3-A, 4-D, 5-C, 6-D, 7-A, 8-B, 9-C, 10-D, 11-A, 12-D
CHAPTER 14
Answers : 1-C, 2-B, 3-C, 4-D, 5-D, 6-A, 7-B, 8-D
CHAPTER 15
Answers : 1-D, 2-A, 3-B, 4-D, 5-D, 6-B, 7-C, 8-D, 9-A, 10-A
CHAPTER 16
Answers : 1-C, 2-D, 3-D, 4-D, 5-D, 6-D, 7-D, 8-B, 9-A, 10-A, 11-A
406
ANSWERS TO SELF-ASSESSMENT QUESTIONS
CHAPTER 17
Answers : 1-D, 2-D, 3-C, 4-B, 5-B, 6-A, 7-A, 8-B, 9-C, 10-D
CHAPTER 18
Answers : 1-C, 2-B, 3-C, 4-D, 5-A, 6-D, 7-B, 8-B, 9-B, 10-C
CHAPTER 19
Answers : 1-B, 2-D, 3-C, 4-A, 5-B, 6-B, 7-D, 8-D, 9-A, 10-C
CHAPTER 20
Answers : 1-D, 2-A, 3-C, 4-A, 5-A, 6-A, 7-D, 8-B, 9-B, 10-D
CHAPTER 21
Answers : 1-B, 2-B, 3-C, 4-D, 5-A, 6-A, 7-C, 8-D, 9-C, 10-D
CHAPTER 22
Answers : 1-B, 2-C, 3-A, 4-B, 5-C, 6-C, 7-C, 8-A, 9-C, 10-B
CHAPTER 23
Answers : 1-A, 2-B, 3-B, 4-C, 5-B, 6-D, 7-C, 8-C, 9-A, 10-C
CHAPTER 24
Answers : 1-C, 2-C, 3-D, 4-C, 5-D, 6-A, 7-B, 8-D, 9-B, 10-C
CHAPTER 25
Answers : 1-D, 2-D, 3-C, 4-C, 5-A, 6-D, 7-C, 8-A, 9-D, 10-D
CHAPTER 26
Answers : 1-D, 2-C, 3-B, 4-D, 5-A, 6-C, 7-C, 8-D, 9-D, 10-C
CHAPTER 27
Answers : 1-A, 2-D, 3-C, 4-B, 5-B, 6-A, 7-D, 8-D, 9-D, 10-C
CHAPTER 28
Answers : 1-B, 2-D, 3-B, 4-C, 5-B, 6-D, 7-A, 8-A, 9-D, 10-C
CHAPTER 29
Answers : 1-C, 2-B, 3-A, 4-C, 5-B, 6-B, 7-D, 8-B, 9-D, 10-D
CHAPTER 30
Answers : 1-C, 2-B, 3-C, 4-A, 5-D, 6-D
407