1

CHAPTER 1

INSURANCE MARKET
 OUTLINE
2

INSURANCE PROVIDER
1. Private Commercial Insurers
2. Private Noncommercial Insurers
• The insurance market
• Lloyd’s
• Protection & indemnity club
• Composite and specialist insurers
• The government as insurer
• Insurance brokers
• Market associations
3. The Government
 INSURANCE PROVIDER
3

 Insurance is provided to the public by three major

sources:
1. Private commercial insurers
2. Private noncommercial (nonprofit service
organization) insurers
3. The government.
 1.Private Commercial Insurers
4

 private life and health insurers

 are the business of making money and are
therefore known as commercial insurers
 2. Private Noncommercial Insurers
5

a. The insurance market

b. Lloyd’s
c. Protection & indemnity club
d. Composite and specialist insurers
e. The government as insurer
f. Insurance brokers
g. Market associations
 2a: THE INSURANCE MARKET
6

i. Joint stock or proprietary companies

ii. Mutual insurance associations.
iii. Mutual insurance companies (strictly insurers)
2a(i): Joint stock or proprietary companies
7

 Bhd (public limited)or Sdn Bhd (private limited)

 Law corporate bodies with limited liability
 Capital from shareholders (owners of company)
 Shareholders responsible for losses up to the extent
of their subscribed capital.
 Capital stock companies control roughly two-thirds
of the premiums in the property- and liability
insurance fields and nearly one-half of the premiums
of all life insurance.
 Often a stock company may be referred to as a non-
participating company because its policyholders do
not participate in dividends.
Stock Insurers

Objective Profit

Management Incorporated; Stockholders

own; Board of Directors
Assessment Never

Participating No, taxable stockholder

Dividends dividends paid
8
 2a(ii): Mutual insurance associations
9

 Formed by members of a particular trade.

 Provide lowest possible cost or protection not
provided by other insurance market.
 Organise mutual protection for members.
 Members share losses in proportion to the value
of their individual property or on mutually
agreed basis.
 Profits distributed among members.
10

 Premiums charged on values at risk, with Additional

fixed annual membership fees
 Members liability limited to his premium
 Management expenses low as there is no commission
to agents or brokers
 Cost of new business acquisition is minimal
 If there is major claims or series of claims, it will be
in excess of the accumulated fund. Therefore,
proprietary insurer is preferable.
 Eg. MCISZurich.
 2a(iii): Mutual insurance companies
11
(strictly insurers)
 No shareholders
 Distributable profits belong to policyholders.
 Specialise in one or more classes of insurance
 Do not restrict themselves to members of a particular
trade or business.
 Mutual companies are sometimes referred to as
participating companies because the policy owners
participate in the dividends.
 Takaful is an Islamic form of mutual insurance.
Mutual Insurers
Objective Non-profit; minimum cost
(not charitable)
Management Incorporated; Policyowners
own; Board of Directors
Assessment Can be; Larger mutuals give
up the right to assess.
Participating Yes, return of excess premium
Dividends when declared; not taxable

12
 SUPERVISION OF MARKET
13

 Insurance Act 1963 (revised 1996)

 Takaful Act 1984
 Bank Negara Malaysia (Director General of
Insurance, Director General of Takaful)

p/s: Insurance Act and Takaful Act were incorporated into Financial Services Act
(FSA) 2013 and Islamic Financial Act (IFSA) 2013, respectively.
 2b: LLOYD’S
14
 Lloyd's of London also known simply as Lloyd's, is the oldest
insurance market in the world, which began as a group of
businessmen getting together at Lloyd's Coffee House in 1688.
 It is neither a bank, nor an insurance company.
 It is an insurance market of members, an independent
corporation that provides a building and facilities for its
members, who actually transact the business of insurance
(carry the insurance risks).
 It is just as an exchange provides facilities for its members but
does not actually buy or sell securities itself.
 LLOYD’S
15

 Members – which may be individuals or corporations

(Names)– are grouped into syndicates, but they remain
individually liable and responsible for the insurance
contracts that they enter into.
 Names organise themselves into syndicates.
 Each syndicates have a professional underwriter and
staff to accept risk on behalf of members of the
syndicate.
 Lloyd’s is controlled by a Committee, regulates the
admission of new members.
 LLOYD’S
16

 A member must satisfy to the committee

 His integrity
 Financial standing
 Furnish security in an approved form to be held in trust by
the Corporation of Lloyd’s, the amount of which varies
according to the wealth of the member and the volume of
business to be transacted.
 LLOYD’S
17

 Pay all premium into premium trust funds under deeds of

trust,
 Subject underwriting accounts annually to a strict audit
which requires his underwriting assets to be sufficient to
meet his liabilities for all classes of business.
 Contribute, by means of a levy on premium income, to a
central fund intended to meet the underwriting liabilities of
any member in the unlikely event of his security and
personal assets being insufficient to meet his underwriting
commitments.
 LLOYD’S
18

 All insurance placed must be presented by Lloyd’s

brokers to underwriters.
 Others can do so by special arrangements.
Lloyd’s Type

Objective Profit

Management Association of individual

underwriters (names)
Assessment No

Participating No
Dividends

19
2c: PROTECTION & INDEMNITY
CLUB
20

• During the mid nineteenth century shipowners

found themselves with liabilities, which their
traditional hull underwriters (Lloyds) were unable
or unwilling to cover.
• In order to solve the problem groups of shipowners
formed themselves into mutual associations and
agreed to share each other’s claims.
• These early organisations have now developed into
thirteen Mutual Insurance Associations or so-called
P&I Clubs,
 PROTECTION & INDEMNITY
21
CLUB
 P&I Club is a mutual insurance association.
 Provide indemnity not available in marine insurance
market.
 Marine insurance provide only three quarter of the
liability, whilst P&I provide the other one quarter.
 PROTECTION & INDEMNITY
22
CLUB
 Membership involves initial fee and an annual
premium (both based on total gross tonnage
entered).
 Calls are made on members to meet the cost of
claims and management expenses required.
 Shipowners often carry part of the risk as co-
insurers.
 PROTECTION & INDEMNITY
23
CLUB
 P&I provide covers for
 The balance not covered by the 3/4ths running down clause
relating to his liability for damage done to another vessel or
its cargo as a result of negligent navigation
 His liability for loss of life or personal injury
 His liability for damage done to immobile objects such as
buoys, quays, dock walls, and other property on land
 His liability for cargo resulting from faulty stowage, short
delivery or non delivery.
 PROTECTION & INDEMNITY
24
CLUB
 His liability as an employer to his employees for vocational
accidents.
 Payments for sickness and repatriation of crew members
 Many other miscellaneous contingencies
 Supplement the marine insurance market by providing war
risks cover.
 2d: COMPOSITE AND SPECIALIST
25
INSURERS
 Specialist – confine their business to one particular
class of insurance
 General insurers
 Life insurers
 Composite Insurers - those dealing with several
types of Insurance
 offer cover for nearly all insurable risks. (Life &
General classes of insurance)
 2e: GOVERNMENT AS INSURER
26

 Government can underwrite risks not taken by the

market.
 Eg. Credit insurance, Exports Credits Guarantee,
proposed National Health Insurance Scheme.
 Malaysian Export Credit Insurance Bhd. (MECIB)
 2f:INSURANCE INTERMEDIARIES
27

 An insurance intermediary is a person or a company that helps

people or organisations in buying insurance.
 Provides liaison between proposer/policyholder and the
insurer.
 Insurance agents, insurance brokers and financial advisers are
insurance intermediaries.
 Remunerated by commission received from insurer.

 On the other hand, a takaful intermediary is someone who

solicits takaful business or invites potential customers to enter
into takaful contracts with operators. They are also known as
takaful agents and takaful brokers.
 Agents
28

 An agent is someone who has the authority to act on

behalf of a principal (the insurer)
 A property and casualty agent has the power to bind
the insurer
 A binder provides temporary insurance until the policy is
actually written
 A life insurance agent normally does not have the
authority to bind the insurer
 The applicant for life insurance must be approved by the
insurer before the insurance becomes effective
 Agent’s Authority
29

 Agents receive authority from principals in several ways

 Agency agreement (contract)
 Ratification – through a series of unauthorized and accepted
repeated acts
 Apparent authority – principal leads the public to believe the
agency relationship exists
 Scope of authority is established in the agency agreement -
contract between agent and the insurance company
 Agency agreement spells out extent of authority as well as
all the contract specifics
 BROKER
30

 Is someone who legally represents the insured, and:

 solicits applications and attempts to place coverage
with an appropriate insurer
 is paid a commission from the insurers where the
business is placed
 Insurance Brokers
31

 Brokers also market insurance in both life and

health and property and liability insurance
 Brokers do not have the power to bind
 Broker is agent of the consumer - not the company
 Comparison of Agents and Brokers
32

 AGENCY RELATIONSHIP
 consumer agent company

 BROKERAGE RELATIONSHIP
 consumer broker company

 Questions: Who does the agent work for? What

was the agent doing at the time of the incident?
 2g: MARKET ASSOCIATIONS
33

 General Insurance Association of Malaysia (PIAM)

 Life Insurance Association of Malaysia (LIAM)
 International Association of Insurance Supervisors
 National Insurance Association of Malaysia (NIAM)
 Malaysian Insurance Institute (MII)
 Chartered Insurance Institute (CII)
 Malaysian Takaful Association (MTA)
 3. The government.
34

 Is a special type of nonprofit provider.

 SOCSO
 Reasons for Government Insurance
35

 Fundamental risks that require compulsion and lack equity

 Hazard considered too great by private insurance
 Adverse selection against private insurers
 Tools of social change by government
 Mistaken notion that government can repeal the law of
averages
 Buyers, Sellers, and Regulators
36

Regulation

Insurance
Companies Individuals

Agents Business
and Firms
Brokers

Regulation
 General insurance market dynamics :
Market structure

Regulators and industry bodies

Governments
Brokers Other Reinsurers
(primary)
Corporates insurers
Underwriting
agencies
SMEs
Agents
Individuals Shareholders
Direct insurers Capital markets
Families

End-users Distribution Manufacture Capital

37